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21 Jan 2010
The head of the City's financial watchdog has blamed accounting rules for inflating banking bonuses in the lead up to the global financial crisis.
Adair Turner, chairman of the Financial Services Authority, told Accountancy Age the pro-cyclical effect of fair value pushed asset prices to artificial highs, which fed into profit estimates and rewarded bankers with inflated bonuses.
“Fair value accounting on the way up can produce a self reinforcing cycle,” he said.
“The price of credit security had gone up - everything was looking more favourable. Banks were making more profits, but they were unrealised fair value profits.”
Fair value, the accounting principle set by the International Accounting Standards Board, has been blamed for exacerbating the effects of the downturn.
The rule required banks to value their financial assets at market price, which led banks to dock huge losses as liquidity plummeted following the banking crisis.
Lord Turner said the high bonus culture could be fought on two fronts: “You can address that on the accounting sides and or address it on the remuneration.”
“You simply don’t know at the end of the year whether that profit will really be there,” he said.
Further reading: FSA: Accounting must help avoid another bank crisis
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Briefings
By looking at the reasons supplier statements became unfashionable, and the reasons why it is different today, this paper delves into the many benefits that can be obtained by automating the process.
Having a real and true view of your organisation’s current financial position, and having the right systems and processes in place, will ensure that you can make strong choices and are ready to capitalise on opportunities
AccountancyAgeInsight is a frequently updated resource centre for finance professionals, offering a free and easy-to-use digital library of briefings, white papers and other information resources. 
Visitor comments Add your comment
Well said, Adair Turner
It will be interesting to see what the apologists for fair value make of Adair Turner's view that it contributed to the Global Crisis. Standard setters and auditors need to take some responsibility for financial stability.
Posted by: Mike Page, 22 Jan 2010 | 00:00
We have been here before
Society does like to believe in having a single all encompassing measure of financial performance, doesn't it? It especially likes the idea of "profits" - they can be distributed, taxed, praised or condemned. Above all once we know the "profit" we can construct our own little narrative tale about how they were achieved and what it all means. We all know vaguely what we mean by that word but few outside accountancy know what it does not mean what it's limitations are, especially the vulnerability of profits to events outside the control of the reporting entity, especially systemic risks. I suppose it was ever thus!
Posted by: David Janes, 22 Jan 2010 | 00:00
FAIR COMPLEXION CAN BE DECEPTIVE
we should not be guided or swayed by the fairness alone of the numbers.the qualitative aspects can not be overlooked in making the risk assessment about fudging the numbers to one's advantage ageold human greed.concept of realisability or to account for gains only on relisation in respect of financial assets could have saved the banks.still not ready to learn.
Posted by: pramod kapur, 25 Jan 2010 | 00:00