PM's proposed cure for markets is problematic
From Prof Prem Sikka.
Sir, The UK prime minister's view that a deficit of transparency, particularly in commercial organisations, is the source of many of the problems plaguing financial markets is spot on ("Ways to fix the world's financial system", January 25). However, his suggestion that the International Monetary Fund should lead the reforms is problematic.
The IMF lacks democratic accountability and is tainted by its tendency to promote corporate interests. In any case, it does not have experience of regulating companies. Such tasks will inevitably fall on national or regional regulators, but their capacities are hindered by poor information.
FTSE 100 companies have more than 15,000 subsidiaries and an unknown number of trusts and structured investment vehicles (SIVs). Yet company accounts do not provide any information about the constituents of global companies. They do not provide any information about corporate income, profits, taxes, investments, assets, liabilities or carbon emissions in each country of operation.
Companies use transfer prices and intra-group transactions to shift profits and risks, but do not publish any relevant country-specific information. Thus neither the regulators nor the markets are able to make a meaningful assessment of the quality of earnings or risks, which are often specific to a country.
Several academics and non-governmental organisations have proposed a "country-by-country" approach, which would require companies to publish the above information and thus improve transparency. The cost of publishing this information is negligible as most companies already have it. The requirement to publish it can be made mandatory by law, or through accounting standards.
One hopes the prime minister and the UK government are ready to sponsor this much-needed change.
Professor of Accounting,
University of Essex,
Colchester, Essex CO4 3SQ
The time for this has come.