Efforts to create unified accounting rules across nations have come under pressure, as each party has its own preferred method for accounting money. The Washington Post takes a good look at how politics and national interest corrupted the process
In October, largely hidden from public view, the International Accounting Standards Board changed the rules so European banks could make their balance sheets look better. The action let the banks rewrite history, picking and choosing among their problem investments to essentially claim that some had been on a different set of books before the financial crisis started.
The results were dramatic. Deutsche Bank shifted $32 billion of troubled assets, turning a $970 million quarterly pretax loss into $120 million profit. And the securities markets were fooled, bidding Deutsche Bank’s shares up nearly 19 per cent on Oct. 30, the day it made the startling announcement that it had turned an unexpected profit.
The change has had dramatic consequences within the cloistered world of accounting, shattering the credibility of the IASB — the very body whose rules have been adopted by 113 countries and is supposed to become the global standard-setter, including for the United States, within a few years.
This really shouldn’t be a surprise. Trying to imagine a global standards-setting body not corrupted by national interest is impossible. There’s no perfect way to do accounting, and every bank/country will seek to draw up the system that makes their balances look best.
But we’re not sure that the failure of IASB is such a disaster. A system of regulatory competition — not the most popular idea at the moment — would allow investors to park their money where they felt the most confident about the meaningfulness of the numbers.
Do you think mark-to-market accounting is too punitive during a time of crisis, as many investors do? Then invest in banks win areas with a more liberal attitude towards booking assets. Conversely, if you believe that accounting rules are allowing weak banks to appear healthier than they are, then go for a jurisdiction with more rigorous standards.
Besides, having one body make these types of decisions is partly what got us into so much trouble in the first place. Rather than make clear what, exactly, they had on their books, banks were able to offer an opaque accounting version under the promise that it cleared standards. Absent that standards body, banks would have to adopt greater transparency to convince investors that it had what it claimed it had.