Signs of danger 'ignored'

Photo / Thinkstock

Accounting standards already tight before the global financial crisis hit, expert says.

Accounting standards were already tight in the lead-up to the global financial crisis, but they didn't stop several major financial institutions from going under, visiting expert Hans Hoogervorst says.

Hoogervorst, who is chairman of the International Accounting Standards Board - the organisation responsible for establishing International Financial Reporting Standards (IFRS) - said all the signs were there before banks started to hit the wall in 2007.

"The irony is that even before the global financial crisis, if people had taken a proper look at the balance sheets of banks in the United States and in Europe, they could have seen that those banks were tremendously over-leveraged by 30, 40 or 50 times," he said.

"They had no capital - it could be seen in the financial statements - but they chose to ignore it," said Hoogervorst, a former Minister of Finance for the Netherlands.

"Good information is important but it is not everything, unfortunately. People have to be willing to use it."

Already stringent standards covering debt consolidation were tightened further after the crisis and corporates were given better guidance on so-called "marked-to-market rules", which cover the value of unrealised financial instruments.

Changes have just been made to the loss model for bad loans.

Hoogervorst, who served as an adviser during the crisis, said that in the midst of the Greek sovereign debt meltdown, banks were pretending that conditions were normal when Greek sovereign debt should have been valued at an 80 per cent discount.

He said the big mystery about the global crisis was that nobody saw the dangers ahead - including regulators and auditors.

"What tends to happen when the going is good is that everybody starts seeing it as a natural phenomenon that house prices can only rise."

Since the crisis, standards had become more transparent and banks had become better capitalised.

IFRS is used in Latin America, Canada, Europe, Africa and in parts of Asia but not in the United States - which uses Generally Accepted Accounting Principles.

Hoogervorst said the treatment of leases would be the next big thing for the accounting profession.

The changes would cover the cost of a lease being included in the balance sheet whereas previously it was treated as an off balance sheet item.

The new rules are expected to change the "look and feel" of balance sheets.

Changes are also in the pipeline for the accounting standards in the insurance industry.