There's a long article in the Telegraph this morning under the above title.
The article refers to the work of UK chartered accountant Tim Bush who has massive concerns about the credibility, and even legality of International Financial Reporting Standards. bevasue I have spent many hours working with Tim on this issue I rake the liberty of reproducing the article in full:
An influential watchdog has written to the Department of Business listing a catalogue of staggering regulatory errors that allegedly contributed to the collapse of several banks in 2008 – and still threatens the system today.
While reviewing the proposed expansion of the International Financial Reporting Standards for accounting, Tim Bush, a member of the “Urgent Issues Task Force” that scrutinises the work of the Accounting Standards Board (ASB), claims to have uncovered “fatal” and “dangerous” flaws in the system.
The City veteran has argued that applied to banks, the standards “produced false profits and overstated capital” which have “misled creditors, misled shareholders, the Bank of England, FSA and others”.
In a devastating assessment, Mr Bush alleges the regulations, and specifically the way they have been implemented in the UK and Ireland, have led to “mistakes [being made] of such severity that it is difficult to overstate”.
His letter, written on August 19 and sent to the BIS as well as the ASB and other accounting bodies, claims:
* The ASB has “not fully understood” the IFRS accounting standards and implemented them in a way that even contravenes the Companies Act. As a result, UK and Irish banks have wrongly relied on a different – and flawed – financial reporting system from the rest of Europe.
* The application distorted bank’s company accounts, giving “false assurances”, and hampered the directors and regulators from seeing the build-up of leverage and other risks.
* The system is still “causing direct business risk” in the banks and will do the same if applied to other companies too.
* The dangers are set to spread to small and medium-sized businesses under proposals to roll-out the accounting system further.
According to Mr Bush, who was formerly a fund manager at Hermes, the root of the “fatal flaw” lies in the adoption of the new IFRS accounting system to work alongside the Companies Act, whose rules had applied to financial reporting in Britain since 1879.
Although the IFRS system was introduced in the wake of the Enron scandal to combat accounting fraud, it has been widely criticised by accounting experts across Europe.
Mr Bush has argued that the standards preclude the principle of “prudence”, or the likelihood of money being repaid, disguising, for instance, a bad loan until it actually fails. But Mr Bush has claimed that while European banks applied the standard at group level, Britain’s ASB said that all bank units and subsidiaries should use the same measures, too.
The standards also applied to the Republic of Ireland, where the ASB is one of the last remaining British bodies to have any jurisdiction.
In his letter, Mr Bush wrote: “Although IFRS had been rolled out across the EU, the UK and Ireland implemented it so extensively that the impact was different. It has been a ‚Äòdouble dose’ to the extent of being a deadly dose, by removing what had underpinned banking solvency for over 120 years.”
He said the system produced figures that hid instability in banks, so that directors and regulators of the banks could look at the audited figures and conclude that banks were not just solvent but had excess cash.
As for banks in the lead-up to the financial crisis: “They did not have the capital that they presented, and they were not going concerns. The true situation was that business models were loss-making and actually consuming capital.”
Mr Bush wrote: “In engineering terms it was like a signalman sending a train down the wrong track. The UK had the first failing bank, Northern Rock, which only the month earlier appeared to have so much capital it applied to reduce it. IFRS merely reports the train crash rather than prevents it.”
He said the system is still flawed and urged the Government to scrap plans to extend the standards. “In my view, the direction that the ASB took, and is still taking, is‚Ä¶ causing direct business risk.”
He added: “The proposed further roll-out of full IFRS and the IFRS for SMEs has the same fundamental flaws as what has gone so badly wrong in the banks, a level of apparent compliance that undershoots what the law requires. It is difficult in the extreme to envisage Parliament knowingly assenting to a model of company accounts that dilutes the responsibilities of auditors at the same time as offering less for directors, creditors and the wider public interest.”
The ASB could not be reached for comment.
I’ve read Tim’s letter – and his submissions to the forthcoming House of Lords review of auditing and the banking crisis and think they’re a wholly appropriate analysis of the situation – and the misunderstandings on the part of regulators and auditors as to what their duties were and are.
And if Tim is right – and I think he is – the case against bank auditors is compelling, and cannot be avoided by claiming they relied on IFSR alone. UK company law has priority – and I think they ignored it.