Boyle: crunch shouldn't mean tighter regulation

The UK’s top accountancy regulator has said that the credit crunch should not
result in tighter governance rules.

Instead, ‘the focus should be on whether the existing standards have been
observed in practice,’ said Paul Boyle, chief executive of the Financial
Reporting Council.

In a speech to members of accountancy professional bodies from the UK and
overseas at the Mansion House today, Boyle set out some preliminary lessons the
FRC has taken from the recent financial crisis.

He said the standards set out in the Combined Code on Corporate Governance,
for which the FRC is responsible, remained comprehensive and appropriately
principles-based.

‘The Code states that the role of a company’s board is ‘to provide
entrepreneurial leadership of the company within a framework of prudent and
effective controls which enables risk to be assessed and managed.’ We expect
that directors of banks and other financial institutions are already reviewing
their governance and risk management practices. We, therefore, currently believe
that the recent difficulties in the financial sector do not require a
generalised tightening of governance standards across the UK corporate sector.
The focus should be on whether the existing standards have been observed in
practice.’

He added that accounting had held up well considering the extreme stresses in
the financial system.

‘Yes, there have been some criticisms and those will have to be carefully
considered, but from my perspective the number of criticisms that the accounts
of financial institutions have understated the losses arising from the credit
market problems is closely matched by the number of criticisms that they have
overstated the losses.’

He also referred to questions about whether accounting techniques have been
able to keep up with the rate of innovation.

‘There has also been of great deal of heat generated by the debate on the
appropriateness of fair value accounting. Notwithstanding the recent efforts of
the IASB and FASB, questions remain about differences between various IFRS and
US GAAP requirements relating to fair value accounting.

There is a wide range of sincerely held views about the merits of different
accounting methods, and judgments have to be made as to which methods best meet
the needs of the constituencies that have to apply them, audit them and make
decisions based on them. We at the FRC believe that the most appropriate
standards are likely to be developed if standard setters are able to exercise
independent judgment, relying on their skills and experience. We support the
IASB in its role as the setter of accounting standards to be used in this
international financial centre and we welcome its recent announcements that it
will continue to seek globally acceptable solutions to the accounting challenges
of the day.’

Some of the criticism of auditors was unjust, he added.

‘Suggestions, for example, that auditors should have intervened to encourage
their financial services clients to constrain the rate of innovation and
expansion of their businesses seem to me to be based on a fundamental
misunderstanding of the relative roles of auditing on the one hand and on the
other hand corporate governance and financial services supervision.

That said, the work of auditors is now coming under a much greater degree of
scrutiny than has been the case in the past and in our role as independent
regulators of the profession we are requiring auditors to demonstrate to a much
greater extent that the judgements made in the course of their work are
defensible.’