Investors Groups Demand Changes in IFRS
According to nine of the leading groups of investors that have submitted a letter to Vince Cable, business secretary, the United Kingdom’s auditing and accounting system is full of flaws and further allows banks to keep risks hidden, increase their profits as well as cause damage to the economy.
Through their letter the investor groups have also requested Cable to reform the IFRS dramatically that UK had adopted in 2005. The authors of the letter who represent organizations including Threadneedle Investments, Railpen and London Pension Fund mentioned that the accounting standards and rules are harming the shareholders as well as destabilizing the economy and banks.
The letter was written primarily because of the issues being faced by the investors with regard to International Financial Reporting Standards. Even though the Accounting Council of United Kingdom and London based IASB has been fully supporting IFRS, the investors pointed out that the IFRS accounting rules allow banks to hide risks and increase their bonuses and profits. They also stated that the IFRS is not allowing banks to make wise provisions for losses of loans. The investors also pointed out that bank can keep poor/bad loans hidden and still boost their profits and further award huge bonuses and salaries to their employees.
The letter also stated that the executives are given rewards on the basis of the ‘paper profits’ instead of being rewarded on real profits basis. They also stated that this mark to market valuation approach has made sentiment more volatile in comparison to economic reality.
The letter voices the same opinions that were highlighted by Robin Freestone, CFO of Pearson PLC who had recently criticized the changes incorporated the accounting rules in the last couple of years i.e. the changes from United Kingdom Generally Accepted to International Financial Reporting Standards.
Freestone had clarified that even though IFRS is assisting the entities in telling their business’s story, it still requires lot of work, especially in the field of leverage. He also stated that the contribution of the management is missing and that it is important to find out what they are contributing and how their work can be better established.