10 April 2008

FT: Accountancy rules broken ‘irretrievably’

Rules regarding how banks account for off-balance sheet interests are “irretrievably broken”, a senior group of international rulemakers has warned.

The rules, which have allowed trillions in assets to escape close scrutiny, have come under attack in the wake of the credit crisis as banks have been forced to disclose huge losses on these holdings.

But a report by a high-level group of accountants has warned that completion of the current overhaul of the rules would not be possible in the near future.

“Completing a final standard by mid-2011 will be extremely difficult, perhaps impossible,” says the report seen by the Financial Times and prepared by board members of the US-based Financial Accounting Standards Board and the International Accounting Standards Board.

While the report does not yet represent the official view of the accounting bodies, it is a sign of the turmoil within the industry in grappling with the off-balance sheet issue. Accounting standard setters are already under pressure for their support of marking assets to current market prices – a practice that has resulted in billions in writedowns and affected banks’ profitability seriously.

The Financial Stability Forum, a global body of regulators and central bankers, has asked the IASB and its US counterpart to consider the issue as a matter of urgency. Accounting standard setters are in the throes of discussing how to respond. However, the report by the high-level group of accountants says the project to overhaul current rules on off-balance sheet interests has lost momentum because of staff turnover and “relative inexperience”.

It also urgently recommends that some senior figure be put in charge of the project, warning: “We cannot afford the luxury of waiting for the newly assigned staff to get up to speed.” The report authors include Jim Liesenring and Tom Linsmeier, board members of the IASB and FASB, respectively, and Sue Bielstein and Wayne Upton, senior technical directors on each body.

Unusually candid for the accounting world, the paper was prepared for a joint board meeting of the two groups this month.

Last week, the FASB took steps towards a short-term remedy in the form of a plan to eliminate a particular off-balance sheet treatment that is used by many banks for mortgage loans.

By Jennifer Hughes in London

© Graham Bishop