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Financial Instruments
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The problems with banker incentives are complex, but few could argue that those who received substantial bonuses at the end of 2006 and 2007 always acted in the interests of their share- holders. In the wider world, senior bankers created a very volatile and fragile financial system that was on the verge of breaking down, saved only by generous handouts from various central banks. An accountant might argue that bonuses, even if badly designed, are outside the scope of his responsibility, which is to calculate the profit or loss and reveal this in a consistent man- ner to the shareholder. However, this is a dangerous view. There is very clear evidence that banks, through off-balance sheet vehicles and mis-valuing of financial instruments, did not reveal all that the shareholder needed to know and therefore it is questionable as to whether they complied with the accounting standards framework. There is also evidence that inappro- priately designed bonuses are putting pressure on the accounting profession to simultaneously comply with the accounting standards and mislead the shareholders as to what is going on. Unfortunately, though the accounting standard setters have devoted a lot of time and resources towards improving the accounting standards, there are still underlying problems that they must address as a matter of urgency. In particular, there are instances where financial institutions claim to be in compliance with accounting standards while simultaneously hiding assets and liabilities through off-balance sheet vehicles. There is also the worry that the accounting stan- dards cannot cope with the increasing complexity of financial instruments, particularly when it comes to hedge accounting. Indeed, so strong was the objection to the hedge accounting rules for financial instruments that the International Accounting Standards Board (IASB) was forced by the European Union (EU) to revise International Accounting Standard IAS 39, Financial Instruments: Recognition and Measurement. In fact, the EU introduced ‘carve outs’ designed to make the accounting standards easier to adopt and more reliable. In effect, the EU told entities to ignore some of the rules that the IASB had devised
Cormac Butler - Personal Name
1st Edtion
978-0-470-69980-5
NONE
Financial Instruments
Accounting
English
John Wiley & Sons Ltd,
2009
USA
1-283
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