Accounting should show the truth
23 Apr 08
Sir David Tweedie, chairman of the International Accounting Standards Board, says now more than ever, accountancy needs to focus on the real numbers
by Richard Goslan
Sir David Tweedie, chairman of the International Accounting Standards Board, is not known for mincing his words.
So when he’s asked about what accounting can contribute to pulling us out of the current credit crunch, his answer is typically forthright.
“The credit crunch isn’t an accounting problem, it’s a banking problem, but the fact is that you’ve now got this toxic waste hidden everywhere, so the question is – what do we do about it?” he told camagonline.co.uk.
“We’ve watched the banks bring back off-balance sheet vehicles which quite frankly they don’t control. So we’re going to have to bring in rules to say, well if you don’t control these they shouldn’t be on your balance sheet.
“And then we come to the question of valuation – and you get these siren voices saying, well, don’t value these things, it’s dangerous, they’re all going down and the actual value is much higher than the markets are showing…but why aren’t they going out there and buying them then, because they are going to make a fortune when the market prices go up.
“The fact is, keeping them at cost isn’t the answer. Are we just going to try to hide the problem? That’s what the Japanese did with their banking loans, that’s what the savings and loans crisis was all about.
“Should management then use their judgement and just put out the number that they think is right? Then you get HBOS getting a different assessment from RBS which is different from HSBC, that doesn’t work either, the market would be all over the place, so basically if people know the values are low, at least you can work from that basis.
“The idea of taking an average [value of assets over a year] is just crazy, I mean if you take an average of Bear Stearns over the last year, what sort of number is that going to be? It means nothing…Northern Rock is another one.
“So these ideas are just silly, you’re just trying to hide the truth and accounting should try and show the truth, and that’s what we’re going to try to do.”
In the meantime, Sir David is moving forward in his mission to achieve convergence in international accounting standards, especially with regard to the last major stumbling block, the US.
“When you look at what’s happening in America, the signs are very good that US GAAP one day is going to disappear and international standards will come, but in the meantime they are coming closer together so the prospects are great,” he says.
And Sir David continues to support the idea of principle-based standards for accountants.
“One of the things that I think the profession has to do is to start using more judgement,” he says. “People criticise the length of accounting standards, but usually the problem is that people ask for all these points.
“What we’re trying to get away from is having to tell them all the answers to all the questions. What we would rather do is say, here’s the principle, now you go and think about the problem in terms of these principles, and don’t ask us for the answers, because we’re not going to give them to you.”
You can watch CA Mag online's video interview with Sir David Tweedie here