Corrupt Regime Reform Through Accounting?

Proposed accounting rules included in a discussion paper on extractive industries may force mining and oil companies to publish how much spend in foreign countries, including payments to corrupt regimes.

The International Accounting Standards Board (IASB) yesterday released a discussion paper which may force companies involved in extractive industries to break down their costs and revenue on a country-by-country basis, and publish the figures in their financial statements.

The paper suggests investors and capital providers may want to know about the risks to reputation and income of working in resource-rich and sometimes corrupt nations.

Required disclosures are the significant components of the total benefit streams to governmentand its agencies on a country-by-country basis. At a minimum, this would include separate disclosure of:

• royalties and taxes paid in cash

• royalties and taxes paid in kind (measured in cash equivalents)

• dividends

• bonuses

• licence and concession fees.

The IASB expects that investors would want to know these amounts to assess what is at risk in each country. another benefit might be that excessive payments could disclose hidden payments otherwise considered ilegal.

The IASB must justify new accounting rules by how useful they will be for investors, capital providers and other market participants.

At the moment, multi-national mining and oil companies aggregate their costs and revenue data which makes it difficult to distil how much they pay individual governments. Breaking the data down to a “country-by-country” basis could expose corruption and provide useful market information, according to the IASB’s discussion paper.

“Generally speaking, the greater the level of corruption, the greater the investor’s concern about the integrity of the government and its commitment to honour existing terms and conditions relating to an entity’s operations in that country,” the discussion paper states.

“The disclosure of payments made to governments provides information that would be used by at least some capital providers in making their investment decisions, either by using the information to make their own assessments of investment risks and reputational risk or by providing better information to other risk analysts that advise the capital providers on investment and reputational risks.”