Tyngewick Gawcott

Small Companies

2011-11-28T11:38:00.001Z

BIS has a discussion paper on small companies. Although the discussion period has formally closed I understand they are still accepting comments.

House of Lords Report

2011-04-12T17:37:00.002+01:00

All power to the House of Lords committee for taking the auditors to task. Predictably they reacted defensively but we shall see if any meaningful reforms result.

Did Financial Reporting contribute to the Global Financial Crisis

2010-10-28T14:45:00.007+01:00

People sometimes ask me whether poor financial reporting, in particular the use of fair value measurement contributed to the Global Financial Crisis.

A recent article by Laux and Leuz in Accounting Organisations and Society reviews research on the question. It is linked from here.

The House of Lords Economic Affairs Select Committee is looking into the Audit Market. The meeting televised here considers the question of the financial crisis

http://www.parliamentlive.tv/Main/Player.aspx?meetingId=6801

Ex-chancellor Nigel Lawson describes the auditors as the dogs that didn't bark. Tim Bush provides a number deficiencies of IFRS, including the loss of 'prudence'.

IAS Plus has a timeline on regulation which includes summaries of a number of financial reporting issues

http://www.iasplus.com/crunch/creditcrunch.htm#0911casey

Accountancy Age has numerous articles touching on the topic. A list of them can be found here

How to find the conceptual framework

2010-10-28T14:38:00.002+01:00

Further to my previous post, I find that one can obtain free access to the new chapters 1 and 3 of the conceptual framework from the FASB website, where it is lurking disguised as SFAC 8.

The stately dance continues

2010-09-28T16:38:00.002+01:00

The IASB and FASB have today published the definitive (for the moment) chapters of their joint conceptual framework for financial reporting. The project, which is supposed to lead to 'internally consistent' standards is already so riddled with contradictions that it has little credibility. However, the long extended search for a framework allows the standard setters to defer awkward questions almost indefinitely.

The latest twist [1] is the assertion that the purpose of financial statements is to

'To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.'

The irony of this is that most equity investors never provide any financial resources to an entity. They buy and sell second-hand shares. When new resources are supplied to an entity, more information, by way of prospectuses and so on, is created that supplements financial statements.

[1] Well I assume the final document includes this phrase. At the time of writing I'm relying on a previous document as I don't have access to the actual document; it is not freely available - one has to pay for a subscription to get it.

A new financial statement? Or an old one?

2010-03-18T11:24:00.002Z

David Tweedie has apparently confirmed that the IASB is considering including a 'regulators'' page in financial statements so that people concerned with financial institutions can be given the information they need to ensure market stability. It's quite likely that this will include something that looks very like a historical cost balance sheet, and so, rather being something new, this might signal a return to something old.

This could be a fascinating accounting experiment and would give standard setters an opportunity to find out what information is actually demanded, has impact and has value relevance. I foresee the growth of a minor industry in researching the relative importance of regulatory and 'decision useful' information.

More on Lehman's

2010-03-18T11:20:00.002Z

Our growth in understanding what went on at Lehman's proceeds apace. Despite the criticism of financial transactions that occurred in London, it seems the accounting that is at issue occurred in the USA. It's said that because the Repo transactions involved exchanging assets worth more than $105 for every $100 of cash received SFAS 140 permitted them to be treated as sales because Lehman's wouldn't have had enough cash to buy them back again.

Layers of the onion

2010-03-17T11:45:00.004Z

The Lehman collapse has been blamed as the crucial event in the credit crunch but now it is revealed that aggressive accounting had been hiding problems for some time. The device that it is alleged was used to manipulate the financial statements was accounting for repo (repurchase) transactions.

In a repo an asset (a block of loans, say) is exchanged for cash, and the exchange reversed some time later. In substance this is usually a short term loan with the asset being used as collateral.

It's alleged that Lehman's were accounting for these as sales so that the asset disappeared off the balance sheet and the cash was used to reduce net borrowing. The effect is to reduce the bank's reserve ratio to within acceptable limits.

How was Lehman able to count these transactions as sales rather than loans? How was it able to exploit the provisions of the relevant US accounting standard, SFAS 140? It is likely that Lehaman's did so by a piece of cheeky financial engineering whereby the transaction took three stages, with the asset going back and forth to the counter-party three, and ultimately, four times. The title link shows how this is done.

What we don't yet know, is why this had to be done in London, the role of fair value, whether the financial reporting in the UK reflected the same things as the American accounting, and whether the accounting was routed through off-shore vehicles.

This one will run and run.

Success in Doctoral Studies

2010-01-27T16:15:00.003Z

At a recent research forum the following success index for PhD studies was proposed:

PhD Success Formula

S= (HW + 3M + NR/4)xC/A
___________________
(1 + FM + FB/10 + S)

Where: HW= Hours worked on thesis

M = meetings with supervisor

NR = number of references

C= Average number of cups of tea/coffee per day +1

A=Average units of alcohol per day + 1

FM = ln(Number of family members)

FB= Number of Facebook friends

S= Number of Sports teams supported + 4 x Number of sports played regularly.

While this is clearly an early attempt at a descriptive index related to probability of success it indicates the need for further research to improve the functional form and parameterisation. One commentator has already suggested that comsumption of illegal drugs should be added into the measurement of A, for example.

Mintzberg on Bonuses

2009-12-02T11:26:00.002Z

In an article in the Wall Street Journal (click on title link), management guru, Henry Mintzberg, questions whether directors' bonuses are necessary at all. A very timely question, in my opinion. There is little evidence that bonuses create long term value or that managerial talent is in very scarce supply. My personal preference would be to pay CEOs a fixed multiple of the average salary in the organisation. At least it would stop directors pay increasing faster than the average and it would be an incentive for companies to give a better deal to their low paid workers.

Politicisation of Accounting Standards

2009-11-30T11:40:00.002Z

The article in the title reports the Association of British Insurers bemoaning the EU's refusal to endorse IFRS 9 'Financial Instruments'. ABI spokesperson, Paul Vipond, regrets the 'politicisation' of accounting standards.

Is politicisation such a bad thing? Standard setters are in business making rules about how companies keep score. These rules can have real economic effects that make some people better off and some people worse off. For example, many people hold the pensions standards partly to blame for the demise of final salary pension schemes. Now, this kind of decision about wealth transfers is quite rightly in the political domain - our elected representatives should be the people making these decisions, not a private and largely self perpetuating organisation, such as the IASB.

