Tuesday, March 10, 2009

Cook the Books

"Banking regulators must not allow their attempts to build up bank capital to distort financial statements, the top international accounting rulemaker has warned. ... Regulators are widely expected to develop some form of so-called 'dynamic provisioning' by forcing banks to salt away funds in the good times to help them through the bad. But accountants have warned that how this is done could seriously affect the transparency of banks' financial statements. ... Accountants worry that doing the latter could raise the risks of 'cookie jar' accounting where executives would boost provisions during periods of bumper profits to quietly release them in poorer periods to cover up bad performance. The complexity of accounting makes this hard for investors to spot. ... 'There has always been a battle between prudential regulators and the securities regulators over stability versus transparency,' said Sir David [Tweedie]. 'Our job is to show what's happened, not to have reserves that actually are not losses at the moment'," Jennifer Hughes at the FT, 24 February 2009.

In theory, this issue was settled in the US with SFAS 5's adoption in 1975. This accounting crap never ends. Banking regulators usually try to protect banks from the public. Look at the NCC fiasco, 9 and 18 June 2008 posts: