Going, going, gone
Before we can get to the bottom of the banking crisis we need to know what going concern actually means, says Tim Bush
THE FINANCIAL REPORTING Council has just asked the simplest but most intelligent question in 20 years of accounting standard setting. What does going concern mean?
It took the House of Lords to identify that going concern was THE question. Because directors and the auditors sign accounts off on it, the buck stops with them. But, to conclude on it requires reliable audited information.
The FRC has needed to ask the question because the omnipotent but accident prone IASB regards a prudent view and loss recognition as passé, but has overlooked that the host of most business activity is a limited liability entity. That makes a company an option itself. The shareholders have an option to take the profits, and an option to leave losses with the creditors. It is therefore shareholders who ultimately decide on going concern and the directors and auditors should sign off knowing that sensitivity. A non-going concern is any limited liability company that the shareholders will no longer support.
Shareholders are deemed equal as a class, but once shares are traded in a capital market they are not equals if the accounts are faulty. The most vigilant in the market will actively seek out any inevitable losses, so that they can get out of the company ahead of the rest – selling their shares. Information advantage can sit inside any company. The truth is the same whether listed or not.
The true going concern proposition depends on the information for the majority being transparently truthful in the accounts, not occluded, fudged or lost.
Governance depends on it too, else AGMs are held on a false manifesto. It should not require shareholders having to penetrate volumes of irrelevant data to spot the core weaknesses of a company’s balance sheet, its “profit” trend or its business model. Being a going concern depends on the viability of all three.
IFRS – despite the myriad of data it throws up – creates information disadvantage by asking the wrong questions. It has actively left out relevant losses and contingencies from its standards, but they are the key ingredients to determining whether the going concern presumption is correct. By the time the smartest part of the market deduces what a board, its shareholders or a central bank does not know, it’s probably too late. IFRS accounts may show thriving returns, in accordance with IFRS, but the rosy picture may not be a true going concern, but a step from inevitable oblivion.
The IASB has said that banking capital is for banking regulators not accounting standards. I believe it is wrong. Going concern is an issue for any company, and that is an accounting matter. Regulators do not sign off banks’ accounts on a going concern basis, they depend on it. Basel regulation actually works on a “gone concern” basis, it is sizing up the buffer needed in the event a bank becomes insolvent. Whether it is becoming insolvent is an accounting issue. A secretly insolvent company is hardly likely to be a going concern.
The Queen asked of the banking crisis: “Why did no one notice it?” Because the IASB got the first question wrong and the rest of its many mistakes then followed.
Tim Bush, is an activist investor, and a member of the UITF of the UK Accounting Standards Board, these are his personal views