On the money with Gavin Hinks

For our profile last week Lord George two particularly interesting things. On
fair value, he said he could only see it leading to a little bit of instability.
Fair value is fast turning into the bête noir of accountancy. Suddenly its
responsible for causing the credit crunch and destabilising the balance sheet of
every bank you can wave a withdrawal slip at.

Except Lord George didn’t stop there. Sure, he admits fair value has its, er,
difficulties, but companies should be working hard to explain the underlying
position so analysts and investors don’t have to be so reactive. And that was
warning number one.

He then turned his attention to the credit crunch and all those new financial
instruments that lay at the heart of the problem. He liked them, he said,
because they spread risk. But here’s the crux. He added that he just never
thought no one would ask what the risk was.

Now this point has been made before, but coming from Lord George, it has
added bite. If someone like the former governor of the Bank assumed that all
those intelligent bankers would unearth what the underlying position was for
their investments, then none of us need feel unfair in making the same
assumption. In fact we can feel perfectly justified.

Last week saw private equity supremo John Moulton complain about the service
from accountants performing due diligence. If he’s right, there’s a way they can
redeem themselves. They simply start helping bankers identify what these
financial instruments are built upon. If they do that then those with accounts
at places like Northern Rock can sleep easier.

Gavin Hinks is editor of Accountancy Age