In an article for the FT on the 5th of February, highlighted by Steve Baker in a recent speech, Lord Lawson wrote:
The auditing of banks’ accounts … is fundamentally flawed in itself. The IFRS accounting system itself has proved to be damagingly pro-cyclical, and the ability to pay genuine (and genuinely large) bonuses out of purely paper profits, which are never subsequently realised, is at the heart of both the bonuses that cause such public and political outrage, and the reason why bank management consistently does so well when bank shareholders do so badly.
His position was supported yesterday in a letter to that same newspaper by Stella Fearnley, Professor in Accounting at Bournemouth University, which conjures an amusing mental image:
Hans Hoogervorst, chairman of the International Accounting Standards Board (Companies & Markets, February 10), claims that gross overvaluation of bank assets which led to the crisis, and the market for lemons which followed, had nothing to do with accounting. This is hard to believe when IFRS’s incurred loss model forced loan loss provisions down and financial instruments were marked to a suspect market.
How much more ostrich behaviour do we have to tolerate from the IASB and the UK accounting establishment before we insist on major change to the whole setup? All stakeholders should be entitled to believe that audited accounts reflect the economic substance of the entity; otherwise, what is the point of producing them?
Keep at it, Lord Lawson. You have got them on the run.
The whole letter is worth reading.