Wednesday, July 08, 2009

Tunisia: on the crisis, secrecy and discredited accounting practices

Update: Sheila Killian's paper now available

I have just returned from a fascinating conference in Tunisia. The theme of this event was the current crisis, which is rapidly deepening in developing countries as remittances, investment, export demand and other sources of revenue dry up. The purpose of the conference was to encourage more critical perspectives on how accounting and financial practices contributed to the underlying causes of the crisis, and to explore possible remedies.

Key notes speakers included Taoufik Baccar, Governor of the Central Bank of Tunisia; celebrated economist and retired banker Professor Chedli Ayari; Professor Shyam Sunder of the Yale School of Management; Professor Prem Sikka of Essex University; plus many others.

I was invited to speak on the opening round table, held under the title of Alternative Architectures for the Financial System. I wanted to emphasise several points.

Firstly, at the roots of this crisis lies the delusion that growth can be sustained on the basis of rising consumer debt rather than rising real household incomes. Charles Dickens covered this issue rather well in David Copperfield, which, you might recall was published in 1849, just after the revolutionary shocks that traumatised rulers right across Europe:

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

Second, the crisis has not just exposed the usual suspect rotten apples. It has revealed systemic weaknesses running through virtually every institution responsible for maintaining market integrity:
• bankers who failed to manage risks and encouraged reckless indebtedness;
• regulators who failed to join the dots and recognise how, where and why risks were mutating through the financial markets;
• credit rating agencies with conflicts of interest;
• auditors who signed off on accounts for companies just weeks before their total failure;
• financial journalists who became delivery agents for corporate public relations and newspapers which have become hostage to corporate advertising;
• economists whose models were totally removed from reality, and therefore lost sight of how markets function at ground level;
• academics who have accepted corporate sponsorship and lost the degree of independence required to formulate new ideas and to take a leadership role in presenting those ideas to a broader public; and
• politicians who rely over-heavily of party funding from corporate sources and, faced with the biggest banking failure since the late nineteenth century, surrounded themselves with advisers and review bodies recruited from exactly the same cadre of bankers and business leaders who created the mess in the first place.

Third, the crisis has revealed the massive disconnect between market theory and practice.

The theory is that markets only operate efficiently in public interest when information is shared symmetrically between buyers and sellers. In practice, the opposite pertains. Too much material information is withheld from key players, including investors. Assets and liabilities are held off-balance sheet. Intra-group activities are wrapped up into consolidated accounts. Information about ownership is disguised through offshore companies and trusts with nominee directors and shareholders. Secrecy jurisdictions across the world allow incorporated companies to trade outside their jurisdiction without any financial reporting requirement. Banks create complex shadow banking structures which operate outside the spheres of regulatory controls.

Far from being transparent and efficient, markets have becoming increasingly opaque and complex, with hidden risks and an inevitable loss of trust between the players. In other words, the prevailing orthodoxy preaches the language of economic transparency but has no clear idea of what that means and how it can be operationalised. Worse still, their actions demonstrate a widespread preference for secrecy and covertness, much of which is rooted in the aggressive tax avoidance structures that most companies now operate.

Fourth, our old friends the secrecy jurisdictions have played a key role in fomenting crisis and more generally making the world a more unequal, and hence less secure, place.

You can read the text of my intervention here.

I also chaired a side event titled Tax Havens: Crucibles of Financial Turmoil and Grand Corruption. Sheila Killian (University of Limerick) and Prem Sikka joined me on the panel, talking respectively about how tax competition pressures from Ireland impact on other countries, including developing countries, and (in Prem's case) how accounting firms promote tax avoidance and undermine corporate responsibility and good governance. Powerful stuff, which came as quite an eye-opener to those attending.

For my part, I talked about the astonishing deficit of research into how tax havens work and how public perceptions have been shaped by the neo-conservative anti-state agenda and by a generally sympathetic media, which tends to concentrate on trivia and celebrity sportspeople, actors and rock musicians:

Ageing French rocker, Johnny Halliday, for example, threatened to leave France and move to to Switzerland if Nicolas Sarkozy failed to win the 2007 elections in France. Lewis Hamilton, the Formula One racing driver, quit England to take up residence in Switzerland in 2008. Both Halliday and Hamilton were portrayed in the largely friendly media as heroes forced into exile by oppressive states. Why did no-one point out that both Johnny and Lewis are rich beyond dreams, and their actions speak more about greed and selfishness?

A copy of my paper for this side event can be downloaded here. Prem's presentation can be downloaded here (sorry - we're still waiting for it - will upload when we can;) Sheila's paper is here.

Tunisia is a lovely country and our hosts treated us royally. I'll be heading back that way as soon as possible, with my family.

John Christensen


Anonymous Anonymous said...

Looks great - could someone just correct the hyperink so we can access the full document presented?

6:38 am  

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