Banks' Use of IFRS Challenged

Banks are using accounting loopholes to inflate their profits and bolster staff bonuses, according to a report published by the think tank, the Adam Smith Institute.

The law of opposites: Illusory profits in the financial sectorhas been written by former banker Gordon Kerr, who says that banks are able to use complex financial products such as credit default swaps to report profits that they might not otherwise be able to.

Kerr is also critical of the way in which banks are able to value their assets on the basis of the current market price – even if they could not be sold at this – which can in turn boost profits, and says the mark-to-model approach to valuation is also at fault.

He says the blame lies with the International Financial Reporting Standards (IFRS) rules that allows banks to recognise their expectations of future income as current profits and calls for greater transparency in bank financial reporting.

Kerr said: ‘Accurate accounting is at the root of the legal and scrutiny framework; without accurate accounts basic laws are incapable of enforcement. As this report shows, banks have been using loopholes in these rules to inflate their accounts and create illusory profits, which pay for bonuses and short-term gains for their shareholders, but give a very misleading view of their real financial health.