Management, not accounting, to blame for crisis: King

Accounting standards were no substitute for poor management at banks, the head of the Bank of England has said during a parliamentary inquiry which has seen blame directed at accounting for excessive risk taking.

Governor Mervyn King told a Lords committee on Tuesday it is misguided to blame accounting rules for the behaviour of banks, instead pointing to poor management.

The House of Lords Economic Affairs Committee had heard international accounting rules, which the UK adopted in 2005, led banks to overload their balance sheets with assets marked at exaggerated prices.

The criticism has focused on so called “mark-to-market” accounting which forces companies to use market price to value their assets. The treatment  buoyed banks’ balance sheets in the lead up to the crisis, but then sent them crashing when liquidity dried up.

“No management should ever use accounts as an excuse for imprudent behaviour,” he said.

“Once the crisis had occurred those people who didn’t like mark to market, who may have used it on the way up, then tried to conceal the current state of affairs by saying we must not use mark to market and conceal the true state of losses that had arisen,” he said.

He said it was “really very silly” for banks to believe an accounting number could capture the risks attached to their assets.

The House of Lords Economic Affair Committee is investigating the audit profession and the role accounting standards played in the crisis.

So far it has heard international accounting rules were complex and led companies to abandon prudence as an underlying accounting concept.

Tim Bush, a member of the Accounting Standards Board’s (ASB) Urgent Issues Task Force, has highlighted accounting rules on impairment, securitisation and contingent liabilities as key areas that contributed to banking collapses.

“I believe that these deficiencies were a major factor in the banks that failed in the UK and Ireland,” he said.

“I think we need UK GAAP back.”

The Lords are expected to hear from the Big Four, when their inquiry continues next week.