The IASB likes to pretend that its work is purely technical and that it is devoted to improving the way that financial statements 'tell things as they are' so that decision makers are more fully informed. By denying that accounting standards involve choices that affect individuals and companies, the IASB attempts to avert criticism about its legitimacy.

If IASB were doing its job properly it would be looking at the likely economic and social impact of its standards.

Bob Monks lecture

2009-11-24T16:58:00.002Z

My thanks to the corporate governance blog for drawing my attention to this lecture by Governance Guru Bob Monks on the past, present and future of governance. There is an accompanying paper at:

http://www.ragm.com/BlogPosts/HLSClass111009.pdf

A clash of philosophies?

2009-11-16T16:33:00.002Z

The EU has deferred accepting the IASB's new standard on financial instruments (IFRS 9). According an article in the FT (see title link) this is because some EU countries (principally Germany, France and Italy) see a role for financial reporting in maintaining stability of financial systems, whereas the IASB doesn't.

This seems to be a case of the IASB being misled by its own propaganda. Although the constitution of the IASB gives it a role in wider economic matters, it steadfastly refuses to admit that its narrow focus on the presumed interests of capital providers may not provide those benefits.

In a recent lecture at the Institute of Chartered Accountants, Professor Mike Power suggested that, in relation to 'fair value', people could divided into fundamentalists and pragmatists. The fundamentalists couldn't see any alternative to fair value whereas the pragmatists' main interest was in whether accounting standards worked or not. His main point was that because of different philosophical standpoints the two groups of people couldn't understand each other's views.

In particular the 'fundamentalists' (I think he may have included the IASB staffers in this category) can't understand the objections other people have to their standards.

A useful website

2009-11-16T16:06:00.001Z

The title link is to the World Gap Info website that provides access to news, commentary and the full text of International Standards without the need to register and login at www.iasb.org.uk.

New financial instruments standard

2009-11-12T12:30:00.003Z

The IASB has just published a new standard as part of its project to update IAS 39 on the measurement of financial instruments. Accountancy Age (see title link) refers to this as a 'fair value' standard which is confusing as there is another ongoing project to redefine what is meant by 'fair value'. The IASB's press release about the new financial instrument standard is here. At first sight this looks like a considerable reversal of the trend towards fair value for everything but the Europeans are still suspicious that it might lead to an increase in use of fair value rather than the reverse.

Fair Value and Accounting Politics

2009-11-11T09:00:00.002Z

The title link is to an article in the FT about the European reaction to the IASB's proposals on fair value accounting. The IASB proposes to reform the unsatisfactory IAS39, which classifies financial instruments into somewhat arbitrary categories. There will be the option to value items with predictable cash flows on an amortised cost basis (like a tangible fixed asset) rather than marking to market (fair value). However the EU is worried this will disadvantage European banks in comparison with US ones that account under different rules.

The moral of this situation: financial reporting is strongly influenced by politics and competition whatever the theoretical arguments may be.

Monitoring Board

2009-10-01T12:15:00.002+01:00

In January 2009, the IASB formed a 'monitoring board' composed of representatives of international regulators. Said board has been fairly quiet but has just said that standards should be 'reliable, relevant, understandable and comparable'. This is an interesting straw in the wind because it reflects the old wording of the IASB conceptual framework, not the proposed new wording, which replaced 'reliable' with 'faithful representation'. Words matter and this was not just a cosmetic change. 'Faithful representation' was seen by some commentators as part of an ongoing trend to move towards fair values.

Another term, another financial crisis

2009-09-30T17:07:00.002+01:00

The world seems to be a more stable place than it was a few months ago. The stock market has had a record run in the last quarter, house prices are stabilising, even the pound has stopped falling against the Euro.

Does this mean the financial crisis is over? I doubt it. The public finances are a mess and we can't see any fundamental change to them until after the election. What then? My guess is that whoever wins is going to squeeze public expenditure hard. Universities, inter alia, will be in for a thin time of it. However the size of the cuts needed to reduce borrowing to manageable levels is enormous. The alternative course of action - a rousing bout of inflation - is going to look awfully tempting to whoever wins the election. Index-linked bonds anyone?

The trouble with markets

2009-05-15T08:38:00.002+01:00

Roger Martin argues (see title link) that linking managers rewards to share prices (eg with options) gives them an incentive to manage the 'expectations' market rather than the real market for production of goods and services. He fingers efficient markets theory, shareholder value and agency theory as the intellectual culprits and advocates reward based on 'real' performance.

He has a convincing case and a corollary of his argument would be a return to historical cost accounting rather than the use of fair values, which are based on the expectations market.

The unacceptable face of capitalism reborn?

2009-05-05T11:54:00.002+01:00

The title link is to a report that hedge funds are buying poor quality corporate debt in order to take over ("loan to own") or liquidate ("loan to bust") the issuing companies. Edward Heath dubbed some of the activites of Tiny Rowland's Lonrho as "the unacceptable face of capitalism". We seem to be seeing that face in a new guise.

Accountants plead for protection

2009-04-28T08:55:00.001+01:00

In possibly the least unexpected news item of the year, Accountancy Age reports that the Big 4 are seeking immunity from law suits arising from the credit crunch. Perhaps they should have thought a bit more about the risks their financial clients were running.

Financial Oligarchs

2009-04-15T09:39:00.002+01:00

Writing in the FT, Martin Woolf asks whether 'America is the new Russia'. The power of the financial sector to influence government and attract subsidies from the public purse is corrosive. Graphs of relative wages and financial sector profits show how much hold the financial sector had generated over the economy as regulation was reduced.

Will increased regulation, which everyone now expects, reverse this? The volume of noise generated by interested parties seeking to reduce the impact of regulation makes one wonder whether new regulation will be toothless.

Credit crunch humour

2009-03-20T10:30:00.001Z

Here is a piece of internet humour about the credit crunch, I'd attribute it if I knew the author. For the moment credit it to 'anon'.

The Credit Crunch Explained

At last! An explanation I understand...

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she
decides to allow her loyal customers, most of whom are unemployed
alcoholics, to drink now but pay later. She keeps track of the drinks
consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of unemployed alcoholics
flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment
constraints, Heidi increases her prices for wine and beer, the most popular
drinks. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and increases Heidi's
borrowing limit. He sees no reason for undue concern since he has the debts
of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these
customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities
are then traded on markets worldwide. No one really understands what these
abbreviations mean and how the securities are guaranteed. Nevertheless, as
their prices continuously climb, the securities become top-selling items
because (insert here the name of your financial advisor) recommended them as
a good investment.

