Jeremy Newman BDO: we suspended belief

When Jeremy Newman was blogging as BDO’s UK CEO, I always admired the refreshing way he tackled subjects. I’m glad to see that in his role as global CEO, Jeremy has lost none of that spark. Thank goodness he has not been infected with the acquired need to talk double speak or legally sanitzed PR nonsense. His blog at the Huffington Post talks directly to the issue of mark to market in a way that must surely leave the Big 4 blushing yet takes responsibility for the profession as a whole:

The transparency required by current accounting standards ensures we can see how banks were affected by increases in the market values of financial assets. However, it seems no-one realized the fragility of the markets in such securities. When problems first emerged in the sub-prime debt market, no-one was prepared to recognize the scale of the impact. In reality, we all looked for reasons why the problem would not be contagious.

Should accountants and auditors have identified these issues? Should regulators have realized the vulnerability of banks’ capital and reserves? Should governments have recognized that a problem in one bank would affect others? The answer to all these questions is “probably.” We believed that real value was being created by these new financial instruments and wanted to believe that the “good times” were here to stay.

The countries that form the G-20 must address this issue. They need to create a more skeptical environment where regulators challenge assumptions, ensuring companies have adequate risk assessment procedures.

He then goes on to describe the irony behind recent attempts to fight fair value, concluding that:

This is the opposite of “transparency and accountability.” It avoids the need for banks to be accountable by pretending financial assets are worth more than their market value…

Abandoning mark-to-market merely allows those who want to pretend that the crisis isn’t real, to do so. A major concern is that we didn’t have a sufficiently critical eye to anticipate the present crisis: abandoning mark-to-market would risk recreating the environment that led to the problems.

[My emphasis added]

Of course BDO is not without its problems. 522 million of them. Even so, as every recovering addict knows, the first step in recovery is admission there is a problem. In making these statements, Jeremy has done the profession a huge service, even if he has inherited a giant headache. The audit solution is less clear though many are attempting to work this out.

Hat tip to Rick Telberg

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Tagged as: Accountancy, Big 4, fair value, Mark-to-market accounting