G20 Summit: Unprecedented Focus on Financial Reporting
Financial accounting and reporting were a central issue at the November 15 meeting of G-20 leaders plus the leaders of Netherlands and Spain. The Summit’s Declaration sets the stage for several important reforms, some of which are already in progress.
First, the summit leaders agreed on “enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions….” This widely-heard complaint in the immediate aftermath of the crisis is something that securities regulators and accounting standard-setters have already begun addressing. For instance, in September 2008, the SEC sent a letter to certain public companies regarding disclosure and the application of FAS 157. Also, last month, the IASB has issued a proposal for improvements to financial instruments disclosures. Much work remains to be done on this front but a strong consensus exists.
Second, they agreed to “strengthen regulatory regimes, prudential oversight, and risk management….” This is a potentially more difficult issue insofar as financial regulators and accounting standard-setters do not necessarily see eye to eye on all accounting issues. Many in the accounting world are wary of possible interference from prudential rules with transparent financial reporting. One traditional sticking point has been fair value accounting, a major attribute of modern financial reporting, which has been blamed by some for its pro-cyclical effects.
The fact that the leaders of the world’s 22 largest economies devoted so much attention to accounting issues in their discussions is unprecedented and should be applauded. Indeed, strengthening prudential supervision and market discipline, two building blocks of the international financial architecture, will require bold action backed by strong political commitment at the highest level, and much closer cooperation between all key decision makers on the world stage. The Declaration sets forth an ambitious, fairly detailed and prescriptive Action Plan to Implement Principles for Reform, which is likely to keep policymakers, financial sector regulators and accounting standard-setters around the world very busy over the coming months.
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I'd be interested in the substance of that "strong consensus" that you perceive to exist. In my view, quite the contrary is the case. There is an unresolved major conflict of objectives in the declaration between transparency and stability, putting at risk the independence of standard setters.
Posted by: Chris Dreyer | Nov 19, 2008 6:27:24 PM
It is said: “financial regulators and accounting standard-setters do not necessarily see eye to eye on all accounting issues.”
Of course the mark to non-existent markets leads to many real technical problems. But many of the difficulties arise from the fact that this is a monumental battle between two of the most risk adverse communities there is -- the accountants and the financial regulators -- and where none of them have much incentive to assume responsibilities.
For instance, when the banks require some flexibility during a crisis, instead of the regulators reducing the minimum capital requirements, they prefer the accountants to stick their head out and change their rules in order to accommodate for what is needed. And of course the accountants recent-post-Enron answer is… no way José!
Meanwhile, a world in urgent need of true risk taking, something much different from just erroneous triple-A following, is kept waiting and waiting.
Posted by: Per Kurowski | Nov 20, 2008 10:43:25 AM
Chris,
The "strong consensus" refers to the need for more and better disclosure, not to the valuation part of the current debate. For sure, on the latter, sharp disagreements exist (especially regarding the banking sector). It is true that, while no one seems to seriously dispute the need for "complete and accurate disclosure by firms of their financial conditions", agreeing on the definition of "accurate" will be difficult--hence the busy agenda for the months to come. I don't believe in, nor do I advocate, a return to historical cost model as by some here in the US have proposed, but there are legitimate questions on the application of mark-to-market. The first roundtable hosted by the SEC provided on that very topic was very interesting and I recommend attending the 2nd roundtable tomorrow.
Posted by: Henri Fortin | Nov 20, 2008 11:01:46 AM