Investors from 10 leading groups secretly wrote to Mr Barnier in October with a warning that the accounting rules were harming shareholders, and destabilising banks and the economy. The group also wrote to Vince Cable, the Business Secretary, but, since previous warnings to the Coalition and the London-based IASB had gone unanswered, they appealed directly for help from Brussels.
Replying in a letter to the investors, Olivier Guersent, the head of Mr Barnier’s cabinet, wrote that he “shared the concerns” of investors over IFRS. He said that warnings that the rules exacerbated the financial crisis were “legitimate questions”.
The Commission’s action is the first intervention from Europe and looks set to leap-frog sluggish reactions from British regulators to a raft of similar warnings.
IFRS has been criticised for allowing banks to hide risk exposure because poor loans do not appear until they have failed. The rules, which were introduced in Britain in 2005, also allow banks to spread losses across several years, rather than recognise them immediately. London-based accountants have been at the forefront of trying to create a single international accounting system, using IFRS which, critics argue, has made many reluctant to admit that the system may be flawed.
In 2010, Tim Bush, a director at the investor group Pirc, sent a letter to the Department for Business warning that IFRS was creating “mistakes [in bank accounts] of such severity that it is difficult to overstate”. His warnings were criticised by both British and international accounting bodies responsible for introducing them.
In October that year, the House of Lords Economic Affairs Committee launched a review and, in the spring of 2011, reported that they had serious concerns about IFRS. In response, Mr Cable insisted there was no problem. But in June last year, Andy Haldane, head of financial stability at the Bank of England, said accounting rules were so flawed that getting an accurate view of a bank’s assets was like trying to “pin the tail on a boisterous donkey”.
In its latest Financial Stability Report, the Bank of England blamed accounting rules for a £50 billion black hole in British banks.
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