One day, although the prices are still climbing, a risk manager of the bank,
(subsequently of course fired due to his negativity), decides that the time
has come to demand payment of the debts incurred by the drinkers at Heidi's
bar. But of course they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better,
stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment-due dates,
and having invested in the securities, are faced with a new situation. Her
wine supplier claims bankruptcy, her beer supplier is taken over by a
competitor.

The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the
non-drinkers.

Some serious arguments against fair value accounting

2009-03-20T09:54:00.002Z

The title link is to a very thoughtful and authoritative set of arguments against fair value accounting by a previous chair of the Federal Deposit Insurance Corporation. William Isaac argues, cogently, that the current recession is largely caused by mark-to-market, aka 'fair value', accounting and that the previous, historical cost system served us well for decades. He argues the Savings and Loan crisis of the 1980s had the potential to be much worse than the current crisis but serious harm was averted because banks were permitted to carry items at the lower of cost or economic value rather than being required to mark them to temporary unrealistic values.

My thanks to Stella Fearnley for pointing this piece out to me.

Sue the auditors

2009-03-18T11:35:00.002Z

Former Chancellor Nigel Lawson and 'semi-house trained polecat' Lord Tebbit have both suggested that the auditors of failed banks might be sued by the government. If they did so the auditors would doubtless rely on the defence that they reported the fair values of the assets held by the banks. It would be an interesting case and well worth arguing in court in order to clarify the role of the auditors.

The FSA report on the current crisis is likely to make some interesting observation of the pro-cyclical nature of banks' accounting.

Sants and sinners

2009-03-16T17:13:00.002Z

All right the title is a bit forced, but the link is to one of Peston's Picks on the BBC website. Peston examines a speech by Hector Sants of the Financial Services Authority where Sants says

"Markets have shown not to be rational; excesses have not been corrected by market discipline".

Peston draws the lesson that markets won't stop management making stupid decisions. He doubts that the FSA would be able to stem the tide of irrational exuberance on its own and concludes that only expert non-executive directors would be up to the job.

Jack Welch says shareholder value a 'dumb idea'. Last 28 years a mistake.

2009-03-13T09:45:00.002Z

In an article in its 'Future of Capitalism' series the FT has interviewed Jack Welch the legendary ex-CEO of General Electric and the man widely regarded as the father of 'shareholder value'. He now rejects shareholder value as a strategy, calling it 'insane', but suggests shareholder value is an outcome of good strategy based on employees, customers and products.

This is yet another straw in the wind indicating the end of Anglo-Saxon capitalism as we know it, and it is to be hoped, the equating of 'liberal democracy' with the freedom to make as much money as possible.

Along with squadrons of flying pigs, look out for Francis Fukuyama explaining that history wasn't dead, merely tired and shagged out after a long squawk.

Costing: a warning for the unwary

2009-03-02T16:57:00.003Z

A widely used text book, Jones's 'Accounting' says

... costing concerns (1) setting a price for a product or service so that a profit is made and (2) arriving at a correct valuation for stock. (p379)

This is seriously in error and we shouldn't be teaching it to vulnerable young minds. Using costs to set prices is a way of going bankrupt quickly. Prices need to be set at the price that will optimise profits, which is largely determined by the market. Using costs to set prices is likely either to set prices too cheap, in which case profit opportunities are lost, or too expensive, in which case volumes will be too low earn the best profit.

Valuation of stock is a relatively minor function of costing, since it is only about finding a number to attach to stock in the financial statements and should have no substantial economic consequences. The notion that there is a 'correct' value is something beginners in management accounting should be warned about. All management accounting valuations are essentially arbitrary to some degree. What is important is to know how the application of the arbitrary rules is likely to affect decision taking and distribution of wealth.

In my view, management accounting is firstly about maintenance of control within organisations. Costing is a process of accumulating costs so that someone is made responsible for keeping them under control.

The second purpose of management accounting is to provide information for taking decisions - but the people taking the decisions really ought to understand where the numbers come from so they can work out what is going on. Sadly, that is often not the case.

The third thing that management accounting does is to consolidate the position of those in power in the organisation, for good or ill. Not only are they provided with information that others don't have, but they also get to decide on resource allocation through the budgeting system. By labelling your group or department as being in deficit (for example by allocation of central overheads) the people in power get the chance to intervene, demand cuts, veto appointments and do all sorts of other damage. Again, sadly, people often believe deficits have more substance than they do. Management accountants like deficits. Deficits give them power. They get asked to write reports and join task forces looking for cost savings and all kinds of other exciting stuff. People defer to them and ask their opinion. When everyone is making a profit, accountants don't have much to contribute. Their role is not to comment on strategy and they don't know about marketing or product development issues so they tend to be ignored or reduced to number-crunchers.

Odd man out

2009-02-27T09:15:00.002Z

Who is the odd one out?

Lord Stevenson, former chairman, HBOS
Andy Hornby, former chief executive, HBOS
Sir Fred Goodwin, former chief executive, RBS
Sir Tom McKillop, former chairman, RBS
John McFall MP, chairman of Treasury select committee
Alistair Darling, Chancellor of the Exchequer
Sir Terry Wogan, presenter of Radio 2 breakfast show.

Answer: Sir Terry Wogan. He is the only one with a banking qualification.

(Courtesy of Private Eye)

Those in power determine what counts as knowledge

2009-02-25T09:53:00.002Z

The title is a summary of one of the ideas of Michel Foucault and has particular application to accounting. No better illustration of this is to be found than in the pensions debate and the current hoo-ha over the Post Office Pension Fund. We are told that the fund is in deficit, that this is a bad thing, the pensions of current pensioners and employees are at risk and urgent action must be taken. The solution is to sell off the Post Office to provide private capital, (at the same time as banks are being nationalised because of the failure of private capital).

My point, however, is that the idea of a 'deficit' is highly contestable. The deficit is the difference between the market value of the fund's assets compared with a discounted cash flow value of the fund's liabilities. Matching these two quantities is not what matters. The important thing is that the future cash flows of the fund are adequate to support the future cash outflows into the far distant future. Getting the funding of the pensions right is a serious matter, but it is not urgent.

