PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Veena Hudson

The need for transparency in financial markets

Leaders of the four largest European economies – the UK, Germany, Italy and France – have this year repeatedly urged financial institutions to boost transparency and better monitor risks. This is because the current financial crisis has revealed shortcomings in the processes and performances of corporate boards which have led to high-profile corporate failures and the wiping out of billions in stocks and shares.

Furthermore, this recession, like every one before it, will undoubtedly bring with it another unwelcome side-effect – an increase in financial crime, such as attempted frauds and money laundering.

These crimes will not simply be limited to people creating false suppliers or not recording some cash sales, but will extend to multi-layered international transactions. While financial crime cannot be stopped, it can more easily be detected in an environment where corporate transparency is encouraged and embraced.

A commitment to transparency creates an environment in which those who fall short of good practice may find it more than a little uncomfortable when their stakeholders – and regulators – begin to ask questions about what they might have to hide.

Carbon accounting – the way forward?

The accounting profession, along with many others, will have a pivotal role in carbon accounting.

Given the significant threat of climate change, the wider the reach of carbon reporting, the better. Carbon reporting can highlight areas of organisational activity that are resulting in particularly high emissions and organisations can be surprised about what they discover – for example, Wal-Mart completed a return on emissions and was horrified at its level of GHG emissions. This caused it to look at its supply chain and to take action that both reduced costs and emissions.

ACCA remains certain that the accounting profession’s most significant contribution – and one of the most influential for the business world – would be for its own accounting standard-setter body to publish a carbon accounting standard. Environmental regulators should work with accounting standard setters to develop a universally applicable climate change reporting and auditing standard for organisations of all sizes.

Carbon accounting and reporting is currently a voluntary activity, at present conducted only by a handful of corporates and according to a range of guidelines. For example, a report from the Ethical Corporation Institute, based on a survey of FTSE 500 companies, claims to have found 34 different carbon emission methodologies. This makes comparison difficult, if not impossible.
 
Ideally, all organisations will ultimately report on their GHG emissions. The challenge will be to achieve such reporting without creating an impossible regulatory burden for the smallest entities.

Should micro-entities file accounts?

On 19 September 2008, the European Commissioner for the Internal Market and Services, Charlie McCreevy, announced initiatives aimed at simplifying the accounting requirements for small businesses contained in European law. Part of this announcement was a Member State option to exempt micro-entities from the need to file accounts.

In July 2008, the High Level Group of Independent Stakeholders on Administrative Burdens, headed by Edmund Stoiber, presented a report to the Commission on burden reduction for companies. The report claimed that there would be an immediate saving of €5.7bn if small businesses were exempted from the accounting framework and not required to prepare annual accounts. The Commission aims, through this measure, to contribute to the reduction of the administrative burden on SMEs by 25%. Proposals were consequently put forward to McCreevy in July to exempt ‘micro-entities’ from the current accounting rules.

However, ACCA believes, and the European Parliament’s ECON Committee has concurred in its opinion on the subject, that companies need to prepare accounts for shareholders and for tax purposes and that the potential savings achieved would therefore be nominal or none at all.

To put it simply, having a duty to file one’s accounts creates a social contract. This in turn requires all businesses to comport themselves in an ethical and legal manner.

The cost of filing accounts is minimal and account production is the end of a long and necessary bookkeeping process. In addition, suppliers to small companies – which are themselves often SMEs – as well as lenders and investors, have come to rely on the availability of filed accounts to check creditworthiness and solvency.

Exempting micro-entities from the scope of the 4th Company Law Directive does not achieve the stated aim of reducing the administrative burden on SMEs, and this is why it is opposed by leading SME representative organisation UEAPME, and the European Federation of Auditors and Accountants for SMEs, who agree that it is unlikely to generate a net cost reduction for micro-entities.

It does, however, risk having an adverse effect on the quality, reliability, availability and comparability of financial information; it could even lead to the fragmentation of the single market and to a serious setback of the harmonisation process of accounting requirements, caused by the uneven application of the proposed option to exempt micro-entities left to Members States’ choice.

ACCA urges the Commission to withdraw its current proposal and to come back with a comprehensive proposal of revision of the 4th and 7th Company Law Directives in 2010.

I would be very interested in your views on this issue.

Who is 'too big to fail'?

When the financial crisis struck last year, US federal regulators pumped tens of billions of dollars into leading financial institutions because the banks were so big that their failure might have brought down the entire financial system.

Following this, the chairman of the US House Financial Services Committee introduced a new 300-page long bill last week aimed at tackling the problem of what to do about 'too big to fail' financial firms, and strengthening the Government's ability to deal with those that are on the brink of collapse.
 
The bill, drafted with the Treasury Department, would give the Federal Reserve authority to take over firms that are at risk of failing and therefore present a danger to the broader economy. It would allow the Government to dismantle a company without sending it through a standard bankruptcy.
 
In spite of the scope of the proposals, some are saying that the bill does not address all of the key points:

• The bill does not answer perhaps the most obvious – and one of the most difficult – questions: Who, exactly, is too big to fail? Which are the organisations that pose such a systemic risk to the entire financial system that they hitherto have been saved at all cost? This became a key question last year, when Lehman Brothers, the large investment bank, was allowed to collapse, triggering panic in the financial markets.
• There will not be full market discipline – the markets do not believe that the Government will actually let a firm like Citigroup, Goldman Sachs go out of business.
• Although the Financial Services Committee is saying that these banks will be allowed to go under, these are firms that have actually got bigger. JP Morgan Chase now holds more than $1 of every $10 on deposit in the US, as do Bank of America and Wells Fargo. It seems unlikely that these behemoths would be allowed to collapse.
• One of the goals of this legislation is to make sure that in the future these financial giants are allowed to fail if they must but that the costs are borne by the financial firms themselves and not taxpayers. The money for that would come from other financial firms, specifically the largest banks, those with at least $10bn in assets – a category that includes roughly 120 US banks. This raises questions such as: Which companies will have to pay for the collapse of one of their competitors? And how easy will it actually be to obtain funding from those other financial institutions during a financial crisis?

It is likely that these proposals, however positive, will encounter some serious controversy before too long.