Basis of bank accounting is deeply flawed, top QC warns

The Times Patrick Hoskin Financial Editor Last updated at 12:01AM, September 1 2015

Theodor Stolojan has been asked to rethink the new bank accounting standard 

The legal cornerstone underpinning the entire edifice of bank accounting is defective, according to a QC’s opinion that questions the approach by accountants at the top of the profession and criticises their regulator, the Financial Reporting Council.The potentially explosive legal opinion, seen by The Times, makes plain that the billions of pounds of profits reported each year by UK banks cannot be relied upon to give a “true and fair” picture of the financial position of Britain’s biggest financial institutions.

George Bompas, QC, accuses the FRC and the Institute for Chartered Accountants in England & Wales of defective logic in supporting the present accounting standards.

The new opinion, dated August 14, reignites a row between investment institutions, worried that flawed accounting standards were partly responsible for the banking crisis of 2008, and the profession, which sees no need for significant reform.

The Local Authority Pension Fund Forum, which represents the retirement funds of hundreds of thousands of council workers and which commissioned Mr Bompas, has demanded that the European Commission throw out the latest proposed standard on accounting for banks, known as IFRS9.

It blasted the British accounting profession yesterday as defensive and self-interested and attacked the FRC for its excessively cosy relationship with the ICAEW, “the professional body it is supposed to regulate”. Kieran Quinn, the pension fund forum’s chairman, has written to Theodor Stolojan, chairman of the working group on accounting standards at the European Parliament, demanding a rethink on the new bank accounting standard.

“The issues are far from trivial, as exemplified by the banks getting the standards wrong, meaning that the accounts in some cases were catastrophically wrong,” he wrote. “The accounting profession has effectively become a ‘state within a state’, interpreting the law incorrectly to suit its own interests and in LAPFF’s opinion against the public interest.”

While regulators have overhauled other areas of banking, including capital requirements and boardroom standards, drastically since the financial crisis, the accounting and auditing of banks has been little addressed.

In a report in 2011, the House of Lords’ economic affairs committee accused the four big accountants of being “disconcertingly complacent”, but the mark-to-market rules that tend to play down future potential problems and later amplify them are largely intact. Several fund managers, including Threadneedle, Royal London and Saracen Asset Management, also have expressed concerns about accounting standards.

Mr Bompas criticised the widespread practice of counting paper gains as distributable profits. He said it was difficult to assert that banks that failed to distinguish between the two could report a true and fair financial position.

Crossing swords with Martin Moore, QC, who advised the FRC and challenged an earlier judgment by him, Mr Bompas said that Mr Moore was guilty of defective logic and fallacy.

Accountants said that the judgment had relevance to various accounting scandals, including the overstatement of supplier rebates by Tesco and the implosion at Quindell, the former stock market darling.

The FRC said yesterday: “The issue was extensively looked at by counsel, leading to the BIS and the FRC’s statement in 2013 and the updated True and Fair guidance in June 2014.”

The ICAEW had no immediate comment.

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