We all know stock markets are down at present but we also know that dividend streams are far less volatile than stock prices. Pension funds used to be valued on the basis of projected future dividends interest flows and that is far more relevant to the long term solvency of the fund than temporary stock market fluctuations. We can only know the extent to which the Post Office pension fund needs long term support when someone gives us some sensible projections about future cash flows.

To the extent that there is a pensions crisis at all (I'm not convinced there is one) it has largely been caused by two things: firms taking contribution holidays when stock markets were high, because funds seemed overvalued; and, the effective removal of tax relief on dividends received by pension funds. Now, let me see, who was responsible for that? Ah yes, Gordon Brown.

For the time being, it is politically expedient to talk up pension deficits, so don't expect any sense on the matter any time soon.

How long can you wait?

2009-02-17T10:47:00.002Z

Writing in the FT Managed Funds Section, John Authers reviews Elroy Dimson, Paul Marsh and Mike Staunton's 2009 edition of the Global Investment Returns Yearbook. He comments:

The FTSE-100 is still languishing far below its all-time high, set at the end of 1999. According to the yearbook, using the historical risk premium, the odds are only 50/50 that it will get back to that peak by 2018, on a capital appreciation basis.
Indeed there is a 25 per cent chance the FTSE will not even have regained its peak by 2033 (on a total return basis, with dividends reinvested, it should get there much quicker).
Numbers like this suggest anyone aged about 50 in 1999, who invested in the FTSE safe in the knowledge that stocks are best in the long term, would have reason to feel angered.

With the FTSE just over 4000 and with a P/E of about 9 stocks are selling just below intrinsic value on the basis of past history. Have we moved into a new world or will previous patterns reassert themselves? My guess is we haven't moved into a new world - new dawns are often hailed but seldom arise.

An amazing revelation?

2009-02-12T12:04:00.002Z

Writing in the Financial Times, Matthew Engel reports noticing an astonishing gaffe by one of the bankers being interviewed by MPs about the Credit Crunch.

Two revelations stood out. One was a phrase that came out in mid-waffle from Lord Stevenson, who startlingly referred to “the balance between the sales culture on the one hand, and caution and integrity on the other”, thus suggesting an organisation so dysfunctional that these were incompatible.

Just how much integrity was the bank willing to sell for each pound of Sales?

What shall it profit a company if it loses its reputation?

2009-02-10T11:07:00.002Z

Barclays Bank published its final results for 2008 and reported what a appears to be a healthy profit of £5.2bn after tax. However two items are worth a second look. Included in the profit is £2.4bn of gains on assets acquired from Lehman Brothers after the collapse. Marking to market can have odd effects where so-called 'bargain purchases' are made.

The second item is even more remarkable. The company recorded a £1.6bn gain on its loan notes. The reason for the gain is that Barclays credit worthiness has deteriorated since they were issued and the company is recording a profit because of it. When the EU adopted IFRS standards it originally forbade companies to treat their own financial instruments at 'fair value through the income statement'. However in 2005 the 'carve out' was removed and companies were allowed to designate some instruments as being treated at fair value.

What shall it profit a company if it loses its reputation? In Barclays' case it seems to be £1.6bn.

RIP EMH?

2009-01-29T15:16:00.002Z

The title link is to a Times article that almost makes a good point. The Efficient Markets Hypothesis (EMH) says that securities are priced taking into account all publicly available information. It doesn't say the price of a security is an objective assessment of value. A consequence is that one shouldn't be able to beat the market by using public information.

However it seems to me that the EMH has been asked to bear too much weight for regulatory purposes. In particular EMH seems to justify using current market prices in mark to market accounting, but prices are not values and reporting prices only reflects back at the market what it already knows.

Economist admits error shock horror

2009-01-05T16:18:00.002Z

In an unusually frank article (see title link) Anatole Kaletsky reviews his predictions for last year and why he got them so wrong. He gives three reasons for the September 2008 meltdown in markets:

1) The surge in oil and commodity prices driven by speculation
2) Regulatory blunders culminating in the decision to let Lehman fail but sparked by 'mark to market accounting'
3) Ideological adherence to a belief that the 'markets are always right'.

Predictably, Ian Powell, chair of PWC the largest UK accounting firm, jumped into the debate to defend fair value, using the hackneyed mantra that fair value reflects 'reality'. Accountants in official positions spout this cliche over and over again. There are two things wrong with the view:

1) No one is arguing that fair values should not be reported as footnotes, only that they should not be used for measuring profit, hence there would be no loss of transparency if the role of fair values was reduced in profit-measurement.

2) Fair value is not 'telling it like it is', it is reflecting an error prone market value back at the market. As defined by SFAS 157, fair value is effectively an estimate of the price of an asset that isn't going sold, as agreed between two hypothetical participants in a market that doesn't exist. This is certainly not 'reality'.

To his immense credit Powell says quite explicitly:

However, fair value accounting is pro-cyclical and on its own this does carry risks for the banking sector.

If everyone could be persuaded to agree to that proposition and that financial reporting has a role in maintaining market stability, then it is possible some progress could be made in improving financial reporting.

Madoff (with the money)

2008-12-19T17:14:00.002Z

The ingenuity of lawyers is always amazing. The New York Law School is suing a firm of auditors (BDO Seidman) not because they were the auditors of the fund run by the fraudster Madoff, but because they were the auditors of a fund that invested in Madoff's fund.

Presumably the auditors verified the value of the investments by looking up the price in a list and didn't think it was up to them to enquire about the substance of the Madoff fund. The Madoff fund had been audited, but by a rather insubstantial firm. Perhaps this is one of the disadvantages of over-reliance on market prices. If theory tells you the market can't be wrong, then the market price is conclusive evidence of value.

I wonder how the case is going to turn out and whether the law school is also suing its investment advisors.

Procyclicality

2008-12-12T16:02:00.002Z

The most damning charge against fair value accounting (FVA) is that it promotes volatility in the financial markets. The link in the title is to chapter 3 of the IMF's October Financial Stability Report. I had high hopes of this chapter but the analysis is woolly at times. The authors spend some time showing that FVA promotes volatility in financial reporting. That much is obvious. They provide some useful data on what proportions of banks fair-valued items are based on market values (level 1 - 25%), what are influenced by market values (level 2 - 69%) and what are 'marked to model' (level 3 - 6%) They then go on to simulate the impact of fair value on banks balance sheets through an economic cycle. They find that fair value is indeed procyclical, except in the case of the property cycle where falls in property values have the effect of increasing American investment banks' equity due to the fall in the fair value of their own debt. (Very counter-intuitive - fair value shows the banks getting better off because their creditworthiness has fallen.)

