On December 19, 2008 in an early Christmas present of sorts, Juan Andrés Camus y Jorge Errázuriz, the founders of Santiago based investment manager Celfin Capital, announced that they would voluntarily compensate clients who lost money on investments connected to a US$50 billion dollar fraud perpetrated by New York financier Bernard Madoff.
The Madoff scandal has been an unwelcome shock to already jittery investors and is a glaring reminder of the value of transparency and effective risk management. On New Year’s Day, 2009 major Chilean firms will begin adopting a new set of accounting rules, the globally recognized International Financial Reporting Standards (IFRS). The switch to IFRS will bring added transparency, but also new challenges to investors interested in pro-actively managing their holdings.
Although in the long-run shareholders and companies alike should benefit from the adoption of IFRS, a common language of universally accepted accounting standards, in the short-term the shift to the new system may pose certain risks.
In the short-term, the transition to IFRS may pose risks for shareholders if regulators, auditors, executives, and directors are unfamiliar with the new system. Daniel Joignant, an accountant with Deloitte Chile told local press sources that “accountants being trained today are still being taught the old standards, which means that their studies will be out of date by the time they graduate.” El Mercurio, a daily Spanish language Chilean newspaper, reported that only around one fifth of the country’s accountants have a high level of familiarity with the new system.
It is important to note that Chile is markedly different from many of the European countries that have already adopted the IFRS rules. In Chile most companies are controlled by insiders. Controlling shareholders are common and independent directors are not. Under IFRS the lack of board independence could emerge as an important concern for investors.
In the short term, companies will have to determine if their boards contain members with significant financial expertise who are familiar with the new system, a significant undertaking in a market where directors are often selected because of their personal connections to company insiders.
Chilean securities market laws do not require companies to form independent audit committees. The duties typically handled by independent audit committees in other markets are the responsibility of Chilean executive committees, meaning that in Chile there is often less independent oversight of accounts than in other markets.
Because IFRS is a principles-based rather than rules based system, it relies heavily on listed companies and their accountants and auditors to make decisions about how to classify and disclose accounts. In Chile, a country with a high incidence of controlling shareholders and a weak presence of independent directors, the switch to IFRS will enhance transparency but also highlight the need for increased independent oversight. Overall, the switch to IFRS will underscore the need for investors to critically analyze financial statements and monitor relationships between listed Chilean companies and their external auditors.
When investigators from Chile’s National Accounting Association were looking into a 1994 futures trading scandal at Chile’s state controlled copper producer CODELCO, they found that Chilean accounting rules included no provisions regulating the determination of the value of forward trades in the derivatives market. More recently, U.S. investigators looking into Mr. Madoff’s murky New York financial operations failed to find anything amiss. Maybe the widespread adoption of a universal accounting system like IFRS will enhance investors’s ability to actively analyze their holdings and more effectively detect and manage risks.
The Madoff scandal has been an unwelcome shock to already jittery investors and is a glaring reminder of the value of transparency and effective risk management. On New Year’s Day, 2009 major Chilean firms will begin adopting a new set of accounting rules, the globally recognized International Financial Reporting Standards (IFRS). The switch to IFRS will bring added transparency, but also new challenges to investors interested in pro-actively managing their holdings.
Although in the long-run shareholders and companies alike should benefit from the adoption of IFRS, a common language of universally accepted accounting standards, in the short-term the shift to the new system may pose certain risks.
In the short-term, the transition to IFRS may pose risks for shareholders if regulators, auditors, executives, and directors are unfamiliar with the new system. Daniel Joignant, an accountant with Deloitte Chile told local press sources that “accountants being trained today are still being taught the old standards, which means that their studies will be out of date by the time they graduate.” El Mercurio, a daily Spanish language Chilean newspaper, reported that only around one fifth of the country’s accountants have a high level of familiarity with the new system.
It is important to note that Chile is markedly different from many of the European countries that have already adopted the IFRS rules. In Chile most companies are controlled by insiders. Controlling shareholders are common and independent directors are not. Under IFRS the lack of board independence could emerge as an important concern for investors.
In the short term, companies will have to determine if their boards contain members with significant financial expertise who are familiar with the new system, a significant undertaking in a market where directors are often selected because of their personal connections to company insiders.
Chilean securities market laws do not require companies to form independent audit committees. The duties typically handled by independent audit committees in other markets are the responsibility of Chilean executive committees, meaning that in Chile there is often less independent oversight of accounts than in other markets.
Because IFRS is a principles-based rather than rules based system, it relies heavily on listed companies and their accountants and auditors to make decisions about how to classify and disclose accounts. In Chile, a country with a high incidence of controlling shareholders and a weak presence of independent directors, the switch to IFRS will enhance transparency but also highlight the need for increased independent oversight. Overall, the switch to IFRS will underscore the need for investors to critically analyze financial statements and monitor relationships between listed Chilean companies and their external auditors.
When investigators from Chile’s National Accounting Association were looking into a 1994 futures trading scandal at Chile’s state controlled copper producer CODELCO, they found that Chilean accounting rules included no provisions regulating the determination of the value of forward trades in the derivatives market. More recently, U.S. investigators looking into Mr. Madoff’s murky New York financial operations failed to find anything amiss. Maybe the widespread adoption of a universal accounting system like IFRS will enhance investors’s ability to actively analyze their holdings and more effectively detect and manage risks.
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