Page 124 - (DK) The Business Book

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Mark-to-market accounting is a risky method of valuation, since it of rules in accounting. He believes
values a company’s assets according to current market value. Historic in traditional accounting principles,
cost valuation is a more reliable, and cautious, measure of value. because these supply the required
flexibility for accountancy across
many different types of companies.
He claims that the idea that there
is a “single correct answer” when
During a stock-market If the stock market preparing a company’s accounts is
boom, valuing a company’s falls, the value of the nonsense. Nevertheless, this idea
assets and investments balance sheet will lies behind the call for increased
according to their shrink, leaving the regulation. “People want it to seem
current market value company in a as if we’re doing something about
can lead to an vulnerable scandals,” he says; they think that
overinflated position. greater regulation will make a
balance sheet. difference, “but it never does.”
Myddelton also believes that
directors should gain a “true and
fair view” of their accounts, instead
of being forced to rely on a picture
produced by someone else’s idea
of the accountancy rules.
Although the time frame for suggested that a more prudent Some “creative accountancy”
implementation is unclear, a widely approach would be to increase the practices stretch the flexibility
supported plan is in place to merge level of provision” against bad debts. within the rules so far that they
the IFRS with the US’s Generally Ultimately, the directors of HBOS can produce potentially misleading
Accepted Accounting Principles had decided to take an optimistic accounts. “Mark to market”
(GAAP) to provide globally view of the bank’s lending. They accounting, for example, values
recognized accounting rules. chose to play beyond the rules. assets at their current market value.
Although the rules are becoming This means that when the stock
clearer, important areas for debate Cautious accounting market is booming, any investment
remain. These might be raised Professor David Myddelton, a (such as shares in another business)
internally, in arguments between UK management scholar, argues will also be booming. This boosts
company accountants and directors; strongly against the expansion the value of the company’s balance
or the debate might be between
independent auditors and the Moral duty
organization. When UK bank Halifax
Bank of Scotland (HBOS) collapsed Julian Dunkerton is the founder profit to the tax authorities. Not
in 2008, the UK government bailed and major shareholder in the that Dunkerton wants to claim
it with $32 (£20) billion, before the fashion business SuperGroup the moral high ground—in its
bank was acquired by Lloyds Bank. plc, whose leading brand is annual report, SuperGroup plc
In 2008 the gap between the bank’s the popular street-wear label explains that “We recognize the
loans and its deposits was $341 Superdry. Based in Britain, commercial value, as well as
(£213) billion. The bank’s auditor, but with business and outlets the moral duty, of consistently
KPMG, was heavily criticized over worldwide, SuperGroup could operating with integrity,
easily follow the lead set honesty, and a commitment to
the HBOS collapse, although KPMG
by other organizations and responsible and ethical business
had consistently raised warnings
manipulate accounts to practices.” Dunkerton has the
over the risks involved. When the
minimize its tax liabilities. wisdom to appreciate that
UK’s regulator, the Financial
Instead, the business plays acting responsibly can yield
Services Authority, published a
by the spirit of the tax rules, financial benefits, particularly
report on HBOS in 2012 it noted paying about 30 percent of its in the long term.
that KPMG had “consistently