Accounting Rules Fueled Banking Crisis: House of Lords’ Enquiry

Jack Humphrey, Regulatory journalist
October 27, 2010 /

The present accounting rules were a significant contributing factor that caused the banking crisis. This has been suggested after a House of Lords enquiry was heard.

Tim Bush, who is a member of the ASB’s (Accounting Standards Board) Urgent Issues Task Force, said in a statement yesterday that the international accounting standards that auditors have been forced to follow led them to be less prudent in their audits.

Bush further added that it was because of the international accounting standards that auditors could not practice their own prudence and hindsight in conducting the audits of companies. He said that this was an important contributing factor to the banking crisis the country faced.

Bush said: “The biggest factor has been the loss of prudence in accounting standards.”

Bush highlighted a few issues during his statement to the media which he thought was mainly responsible for the crisis. Among them, the international accounting rules on securitization, impairment and contingent liabilities were identified by him as being the key areas which were responsible for the collapse in the banking sector.

Bush further added that it was his belief that it was these deficiencies that led major banks to fail in the UK and Ireland.

When asked about what remedies he though was going to rectify the problem, Bush said that bringing UK GAAP back would be helpful.

Lord Lawson was reported to have said that “the auditors were one of the dogs that didn’t bark.”
Previously the media had reported Bush of clashing with ASB Chairman Ian Mackintosh over what role accounting played in the banking crisis. In the month of August, Mackintosh said that Bush’s opinions were not “widely held”.
The House of Lords will be hearing from the representatives of the Big 4 firms on the issue next week.

 

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