The Death of Business Intelligence

International financial reporting standards ‘need change’

Posted in Uncategorized by TheLondonEconomic on July 4, 2013

International financial reporting standards (IFRS) used to judge a company’s financial health are not up to scratch, Conservative Member of European Parliament (MEP) Syed Kamal has argued.

Speaking to the Financial Director, he said the IFRS – which have been used prior to, during, and after the crash – does not give a true and accurate account of a bank’s balance sheet. What’s more, investors seem to have become attuned to its outdated function within the corporate realm, which is reflected by the discount many banks are currently trading at in the markets against their stated asset value.

Globally converged accounting standards are certainly desirable in the contemporary financial landscape, but they must be prudentially sound in order to work. European and American accounting models are inherently different. In the US, financial standards are geared towards corporate governance, and by merging the two together under the mandate of the G20 and International Accounting Standards Board, the effects of each system have been diluted with damaging implications.

“Investors are concerned that the IFRS has encouraged a move away from the principle of prudence, whereby accounts must not overstate assets or understate liabilities, profits should only be booked once they are realised, and sufficient funds are put aside to cover any potential losses,” Mr Kamal told the Financial Director.

Instead, financial institutions are using accounting systems based on neutrality, which encourages auditors to move away from exercising professional scepticism to simply ticking boxes. In part, it is this practice of ‘tick boxing’ that allowed the financial meltdown to happen, with financial institutions not storing enough funds to cover their exposure to credit default swaps and collateralized debt obligations.

An alternative system

Accounting practices should ensure that appropriate levels of loan loss provisions are in place, which means returning to a system that predates convergence in the ‘80s, Mr Kamal argues. The European Financial Reporting Advisory Group must take on a greater role in ensuring that adequate reporting methods are in place that accurately reflect performance, whether that be through new reporting standards or capital buffers.

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