Accounting Rules Could Reveal Trade Secrets

This paper seeks to provide comments on disclosure or other aspects on the article entitled “Global accounting rules could reveal trade secrets” by Cole (2008). The article discusses about the possible revelation of trade secrets which is due to the fear for vague standards under the international financial reporting standards (IFRS) that may require too much disclosure as a result. The IFRS will replace the US generally accepted accounting principles (GAAP).

The author argues that since IFRS is based on more general principles than the US GAAP, the lack of specific guidance on how to comply with rules, the auditors will demand more public disclosure from client-corporations before they will give their clean opinion on financial statements. It is argued that because of more disclosure, then necessarily there could revelation of trade secrets (Cole, 2008). The author’s argument sounds as if trade secrets will be necessarily revealed because of the requirement of the standards for more disclosure and that auditors would in effect be disregarding the laws protective of trade secrets.

The author’s argument is simply baseless since auditors cannot just reveal trade secrets acquired by their audit engagement without suffering the penalty for prescribed for under accountants’ code of ethics and without being liable for damages when sued by clients under laws on trade secrets (IPWatchdog, 2008). This researcher believes that the argument of forced or more likely revelation of trade secrets is an oversimplification of the purpose of adequate disclosure under the IFRS. The real purpose of the disclosure is just to make the information more transparent and objective to the investors but never to reveal trade secrets.

The companies under IFRS are under no obligation to reveal these secrets in the first place to their auditors since the IFRS are never intended to repeal the rights of corporations under existing laws on trade secrets. But if in the process there would revelation by accident, the client corporations can still invoke its rights under existing laws for the protection of these trade secrets or they would make it a condition of engagement with auditors that no revelation of secrets would be made.

Otherwise, these auditors would be liable for damages in addition to being possible liable for criminal and administrative penalties provided for by law. Cole (2008) has cited about the mind-set on rule-based accounting under the US GAAP where people were used to work under the old rule and the seeming difficulty or reluctance to apply IFRS. The attitude could be read as a resistance to change. Cole (2008) also cited about the additional required guidance from the accountants under the IFRS where there is more professional judgement than merely complying with rules as done under GAAP.

The practice of the accounting profession would be more evident if auditors have to exercise professional judgment rather than blindly follow the rules as was applied under the US GAAP. Cole (2008) cited however a favourable argument for under the IFRS on premise that the new system would force auditors to understand the economics of transaction rather than just how it needs to be accounted for. Moreover, the fact that there would be more professional judgement under the IFRS as compared with US GAAP does not necessarily imply that accountants will be less professional in revealing the secrets of their clients.

Accountants also have their code of ethics dealing on confidentiality of information which prohibits them from disclosing what they have learned as trade secrets in the course of practice of their professions. Although the transition will require more time not only from accountants but also from people from operations, the cost of this exercise would be justified by the benefit afforded to investors under the IFRS which is to improve the qualitative characteristics of information for the use of the decision makers.

It can be concluded that the feared revelation of trade secrets as a result of the adoption of the IFRS is not necessarily true. The laws on trade secrets still afford protection in case on violation. It could not be argued that the IFRS is meant to violate the law on trade secrets. Since the purpose of the disclosure is just to make the information more, accurate, reliable and complete on the basis of the standard, the revelation of trade secrets does not necessarily come as a result.

These companies could always go to court to protect their rights under trade secret in case of possible violation as done by of Coca Cola which has kept its trace secret over the years (Pendergrast, 2000).

References:

Cole (2008), Global accounting rules could reveal trade secrets, {www document} URL http://www. financialweek. com/apps/pbcs. dll/article? AID=/20081026/REG/810242220, Accessed November 3,2008 IPWatchdog (2008), Trade Secrets Act. , {www document} URL, http://www. ipwatchdog. com/tradesecret/ , Accessed Nov 3,2008 Pendergrast (2000), For God, Country and Coca-Cola, Basic Books