FRC defends accounting rules in lead-up to crisis

THE UK’s corporate reporting regulator has defended international accounting rules blamed for destabalising banks’ finances which exacerbated the financial crisis.

A House of Lords, inquiry now into its fifth week, has so far heard international accounting rules led banks to use inflated asset values, which later collapsed as the crisis took hold in 2008.

The UK abandoned domestic accounting standards in 2005, known as UK GAAP, and switched to international rules. Yesterday, the Financial Reporting Council (FRC), defended the switch, arguing that homegrown accounting rules were not up to scratch.

“You can’t look back to an old world and say lets get back to that,” said Stephen Haddrill, chief executive at the FRC.

“The accounting world has had to move with the financial world.”

He said UK GAAP was lengthy and had failed to keep pace with the financial world.

“It did not have some of the key elements it would need in order to cope with modern capital markets… Personally UK GAAP is not a particularly simple set of standards it goes to well over 2000 pages.”

Accounting experts and academics have heaped criticism on international accounting rules, believing them to be inferior to UK accounting rules, abandoned following the 2005 decision.

“I believe that these deficiencies were a major factor in the banks that failed in the UK and Ireland,” Tim Bush, a member of the Accounting Standards Board’s (ASB) Urgent Issues Task Force told the Lords committee in October.

“I think we need UK GAAP back.”

The Lords committee also heard auditors should have sounded the alarm before the crisis took hold.

“They need to challenge companies when the sky is still fairly blue and the cloud is still a long way out on the horizon, not when it’s started raining,” Haddrill said.

“There’s quite a danger in the auditors having to sound the alarm just as the crisis is happening – what we need to ensure is that the auditors are in a position to send an early warning signal.”

The inquiry also heard auditor’s training needed improvement to keep pace with rapidly changing developments in the financial world.

“There is very little formal qualification required after an auditor has been qualified as a partner, but in a 25 year period after that happens the world moves on,” Haddrill said.

“Clearly the financial services regulation requirements have moved a lot in that period and need to be fully understood.”

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