Protests should prompt accountants' serious questions

LAST MONDAY, during lunch, I decided to take a look at the Occupy Wall Street protest movement outside St Paul’s Cathedral. I anticipated meeting individuals who may be hostile to me or disagree with my belief in the free market system.

To my surprise I met individuals who were well educated, professionally qualified, articulate and genuinely concerned about events affecting them but seemed to have little control over. I share many of their concerns. The Euro crisis and events around the world seem to be fast escalating out of control . As a father of two nine year-old twins, I am becoming troubled if not scared about the world my children will inherit.

As a chartered accountant, an associate member of Corporate Treasurers and holding an Economics degree, I am concerned that something seems to be wrong with the present system. From a moral perspective, I find it difficult to accept the imbalances that have resulted. For example, 1% of the individuals in America control 40% of the wealth and that the average CEO salary package has grown from 30 times the average worker’s salary package in 1970 to over 300 times today. This level of income disparity can only lead to increasing social tension.

Of particular concern to me is the deteriorating debt crisis that threatens to engulf individuals, corporations and governments around the world. I come from a generation who schooled in the mid-eighties and understood (as did Mrs Thatcher), the economics of Milton Friedman that argued that inflation was a monetary phenomenon.

Money out of thin air

In 2011, politicians and central bankers prefer a policy of printing money out of thin air. This has led to sovereign balance sheets around the globe becoming highly leveraged to the point of default. For example, in the UK at present there is approximately £1,033bn of gilts in issue. In 2000, the total was just £290bn and in 2008 it was less than £500bn. In less than three years the government has racked up more debt than it managed in the whole of the last century. In America total government debt has grown from approximately $1 trillion in 1980 to around $14 trillion now.

We have been participating in an illusion of wealth based on unsustainable levels of debt financed by flat currencies. History has shown us that this leads to hyperinflation that will debase the currency and create severe economic hardship and social unrest.

The accountancy profession should ask fundamental questions about the financial institutions seeking liquidity or recapitalisation.

Should ‘toxic’ assets continue to be valued at ‘mark to model’ as opposed to pricing more closer to reality or ‘mark to market’ i.e. is there a question of solvency? We often hear about the $600 trillion of derivatives in the world financial system – are auditors comfortable with how these products are valued?

Lastly has the quiet migration from general partnerships to limited liability partnerships diminished responsibility of the accounting profession in performing audits?

Tim Sanders is a chartered accountant

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