Category Archives: Accounting profession

Professional accounting theory and practice

Accounting profession, Banking, Economics, Political Decision, Ratings Agencies

Pushing the Economy with AAA Rated String

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Following the demise of Lehman Brothers almost three years ago, the then UK government, being committed free market idealists and N word phobic, pumped trillions of taxpayers’ money into the economy to keep it buoyant. But it did so by funding banks which would otherwise have collapsed, and then trying lamely to persuade them to pass it on to real economy businesses so as to maintain employment. But the banks were reluctant to pass the money on because they needed to rebuild their own balance sheets, having themselves made such a mess of them. The phrase ‘quantitative easing’ was really bank balance sheet easing, and had limited impact on real business and real jobs beyond the financial sector.

Now we are back in the same mess and the talk is again of quantitative easing for the same purpose. The insanity of persisting with the same dysfunctional strategy is the result of the apparently unshakeable belief in free trade, open markets, with minimised government, taxes and public spending. But quantitative easing won’t stimulate the economy and create jobs any more than it did the last time. The only difference between now and then is that instead of the banks being in greatest need, it is now nation states which are seen as the key problems and the focus of the credit rating agencies.
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Accounting profession, Economics, Political Decision

The Big One is Coming

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Two brothers. One got a real job and lived modestly at home with his parents. The other got the gambling bug and got clever at it. He found all sorts of obscure forms of gambling and developed sophisticated new techniques and methods and made a lot of money and lived a wild lifestyle. Till he lost it all and more, much more. And had to go to his father and plead to be bailed out. The amount was more than his father could afford. So he started to charge the working brother for his food and accommodation, and explained to his wife that they would have to tighten their belts so as to pay off the son’s huge debts. The brother grumbled but paid up. The important thing was, what did the wife do?

She considered her options. She could just walk away, but she wanted to keep the family together. The really important thing was to make sure it never, ever, happened again. After much thought, she told her husband she would only stay if he made the feckless one stop gambling and made him realise he had been gambling with all their lives. In addition he would have to be made to get a real job like his brother. And he would have to repay all the money that had been spent to bail him out, both to the parents and to his brother. If the husband didn’t agree with all that, she would leave.
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Accounting profession, Banking, Free Market Capitalism, Political Decision, Public Sector, Shareholder Value

Limits of Economic Advice to the Coalition

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David Cameron’s special advisory committee of ten on economic strategy includes five business graduates, five knights of the realm, three retailers, three asset strippers, two accountants, a banker, a lord, an advertising exec, a publishing exec, and Sir James Dyson. Only the last named has a background in manufacturing and is likely to have got his hands dirty at work.

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Accounting profession, Audit profession, Banking, Corporate Governance, Regulation

Basel’s New Banking Game Rules

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The new rules on bank liquidity, now agreed by the Basel Committee on Banking Supervision, will contribute to reducing banks’ risk-taking. But not a lot, and only slowly. Under pressure from the banks themselves, the rules have been softened and their implementation slowed down. Timidity in tightening requirements is justified on the grounds that too fierce and too rapid rebuilding of bank balance sheets would take too much out of the real economy and so contribute to the much feared double dip recession. But beware!

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Accounting profession, Audit profession, Corporate Governance, Corporate Ownership, Free Market Capitalism, Regulation, Shareholder Value

Codes of Corporate Governance Practice

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The Financial Reporting Council (FRC), which oversees issues of corporate governance, has been busy recently. In June it published an updated UK Corporate Governance Code. Now, this month it has published the companion UK Stewardship Code for institutional investors. So we now have both sides of the governance coin, ready for implementation, the considered regulation by City insiders to prevent a repetition of the banking excesses which landed us in such a pickle two years ago. What do they amount to?

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Accounting profession, Audit profession, Bank Bonuses, Company Law, Corruption

Going for Goldman

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The problem with the Securities and Exchange Commission’s long overdue pursuit of the potentially fraudulent practice in Goldman Sachs is that it is likely to take a long time to conclude, will cost an arm and a leg, and its outcome is far from certain. If and when the UK authorities follow SEC’s example, it would be likely to cost more, take longer, and be even less likely to produce convictions.

The problem is that such legal actions engage with the details of credit default swops (CDSs), collateralised debt obligations (CDOs) and the whole panoply of financial derivatives that have been deliberately invented to mislead and defraud. CDOs were invented so as to deliberately disguise the real extent of liabilities and so make a firm appear less risky and therefore capable of taking on more debt, which was done with the same deliberate intention to mislead and defraud. This is a minefield where the attribution of blame and intent is full of deliberately confusing and opaque detail.

It would be better to step back from the detailed machinations and simply take a view of the truth and fairness of a firm’s published accounts. It is not difficult to do with the benefit of hindsight. Where balance sheets have been seen not to reflect a true and fair account of a company’s position, the auditor who certified the balance sheet should be prosecuted. They are paid vast sums for their expertise and diligence in certifying company accounts. Auditors who are party to misleading accounts, are guilty of either incompetence or dishonesty. They should surely have to face the full force of the law and be struck off by their professional body. Similar treatment should be meted out to those who presented the misleading accounts. And those who gained through their deliberate misrepresentation and have taken large bonuses as a result, should be similarly treated, with their fraudulently earned bonuses being repaid.

This would be a major change in accepted custom and practice, but it is to be hoped the SEC’S action against Goldman Sachs is a first step in that direction.

Accounting profession, Audit profession, Corruption

Auditing Repo 105 Deals

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John Lanchester, writing in last Saturday’s Guardian, explained the essence of the Repo 105 deals which Lehman Bros did to create the false impression in their accounts that the company was fit and well. And Lehman’s accountants, Ernst & Young, were happy, as Lanchester explained, to ‘sign off on the deal … It was all within the rules.’

But it wasn’t. Company accounts, in Britain and in America, are intended to reflect a true and fair picture of the company’s position – otherwise what is their point? It doesn’t matter that custom and practice has become so fraudulent in financial circles. The only reason why auditors are still required in Britain to certify the accounts as “true and fair” is to be sure that the various clever creative ways of accounting to disguise the true picture, which in themselves may be perfectly legal, are not used to deceive. At the end of the day the accounts must give a “true and fair” account. If audited accounts are not “true and fair”, then the accountants responsible, and the auditors who signed them off, should be struck off and locked up.

Accounting profession, Audit profession, Corruption, Economics, Shareholder Value

Financial Swindlers

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So it turns out the top brass at Lehman Brothers were deliberately lying about their indebtedness to the tune of $billions. Shades of Enron! So what’s new? Speculative markets are based on lies. In the old days financial institutions such as pension funds and insurance companies, served some social purposes. Today, hedge funds, sovereign funds and the like, serve no social purpose. They exist only to make money for their investors and themselves, both being in a position to take risks with ‘loadsamoney’. They have no moral compass beyond ‘making as much money as possible’ to quote the famous economic mountebank, Milton Friedman. So, of course, they are liars. The accounting profession are culpable, deliberately falsifying balance sheets so they appear less risky than they are. And firms of auditors are liars, declaring the accounts to be “true and fair” when they know perfectly well they are nothing of the kind. But very few of these parasitic liars end up behind bars.