Accounting not to blame for financial crisis

Stephen Haddrill, ABI director general and FCAG member

Accounting rule makers should remain independent from ‘undue commercial and
political pressures’, a group of recognised leading financial experts has warned
in a report which defends accounting standards as ‘not a root cause of the
financial crisis’.

The Financial Crisis Advisory Group (FCAG), formed in the wake of the global
economic meltdown by US and international accounting rule makers, today
published its recommendations where it said the independence of standard setters
should be maintained.

‘We strongly believe that to develop high quality, unbiased accounting
standards that are widely accepted, the [accounting] boards must follow their
due process procedures, including wide consultation with interested parties, and
our recommendations on possible new standards are not intended to pre-empt the
outcome of that due process,’ the report states.

Both the US and international standard setters have come under political
pressure in the wake of the financial crisis to rethink their measurement and
impairment rules.

FCAG also found accounting standards where not one of the root causes of the
crisis, but that weaknesses in accounting standards and their application where
brought to light by unfolding world events.

It cites the difficulty of applying fair value accounting in illiquid
markets; the delayed recognition of losses associated with some financial
instruments; issues surrounding the broad range of off-balance sheet financing
structures; and the ‘extraordinary complexity’ of accounting standards for
financial instruments, as weaknesses exposed by the crisis.

The International Accounting Standards Board is in the process of reviewing
these rules.

FCAG also highlighted the importance of high quality reporting rules which it
said plays an ‘integral role in the financial system’.

‘Financial reporting plays an integral role in the financial system by
striving to provide unbiased, transparent and relevant information about the
economic performance and condition of businesses,’ the report states.

FCAG’s report has already won some support with the Association of British
Insurers (ABI), which released a statement supporting FCAG’s findings this

ABI director general Stephen Haddrill, who is a member of FCAG, said the
report will help standard setters improve the usefulness and accuracy of
financial reports.

‘The financial crisis has emphasised the need for high-quality financial
reporting. This report highlights the importance of independent accounting
standard setting to investor confidence, as well as the need to avoid knee-jerk
responses,’ he said.

Related reading