The authors don't conclude that fair value should be abandoned but rather than banks need to be regulated in a way that builds up reserves in good times to prepare for worse times to come.

The analysis is very partial because it fails to model the moral hazard inherent in fair value profit measurement. While it acknowledges that fair value can lead to instability in the system the authors take as given that financial reporting standards are directed at individual organisations and can ignore systematic effects. My own view is that financial reporting is all about increasing the economic welfare of society and refining the value of securities in second-hand markets is secondary to stability of the system and providing an environment where economic actors can contract efficiently with each other.

What the G20 really said

2008-11-27T16:01:00.002Z

The title link is to the text of the G20 Declaration on sound financial markets. The G20 had been urged to make financial stability a goal of the IASB, but funked it. Instead G20 said

With a view toward promoting financial stability, the governance of the international accounting standard setting body should be further enhanced, including by undertaking a review of its membership, in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body and the relevant authorities.'

Which seems to mean that the IASB had better make itself accountable to regulatory authorities such as the EU and the SEC. It is to hoped this will help the IASB ground itself in reality rather more than its wilder flights of fancy about fair values suggest that it is currently grounded.

Credit Crunch Humour

2008-11-27T10:06:00.002Z

Here is a selection of current internet humour ...

Q. What's the capital of Iceland?

A. About £3.50.

Q. How do you define optimism?

A. A banker who irons five shirts on a Sunday.

Q. Why have estate agents stopped looking out of the window in the morning?

A. Because otherwise they'd have nothing to do in the afternoon.

Q. What's the difference between an investment banker and a large pizza?

A. The pizza can still feed a family of four.

As a surprise, a chief exec's wife pops by his office. She finds him in an unorthodox position, with his secretary sitting in his lap. Without hesitation, he starts dictating: '. . . and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair.

Q. What's the difference between a merchant bank and Katie Price?
A. Both are institutions whose reputation is built on assets that, on closer inspection, turn out to be entirely artificial, vastly over-inflated and in danger of going through the floor at any moment. But at least Katie Price is still worth something.

Q. What's the difference between an investment banker and a pigeon?

A. The pigeon is still capable of leaving a deposit on a new Ferrari.

A lobbyist on his way home from Parliament is stuck in traffic. Noticing a police officer, he winds down his window and asks: 'What's the hold-up?' The policeman replies: 'A group of bankers are so depressed they've stopped the traffic and are threatening to douse themselves with petrol and set themselves on fire. 'They say they are bankrupt and no one believes we can get through the credit crunch. So we're taking up a collection for them.' The lobbyist asks: 'How much have you got so far?' The officer replies: 'About 40 gallons, but a lot of people are still siphoning.'

The credit crunch has helped me get back on my feet. The car's been repossessed.

Latest news: The Isle of Dogs bank has collapsed. They've called in the retrievers.

Q. What do you say to a hedge fund manager who can't sell anything?
A. Quarter-pounder with fries, please.

Bradford & Bingley employees are concerned they were given no notice of the takeover by Santander Bank.
A Government spokesman said: 'No one expected the Spanish acquisition.'

You know it's a credit crunch when...
* The cashpoint asks if you can spare any change.
* There's a 'buy one, get one free' offer - on banks.
* The Inland Revenue is offering a 25 per cent discount for cash-payers.
* Gordon Brown has stopped chewing his nails and started sucking his thumb.
* Your builder asks to be paid in Zimbabwean dollars rather than sterling.
* Highgrove has been repossessed.
* Victoria Beckham is pictured shopping in Primark.
* Alistair Darling's eyebrows have turned white.

With acknowledgements to Andy Thorpe, the man who made cow flatulence newsworthy.

As predicted, auditors now being sued for bank collapse

2008-11-20T11:49:00.002Z

An earlier post suggested that one of the reasons the big firms of accountants are desperate to maintain the legitimacy of fair value accounting is the likelihood of being sued as a result of financial collapses. News in the title link that the process has started.

If there is official acknowledgement that fair value accounting promoted risky behaviour by banks, then it will be a lot harder for auditors to defend allegations that their financial statements were misleading, or that they were negligent in assessing whether clients were going-concerns.

Stand by for a rush of going concern qualifications on the financial statements of financial institutions.

Procyclical Accounting

2008-11-20T09:37:00.003Z

Following up on my post labelled 'the most hated accountant in the world'[1], if you stick with the videos of the interview with Sir David, near the end of part 3 of the interview he admits that regulating banks on the basis of financial statements 'would be pro-cyclical', and another way needs to be found. As I understand it, banks have been regulated on the basis of financial reporting so this amounts to an admission that accounting in its current form, ie using fair values, is promoting cyclical behaviour, which is another way of saying causing financial instability. Since the remit of IASB includes some general economic objectives, as well as providing information for financial decisions, it would appear that current standards are not meeting those objectives.

[1] Sir David styled himself thus after debate on the IASB's pensions standard, which has itself contributed to a certain amount of financial misery and transfer of risk to those least able to bear it, pensioners, as well as having its own procyclical effects.

Financial Stability

2008-11-17T17:11:00.002Z

To understand what is going on in standard setting at the moment seems to require an advanced knowledge of the politics of both accounting and the EU. According to Accountancy Age (see title link) the world's top 20 nations discussed the internal politics of accounting at their recent summit. It is not surprising that they fudged the issue. The French, in their rational, Gallic way, were pressing that the IASB should set accounting standards taking into account financial stability. The Americans and Brits and the IASB, it seems, wanted to avoid that and there was the usual talk about 'transparency', as if it wasn't possible to both disclose the values of assets at the same time as incorporating a value in the financial statements that would promote stability - ie a prudent one. The conclusion was that the IASB would promote stability via a review of its governance. How changing the governance will change the standards set is a bit of a mystery.

Humour 111

2008-11-11T14:12:00.000Z

Cartoons on the credit crunch.

Where do we go from here?

2008-11-11T13:25:00.001Z

Bill Mott muses on three possible outcomes for the economy.

A Nobel Laureate speaks ...

