The Institute of Chartered Accountants in
England and Wales (ICAEW) has argued against European allegations
that accounting standards have been an important factor in
amplifying the financial crisis.
A new report from the European Commission
Council on Economic and Financial Affairs (ECOFIN) on reducing
pro-cyclicality in the financial sector alleged that two important
factors in the amplification of the financial crisis have been the
absence of counter-cyclical buffers and the lack of flexibility of
accounting rules in allowing through-the-cycle provisioning.
It stressed the urgency and importance of
addressing these issues.
Suggestions included introducing forward
looking provisioning, which consists of constituting provisions
deducted from profits in good times for expected losses on loan
IFRS do not currently allow for the
recognition of expected losses, although the International
Accounting Standards Board will publish an exposure draft dealing
with the provisioning issue, including consideration of an expected
loss model, by October this year.
The ECOFIN report suggested the standard
setter should give priority to amending the current accounting
rules to allow for more flexibility for provisioning expected
But Iain Coke, head of the ICAEW financial
services faculty, said that if policymakers want to increase
capital buffers in banks, they should concentrate on getting the
prudential capital rules right, rather than tampering with
“There is at present no credible evidence to
support the view that the accounting rules contributed to the
financial crisis. If such evidence exists, we have yet to see it,”
Coke said. “We strongly reject the assertion that counter-cyclical
accounting buffers would improve financial reporting or how
financial reports are used.
“The insurance industry has experience of
through-the-cycle provisioning with so-called ‘equalisation
reserves’. These reserves were dismissed by many users as
meaningless information in financial statements that simply
obscured the true financial position.
“Changing the accounting rules will not
achieve any regulatory objectives that cannot be achieved through
other, more direct means, such as the prudential capital