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Healing the markets

29 Sep 08

To use an analogy, I believe that accounting professionals can be seen as nurses to the markets – ensuring that strong medicine is given to cure the illness of over complex products and over valued stocks. Yes – that has led to writedowns. Yes – these have not been popular with investors or management. But what was the alternative? A situation similar to Japan in the 1990s, where the financial sector was sleepwalking for the best part of a decade and the economy suffered accordingly?

This time, by forcing the numbers to the surface, the judgement of accountants has meant that companies have had to put their house in order. This has created a febrile atmosphere, but I believe that hindsight will judge it a good thing that this has happened very quickly. It means recovery can begin earlier.

So the role of accountants has been significant to this point. It is no less important now, as the financial markets move into a phase of reinvention and reconstruction. I am not Nostradamus, but if I can make a quick prediction – there will be an enormous regulatory response to attempt to address the causes of the credit crunch. It is also a safe bet that this response will be disproportionate. Angry politicians versus chastened “masters of the universe” will not a fair contest make.

All CCAB members should cheerlead for principles-based regulation. Principles-based regulation plays directly into your hands. You are professionals with the training, experience and intelligence to apply your own judgement. Principles allow you to do that. Rules do not.

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Ian Jenkins

Monday October 13, 2008, 14:34

The current instalment of CAtv, presented by John Beattie in early September, includes interviews with Sir David Tweedie and Professor Niall Ferguson.

Different perspectives on the financial crisis were advanced.

On one hand global investors are the priority. Banks never complained about mark to value accounting in the years when the accounting was hugely beneficial to them. It's not without flaws, but what are the alternatives? For example would you like to buy Bear Sterns or Northern Rock shares at the average price last year? Investors certainly prefer fair value accounting.

On the other hand is politics. John Beattie's question to Niall Ferguson was who'll be bigger in the years to come, companies or countries? Niall Ferguson thinks we're at a turning point - and the answer looks like countries. In the Middle and Far East sovereign wealth funds controlled by countries are growing, and probably will continue to grow, enormously. In the West we are seeing a dramatic shrinkage of big financial institutions and countries trying desperately to shore them up.

The answer may lie in solving the political problem of frightening trade imbalances around the world. Last year the top surplus country was China (+$372bn), and bottom was the United States (-$731bn).


principles | markets | credit crunch
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