2008-11-11T13:16:00.001Z

The title link is to an MP3 of Joseph Stiglitz discussing the credit crunch. Most of the talk is general economics, but is a welcome refresher to the basic economics underlying the current situation.

Crunch explained

2008-11-10T17:52:00.002Z

In a very readable Guardian article, John Lanchester explains the crunch and asks whether our view of the markets can ever be the same again.

"The most hated accountant in the world?"

2008-11-09T12:20:00.002Z

The title link is to a video interview with Sir David Tweedie, chair of the IASB. Sir David is his usual engaging self, but steadfastly avoids admitting that mark-to-market accounting may have had something to do with the current crisis. The nearest he gets is to suggest that accounting in its current form may not be usable as a way of regulating bank lending. To me, this suggests that, if it can't be used for this purpose, it's not portraying the reality Sir David is so keen on.

Winding up Lehman Brothers

2008-11-09T12:11:00.002Z

This article (click on the title link) by Jennifer Hughes in the FT magazine is a fascinating account of what the accountants did when the took over Lehman Bros after it became insolvent. It's rare to come across well written and interesting pieces about the work of accountants. This is definitely one of them.

More Humour

2008-11-09T07:44:00.001Z

Obama's journey to the White House in biblical style.

PWC voted 'employer of the year'

2008-11-05T13:52:00.002Z

I suppose it all depends on what you want out of life, or perhaps things have changed from when TG was a lad. Auditing in some dismal location in East London for £1200 a year was not my idea of fun.

More seriously, there probably isn't a better introduction to the business world than training with a large firm of accountants.

How long is your arm?

2008-11-04T11:49:00.002Z

The government has announced that its investments in banks will be administered through a new company UKFI that will manage them on an 'arms-length' basis. Two questions arise: 'Can the management really be independent of the influence of government?' and 'Do we want the management to be independent of government'. The answer to both questions seems to be, 'Not really'. It's doubtful if UKFI will operate like an independent bank and allow its investment companies to pursue the same kinds of policies that they once did. That's probably a good thing. It would be nice to see the banks run in a manner that the general public would find acceptable ie sticking to the knitting of sound commercial banking, largely lending on the basis of the deposits they receive and paying their staff the kinds of salaries that members of the general public think are adequate for 'indoor work with no heavy lifting'[1].

[1]I'm indebted to the books of Terry Pratchett for the formulation.

Corporate Law and Governance Blog

2008-11-04T10:32:00.002Z

I've added a link in the sidebar to a blog by Robert Goddard at Aston University where he records developments in corporate law and governance. Thanks to Robert for providing a most useful resource.

Two sorts of regulation

2008-10-31T13:52:00.003Z

In a recent article in Financial Director, Robert Bruce, warns of the danger of politicians knee-jerk reactions to financial crises. He takes as his text a recent ICAS publication by Laura Spira and Cath Gowthorpe, as 'tres formidable' a pair of academics as one could hope to meet. Their report Reporting on Internal Control in the UK and the US: Insights from the Turnbull and Sarbanes-Oxley Consultations compares experience of the UK Combined Code with American reactions to the Sarbanes-Oxley Act passed after the Enron scandal.

Bruce thinks regulations set in the heat of the moment, like SarbOx, are likely to be poor ones and cautions against political interference in the aftermath of the current crisis. I'm not so sure. At least something is done and the current crisis is an almighty failure of the City's traditional approach of self-regulation.

With one bound, Jack was free.

2008-10-31T13:35:00.003Z

The option to reclassify some financial assets from 'available for sale' to 'held to maturity' has been seized by two European banking groups Schroeders and Deutsche Bank. In the case of Schroeders this turns a £50m loss into a profit.

If this is being treated as a change of accounting policy, prior year figures should have been restated.

[The title is taken from a story about writing in weekly comics in days when comics included tales told in episodes from week to week. According to the story, the hero of a tale had been left bound to a tree and surrounded by hostile savages at the end of one week's episode. Unfortunately the writer had gone sick and no one could think how to get the hero out of his predicament. Eventually the writer returned to work, took up his pen and started the next week's instalment with the words, 'With one bound, Jack was free'.]

Do falling corporate tax rates lower the tax yield?

2008-10-29T09:25:00.002Z

A recent EU paper gives the first impression that, although corporation tax rates have fallen across Europe, the tax take has not declined because the total proportion of corporation tax to GDP has not fallen. At first sight this would seem to give some support to versions of right wing economics that claim cutting taxes increases income. The authors of the study find this is not the case; what has happened is that economic activity has been shifted into companies to take advantage of the low tax rates.

Click on the title to go to the paper.

Short selling corner

2008-10-29T08:44:00.002Z

Every now and then someone successfully 'corners' the market in a security or commodity. A well executed corner is a thing of elegance and beauty, even if it results in financial mayhem for some. In this case, short sellers have somehow managed to sell short more Volkswagen shares than are available for trade, because Porsche has acquired rights to a large proportion of the shares. The result is that the hedge funds and others who have sold shares they don't own now have to buy them in at almost any price. Click on the title link to go to an article that explains what has been going on.

Dynamic provisioning

2008-10-28T14:18:00.003Z

In its recent bi-annual stability report, the Bank of England has called for measures to improve the financial stability of banks. One of these measures is called 'dynamic provisioning' which involves building up 'reserves against future losses in the good times, which they could then draw on when times were tough'. What a good idea! This used to be called 'prudence'. Admittedly, in the past banks kept these reserves hidden in the form of secret reserves and there is everything to be said for keeping them transparent.

The FT, in another article about the same report, says the Bank blames the crisis on 'shareholders' for failing to supervise their companies and 'marking to market'. As a shareholder in Lloyds TSB I shall chastise myself severely for failing to attend their AGM and point out to them the error of their ways. I'm sure that would have made all the difference. But it is interesting that the Bank explicitly cites marking to market as one of the causes of the crunch.

We are beginning to need a new name for the 'credit crunch', which was fine when the problem seemed to one confined to interbank lending. Something more indicative of the scale of the problem would now seem more appropriate: something like 'Global Financial Meltdown'.

The Wonder of Woolies

2008-10-27T14:25:00.003Z

Older readers will remember the slogan with which Woolworths used to market itself. The company is a useful case study in corporate decline having lost around 90% of its value over the last five years. Today we hear that lenders have appointed there own accountants to look at the company's plans and budgets. Normally such an announcement would cause a huge drop in share price, but in a turbulent market it seems to be just one more bit of glum news.

