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Eli Amir, the head of the professional committee at the Israel Accounting Standards Board (IASB), had some harsh words to say on Monday at a conference for executives of publicly traded companies, organized by Luboshitz Kasierer (Ernst & Young). "The financial reports of publicly traded companies have to reflect reality," he said, "and if anyone does not behave properly, it would be better that they go to prison."

Amir was referring to the banks and other interested parties that have so far succeeded in preventing the implementation of Standard 15, which dictates the manner in which investments in private and publicly traded companies are recorded in company books and balance sheets.

The standard obliges companies to record investments at market value or to explain any discrepancy between the market value and the value it attributes to an investment. Amir says that Israel's terrible economic situation - overwhelming unemployment, the collapse of many businesses, the withdrawal of foreign capital and the decline of the stock market - will not change for the better if it is all swept under the carpet.

"The capital market will only improve when it recovers the minimum of credibility it had in the past," Amir said. "There are not two types of accounting, one for recessions and one for periods of economic growth."

Amir thinks the Council for Accounting Standards will approve the new standard after a hearing before the council next week, but ultimately the matter will reach the High Court of Justice, like every other critical decision in this country. "No one usually comes to the hearing. We eat some cake, drink some coffee and go home. Then we receive the objections in the mail," Amir complained.

The campaign against the new standard arises from what is known as "the agent's problem," says Amir. "Managers have an interest in concealing things and postponing truthful reports because of fears of losing bonuses and problems that could arise with bank credit because of unsatisfactory financial ratios. Large organizations also try to avoid presenting the truth, in the hope that the next quarter will be better. Will the situation improve," asked Amir rhetorically. "Of course not."

Amir noted that although the "agents" suffer from a drop in the value of the investments, the companies themselves do not suffer. The reduced value of the investments does not harm the company's cash flow or its business, said Amir, adding that everyone's greatest interest should be in truthful reporting.

A strategic decision to report the truth will prove correct and will ultimately help restore market credibility. "There will be no capital market. The credit situation will worsen, interest rates will climb, the economy will continue to shrink and more employees will be let go - if we continue with these false reports."

Amir said there is an accounting struggle between the credibility of the financial report and its reflection of reality. "A credible report in which the investments are recorded at cost would be much more convenient for everyone - but such a report does not reflect reality and belongs in the garbage," he said.

Until now it had been acceptable for companies that did not want to write off losses due to the reduced value of their investments to use the term "temporary reduced value," but Amir said there is no such thing. "Even the Americans, who invented the term 30 years ago stopped using it a long time ago," he said. "We are stuck in 1975. I know of only one situation in which one can correctly use the term `temporary drop in value' - when there will be a further drop in value in the next quarter." Amir explained that the basic assumption of Standard 15 is that the capital market is active and the prices it reflects are feasible.

The organizations fighting against the new standard (and always represented by the same lawyer - Ram Caspi) are trying to postpone the implementation of the standard by a war of attrition via bureaucratic excuses.

"Yesterday I received a letter from the lawyer asking why we chose Thursday for the hearing," Amir says. "Now I have to write a response, to involve the [IASB'] legal advisor and spend a whole day on this issue. We have been working on two standards for two years, but most of our time has been spent corresponding with lawyers."

Erase or explain

The conference, attended by representatives from Bank Leumi, Delek, Clal Industries, Ashtrom, Kardan, Hadera Paper and Tnuva Dairies, among others, featured lectures by accountants from Luboshitz Kasierer on the implementation of the new standard. Accountant Joseph Bachar, the firm's managing partner, said the new standard is complicated and represents a jump from the simplicity that has characterized accounting until now to realm of economic values and judgment.

"The whole game is over the margin between the cost and the amount that can be retrieved," said Bachar. This means that the problem is how to explain the discrepancy between the high cost at which an investment is recorded and its economic value. Bachar notes that the unequivocal statement of the new standard is that investments must be recorded according to their market value. "Anyone who wants to explain less and have fewer problems should record the market value," said Bachar, and Amir concurred.

"We, as a standards board, would be very pleased if the market value was recorded," explained Bachar, "but if you don't want to do that, you will have to embark on the path of detailed proper disclosure, presenting one stage after another and explanations of the discrepancies between the balance sheet value and the market value."

Bachar said because implementing the standard had been temporarily postponed, a company that hastens to publish its financial reports before the end of February will be able to avoid writing off reduced values due to the standard.

He said the standard does not require the services of an outside assessor, and the assessments can be made by the company's executives. One significant aspect of the new standard is that companies will have to meet the conditions set out in bank loan agreements