There seems to have been a working assumption in the past that any problem involving ‘numbers’ was automatically the fault of the accountants. [I have to say, in my experience, this isn’t too far from the truth at an organisational as well as a macroeconomic level!].
However, maybe those (partially blinkered?) days are numbered following Bank of England governor Mervyn King’s statements last week speaking during a Parliamentary Inquiry Lords committee which has already directed some of the blame at accounting. The Committee is investigating the contribution to the crisis of both accounting standards and the audit profession.
King told a Lords committee that it is ‘misguided’ to blame accounting rules [for banks’ behaviour]; instead, he highlighted the problem of poor management.
The accounting rules in question were various complex IFRS standards adopted by the UK from 2005 which may have inadvertently encouraged banks to load their balance sheets with overpriced assets. The standards effectively obliged banks and other companies to value their assets at market price – clearly this inflated balance sheets in the run up to the crisis; of course, as soon as liquidity issues started to strike, then the same methods sent valuations crashing. The complexity of the rules may have led to banks ‘forgetting’ that judgements of prudency may override any accounting rule.
In support, Tim Bush, a member of the Accounting Standards Board’s (ASB) Urgent Issues Task Force (UITF), pointed to other accounting rules on impairment, contingent liabilities and securitisation as others that may have contributed to the problem. He said that “I believe that these deficiencies were a major factor in the banks that failed in the UK and Ireland”.
Mervyn King stated that “no management should ever use accounts as an excuse for imprudent behaviour”.
Whilst the inquiry continues, perhaps people might start to see accountants as one partner in the overall business management process rather than keepers of ‘anything with a number in it’.
Of course, any finance professional worth their salt will always work as business advisor to the management, and not blindly follow the rules!