Wednesday, November 12, 2008

Accountancy and the Banking crisis

Prem Sikka, professor of accounting at the University of Essex, UK, has published a short but thoughtful piece about the role of accounting in the current crisis. It's a submission to a UK Treasury Committee inquiry into accountancy and the banking crisis. As we've pointed out before, this subject is often overlooked, but its importance cannot be underestimated.

We can't do the report's many points justice here, but suffice to say that it asks the simple question: just who are companies' financial reports designed for? The interests of investors and markets overlap significantly with the interests of the general public, but they are, contrary to lazy assumptions that are quite widely held, by no means identical. An early paragraph puts it into context :

"The financial reports are primarily aimed at meeting the assumed needs of investors and creditors, or capital markets. The current financial crisis must cast severe doubts about such idealised claims. It is assumed that the same reports can also meet the needs of other stakeholders. This is simply not true."


Which is not happening. He looks quite closely at the International Accounting Standards Board (IASB). As he continues:

"The IASB has no democratic mandate to transfer income, wealth and risks. It has no moral mandate for making regulations. Right from its birth, avoidance of taxes and hence accountability was a major factor in its operations."

And he adds:

"The objective of financial reporting should be amended by the due process of law and parliamentary scrutiny rather than through the private processes of the IASB."

As he reported in The Guardian newspaper last year:

"One of the disturbing things about modern globalisation is the privatisation of public policymaking. All over the world, public regulation is moving away from public bodies and elected governments and towards private and unaccountable cartels. A good example of this is the London-based International Accounting Standards Board or IASB, which formulates accounting standards that affect the financial reporting of all companies quoted on European stock exchanges."

For this and plenty more, read it.

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