More Credit Crunch Humour

2008-10-27T10:27:00.002Z

Accountancy Age misdirects[1] me to a splendid satirical offering thedailymash whose recent articles in the news/business section include 'Leprechauns are stealing our gold, claims Darling' and other gems.

[1] The URL in their article is wrong.

Stewardship in the ascendant?

2008-10-21T08:23:00.003+01:00

Despite the accounting standard setters' determination to downplay the importance of corporate governance and the control of directors' potential excesses, the current crisis is focusing minds on the need to make companies accountable for the resources entrusted to them. Most recently Gordon Brown's article in the Daily Telegraph in which he calls for greater attention to the stewardship exercised by companies. The BBC reports him as follows:

The markets must reflect society's values, including "fairness, stewardship and co-operation," he said.
Mr Brown said he wanted to uphold these three key ethics in public policy and across the public arena, as "markets work best when underpinned by an ethic of fairness".
This is a "defining moment for our emerging global society", he added.
"The ethic of fairness means we reward hard work, thrift, enterprise, effort and responsible risk taking, but refuse to condone or reward irresponsible or excessive risk taking," he said.
Also, the "ethic of stewardship must restore to all financial institutions their public purpose.

If the IASB and FASB take this as a prompt to rethink their objectives for financial reporting, it would be a small step in the right direction.

Should Corporation Tax be Voluntary?

2008-10-21T08:13:00.004+01:00

According to a House of Commons select committee a quarter of Britain's top companies pay no corporation tax. These may be the ones who are investing and taking advantage of tax incentives to ensure future prosperity. On the other hand they may be using off shore tax havens and managing their affairs to avoid contributing to the economy and to society. I think we should be told.

What's all the fuss about marking to market?

2008-10-17T16:26:00.004+01:00

On Sunday European heads of government discussed accounting standards. That's pretty unusual. On Monday the International Accounting Standards Board (IASB) had an emergency meeting. On Tuesday Trustees of IASB had a conference call to suspend the IASB's due process. On Wednesday the Accounting Regulatory Committee of the EU met to consider the IASB's proposal. Such haste is unusual. What was all the fuss about, and why is accounting intimately involved in the solvency of banks?

It all comes down the technicalities of an IASB accounting standard IAS 39 on Financial Instruments. Financial instruments have been a problem for financial reporting because a lot of people think that historical cost accounting doesn't do a good job of reporting them. For one thing you can acquire financial instruments without laying out any immediate cash, so the cost is zero, and for another the value of the things can fluctuate wildly and may not bear any relationship to the cost, if any. IAS 39 tries to solve this problem by classifying financial instruments into several boxes - I won't go into the details.

The main importance of which box instruments get classified into is that some boxes allow the instruments to be valued at 'amortised cost' on the assumption that the company will hang onto them until the end of their lives. Other boxes require the instruments to be valued at 'fair value' - which is mostly market value. This is what is called 'marking to market'.

Now one of the main effects of the credit crunch has been that the market price of many instruments, especially collatoralised debt obligations (CDOs - rights to the cash flows from sub-prime mortgages and similar things), have collapsed because nobody wants to buy them. If the holders of CDOs are required to value them at market value then that creates a huge hole in the balance sheet. And if the holder is a bank, that can mean that the bank either has to raise a lot of new capital, or reduce its lending drastically in order to maintain its required level of reserves.

What the banks want to do is to revalue the CDOs and similar on an amortised cost basis, which means they look at the likely payments that they are going to receive over the life of the CDO and value that stream of cash flows, using a net present value method. Since everyone seems to agree that, although currently unsaleable, most of the CDOs will eventually produce a respectable stream of cash flows, this will result in a much smaller balance sheet hole and make life a lot easier for the banks.

Sounds like a good idea? Well, yes, it probably is. But if it works in one direction it works in the other. That is to say, the reason that banks got into the current pickle is that they marked up the value of financial instruments when the market was valuing them above a realistic value, and the banks didn't complain then. In fact they declared record profits and paid their senior executives and employees mind-blowing bonuses.

My personal take on this is that marking to market always was a bad idea and encouraged market instability. Accounting should be providing a reality check on markets, not reflecting their errors back at them. The head of IASB has often defended market value by saying, in effect, that it is the only way of portraying reality. But that's a view that is rooted in a touching faith that markets can't be wrong. Users of financial reports want to know what the long term cash flows that they'll receive from various financial decisions will be.

Market prices reflect the value of those long term cash flows, but with an enormous amount of error. If the market gets the value of one bank's CDOs wrong, it gets the value wrong for all banks, so there is a huge 'systemic' effect. Moreover, if an upwards error in market prices is reflected in profits and bonuses, then banks buy more CDOs pushing up the prices still further and creating incentives to make more CDOs. When the error reverses, the herd instinct among investors, ensures that they all try to sell at the same time and prices collapse.

'Okay, clever clogs', I hear you say, 'what would you do?' Well, I'd use historical cost principles. Either, I'd treat the assets as 'held to maturity' and value them on an amortised cost basis. Or I'd treat them as trading items and value them at the lower of cost or net realisable value, as is the practice for inventory. For these purposes 'cost' could be zero for things like interest rate swaps which don't require up front payments. I'd also require extensive 'footnote' disclosures showing market values, but I wouldn't incorporate these in the balance sheet and income statement which form the basis on which contracts are written and solvency calculated.

For more on why marking to market is not such a good idea see John Kay's FT column of 14th October.

Vogon Poetry Award

2008-10-16T15:01:00.002+01:00

Older readers will recall with affection a radio programme called Hitch Hikers' Guide to the Galaxy. HHGG or H2G2 to its friends[1]. H2G2 features the Vogons, a race of intergalactic thugs who tortured their victims by reading Vogon poetry to them. TG has recently come across a strong contender for what should be an annual award along the lines of the Ignobel awards. Both the Vogons and the Ignobel awards are covered in Wikipedia, if you need to find out more.

The writer of the poem is Guy Judge, an academic in the Economics Department at Portsmouth University. Guy's blog contains a raft of interesting stuff about Econometrics and Mathematics[2].

[1] Yes, it was radio before it became a book or telly series.
[2] For those who don't find 'interesting' and 'Econometrics' an oxymoron.

And now the lawyers ...

