Is accounting to blame for the credit crunch?
There has been much talk of late about who precisely is to blame for the west’s economic woes. A letter from John Betts in The Times this week pointedly laid the blame at the feet of “creative” accounting.
“How can a financial institution be allowed to set the worth of non-liquid assets held on its books, where there is no published value for such an asset and nobody wishing to purchase it?” Betts asked.
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Cause and effect
@Richard Rees
My reading of that statement is that if reporting (and by implication, analysis, or at least some degree of inspection) was being done correctly, the complexity would never have been allowed to get out of hand, since those "in the loop" would have been aware of the precariousness of the situation; the reports would have revealed the risks to those with eyes to see them.
But what do I know - except that one of my school contemporaries made a £10m "city" bonus last year ... :(
Complexity caused by financial reporting?
"After all, the illiquidity behind the credit crunch comes from a misunderstood exposure to risk, and that misunderstanding relates to the complexity of financial instruments, and that complexity stems from a failure in financial reporting."
In what possible way does the complexity of financial instruments stem from a failure in financial reporting?
It may be that financial reporting isn't reporting properly the complexities, but I struggle to see how it is the direct cause.
Re
Fair value accounting may not have reigned in the effects of careless lending by wreckless bankers. The optimism generated by rising property prices at one stage only catapults this problem and when the pessimissm sets in bad loans set in with people who should not have been given financing if their books were also scruitinised by accountants and not just bankers who read on the basis or ratios if they are so lucky. If proper financial planning education were provided for the borrowers who weren't suppose to borrow and proper guidance and employment were given, then maybe the applicants for loans would think twice about borrowing and living beyond their means. Secondly, the prudence concept once again should be taught not just at adult level but at school. This will encourage children to save rather then spend when credit cards are dispensed by commission making sales consultants lurking around corridors of colleges. Thus, debt no longer becomes a culture but frugality becomes the norm. Something that society has lost over the glits and glamour.