Insider Business Club: Fair play on credit crunch?

Has fair value contributed to the credit crunch?

Paul Moxey, head of corporate governance and risk management,
ACCA

I think the problem is in its application and how it is used. The concept is
fine, the problem is application. It’s a bit like a laser. You can use a laser
for useful things or you can use it for destructive things and some of the
consequences or the applications of fair value haven’t been helpful.

But if we are comparing the historic costs to fair value, then I think fair
value seems, generally, a better concept. Maybe we need to be looking a bit more
outside that little box.

Accounts are complex enough as they are. The accounts of a bank can run into
500 pages, so how could you actually give further subtlety by providing an
indication of the uncertainty that can attach itself to some of the values that
you can find in the accounts? I don’t know.

But the problem there is that you take a figure that you perhaps don’t
assume, but some people may assume, is correct, simply because it has got a lot
of digits, there isn’t a great big C in front of it and it doesn’t indicate a
range.

But the reality is that it is just one figure and we don’t really know how
close, or how accurate that is.

Much has been written about the role of banks, regulators and others in
the crunch ­ have other factors contributed?

Alan Craft, director, Craft Financial Advice Ltd

One area which we don’t get a lot of commentary about, but has been a very
crucial element of what has happened here, is the sheer volume and scale of
computing power that has gone on behind these great brains to come up with
solutions to solve the problem of low yield.

As a result, you have had a conglomeration of factors coupled with
globalisation of financial services, and while you can put risks in all sorts of
places at all sorts of times on the global clock, tracking them in itself is a
serious problem.

What that means for the regulators is that they’ve got to be as smart as the
players and frankly they haven’t been. My personal view is that they probably
could never have been.

What we have ended up with is a situation where the regulators have been
chasing a market that has been moving at an accelerating pace.

Has risk management been good enough?

Brandon Davis, managing director, GARP Risk Academy

Risk is inherently complex ­ idiosyncratic is a good way of looking at it. It
can come from relatively small beginnings to become a very large problem. I
always used to give a lecture where I said the one thing that always worried me
was the elephant in the very long grass, because you didn’t see it until it trod
on you. That was the thing in risk that would always keep me awake at night ­
where is the elephant in the long grass, the thing that I just can’t see but I
know it’s coming or that I know it could be there? A lot of this is a result of
that.

Risk management has been grossly over simplified and I think that is one of
the cores of this problem.

Was fair value the right option at this time?

Ken Wild, national director of accounting and audit, Deloitte &
Touche

Accountants are the easy people to blame, you always know when politicians
start blaming accountants that they’re protecting their own reputations.

How can telling people things cause the problem? Everybody is criticising
fair value. What else? Average? Well, that’s sort of adding together your
historical costs and your fair value and saying let’s tell people a smoothed
version of these things. Let’s not tell them where we really are today.

Do we let people make up their own numbers and say everything is much too
depressed, but I know it’s going to go up? How does anybody know what the
markets are going to do? So what do you put in instead? Do you not want the
information?

We’re only using fair value as an alternative to the other options. I think
there is a lot of ground to be covered in trying to improve how we come to those
values and the IASB is doing work in that area. Should they have done it
earlier? Of course. They should have done it 50 years ago. Hindsight is a
wonderful thing but this is a developing field and it is developing all around
the world. That will create tension but we are trying to move it forward in the
best possible way.

Chaired by Damian Wild