2008-10-16T14:51:00.002+01:00

It's reported today in Accountancy Age that firms of accountants are likely to be sued for their role in setting up the sub-prime mortgages which many people believe were key to the start of the credit crunch. There must be some very nervous partners at the moment worrying about where the next holiday in Antibes is going to come from. One consolation for them is that they are all in the same boat; not all the big firms can be allowed to go bankrupt in hurricane of law suits that will follow the deluge of the crunch.

Remuneration policies partly to blame shock horror

2008-10-13T14:30:00.003+01:00

Under the headline City bonuses may have worsened crisis says FSA we learn that the Financial Services Authority has come to the astounding conclusion that remuneration policies may have had something to do financial institutions taking unwarranted risks. Well my gob is smacked.

Tax havens for all

2008-10-10T10:15:00.003+01:00

I've just bought a couple of bits of electronics from Amazon. Keen price, prompt service.

They both came from Jersey and so presumably evaded VAT. We are all likely to get caught up in the world of tax havens, whether we want to or not.

A modest proposal ...

2008-10-10T09:53:00.003+01:00

Writing in today's Guardian, Richard Murphy and John Christensen argue that location of special investment vehicles in tax havens was one of the conditions leading to the present crisis and that global regulation is needed to cover the operations of tax havens. Not all of these are offshore. London is one of them.

[My title is taken from a notorious article by Jonathan Swift from 1729 proposing the eating of babies as a solution to an Irish famine. Swift was, of course, being satirical. It is likely that many in the financial community will regard Murphy and Christensen's proposal as equally outrageous, but at the time of writing the FTSE is off another 5% and less self-interested people may be beginning to realise that a root and branch rethinking of financial regulation is necessary.]

Credit crunch - beginners start here

2008-10-06T17:30:00.004+01:00

There is an excellent piece on what has gone wrong; it's in the Economists' Forum - backpage of today's FT. Under the title 'The Fed must widen its focus' Thomas Palley explains how the unregulated 'parallel' banking system has boomed and bust and the role of mark to market accounting. Available at www.ft.com/econforum

Enron was an omen of dangers of fair value rules

2008-10-06T15:36:00.002+01:00

A letter from Prof Mike Page of Portsmouth University in today's FT argues for suspension of the fair value rules. The letter stands out against the current of interested preparers and users striving to maintain the existing rules. IASB has promised to look at classification of financial instruments, but this is no substitute for a more radical reappraisal of the role of financial reporting in regulation.

From Prof Mike Page.

"Calls for the suspension of marking to market and fair value rules should be supported, not because the rules were the cause of the crash, but because they were the cause of the bubble that preceded it. In bending the knee before the illusory power of the market, accounting standard setters have ignored the unintended consequences. Marking to market was an invitation for operators in financial markets to make up numbers and pay themselves accordingly. Enron was a warning of what could happen. We know market prices are highly variable and accounting standard setters should now acknowledge that the role of accounting is not to mimic market prices but to provide a more reliable alternative.

Apologists for marking to market say there is no alternative, since it is impossible to calculate the intrinsic value of some instruments. If this is the case, what were institutions doing buying instruments for which they had no idea of the intrinsic value?

In the wake of this crisis the International Accounting Standards Board and US Financial Accounting Standards Board need to acknowledge, through their joint project to create a conceptual framework for financial reporting, that it is the function of financial reporting, not to pander to the markets' whims, but to create a sound basis for evaluating the stewardship of management and preventing opportunistic behaviour."

Credit crunch humour

2008-10-05T12:04:00.003+01:00

The following was recently posted to the internet news group alt.usage.english

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s.

This transaction is 100% safe. This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in
the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbail...@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond
with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

To which a subsequent poster added - (to the Tune of Galway Bay)

If you ever go across the sea to Wall Street
Then maybe at the closing of the day
You will see a banker jumping from a window
As you watch the sun go down on Fannie Mae

Just to hear again the riffle of the dollars
And the brokers in the exchange making hay,
Just to sit and count your bonus by the million
And listen to the taxpayers as they pay.

For the cold wind that is blowing over Wall Street
Is all icy from frozen bank accounts
And ex-bankers, now are digging praties
for to creditors they all owe large amounts.

If you ever go across the sea to Wall Street
Then maybe at the closing of the day
You will see an evicted mortgage holder
As you watch the sun go down on Fannie Mae

[Pedant point on the original song - Galway Bay - the first verse is

If you ever go across the sea to Ireland
Then maybe at the closing of the day
You may sit and watch the moon rise over Claddagh
As you see the sun go down on Galway Bay.

But in summer, when the song is set, there is nowhere on land where you can both watch the moon rise (at about 12 degrees north of east) over Claddagh (a suburb of Galway) and the sun set (at about 12 degrees north of west) over Galway Bay.]

Shoulder to shoulder for marking to market

2008-10-03T17:32:00.003+01:00

The accounting standard setters and the firms of accountants are becoming increasingly clamorous in their defence of marking to market. One of the latest examples is Ian Powell's letter in today's FT. Mr Powell wants transparency - but one can have transparency with footnote disclosures. Marking to market caused the problem on the way up when it was used for calculating profits and bonuses and it is doing damage on the way down as it takes away from balance sheets what it previously added.

Call me an old cynic, but there are going to many law cases in the wake of the crunch; anybody solvent who had anything to do with it is going to be sued. Suspending marking to market might just be an admission that the policy sanctioned by the firms and standard setters was not such a good one.

John Kay and the Halifax

2008-10-03T04:01:00.000+01:00

A BBC podcast about the Halifax Building Society is well worth a listen. You can find it at

http://www.bbc.co.uk/worldservice/programmes/business_daily.shtml for Thursday October 2nd.

John Kay, (www.johnkay.com) who was a director of Halifax at the time of privatisation, makes the astute observation that financial engineering is a zero sum game. If you added up the value of all the CDOs and credit derivatives (look 'em up in Wikipedia), they should have come to no more than the value of the underlying securities. Did any of the auditors blythly putting their names to the accounts of financial institutions ever do a ballpark check? Did the accounting standard setters? It would have been revealing and have cast some doubt on the reliability of market values.

Aims and purpose

2008-10-03T03:58:00.001+01:00

This blog is to add thoughts about current developments in the world of finance and accounting. The name is clearly a pseudonym, but those in the know won't find it too hard to work out who I am, so there is no big secret.