A question of balance….

It was the accountants what done it you know. Pushed the world into recession that is. If they had not forced the banks to value their more esoteric financial assets at market prices they would not have got into the mess that they did. They should have simply let things be.

However accounting standard setters are definitely not letting things be any more. Over the past few weeks I have attended Finance Director briefing sessions from accounting firms Smith and Williamson and Crowe Clark Whitehill, and have been updated on the latest proposals to “improve” financial reporting, proposals which to me as a qualified accountant seem mind blowingly complex. These include a brand new set of accounting standards for SMEs based on international accounting standards (FRSME), and the prospect of short term leases for items such as photocopiers being treated as finance leases and therefore creating additional balance sheet liabilities.

What all this will mean to the average businessman who is just trying to work out how well his business, or that of his competitor, is performing heaven only knows.The government may be trying to operate a “one in one out” policy as regards regulation but the world’s accounting standard setters seem determined to load even more burdens on companies large and small.

And yet it all used to be so simple. When the father of accounting, Franciscan friar Luca Pacioli developed double entry bookkeeping in the fifteenth century, it established a balanced approach to accounting that has served businesses well for centuries. Goethe, no less, described it as “one of the most beautiful discoveries of the human spirit.”

Today Pacioli would be spinning in his grave at the horror of what financial reporting has become. For example HSBC’s annual report is now around 400 pages long and frankly there is no way even the most diligent highly paid analyst can grasp everything that is in there let alone distill it into an easily digestible investment note for public consumption. Hence the lazy headlines that tend to accompany most profit reports nowadays as journalists latch onto the number that best illustrates the point they want to make.

Accounting should always aim for simplicity. If double entry cannot handle a transaction without stacks of rules and guidance then one has to question if it is actually an economically worthwhile transaction. Perhaps if this has been the attitude during the boom times some of the economic fall out of the past few years could have been avoided.

Meanwhile back to those poor bankers. Must be tough being blamed for something that isn’t their fault eh? Still at least they have this year’s bonuses to console themselves with……

Keep your enemies closer…..

Martin is a banker. And yet I like him very much. In a world where cabinet ministers indulge in cheap jokes designed to inflame anti-banker feelings, this probably comes across as a bold, even brave statement. But one I think that has to be made if we are to get back to a more normal level of bank finance for small and medium sized businesses.

Of course Martin is not one of those megabucks merchant bankers whose bonuses set the world (or at least Robert Peston) frothing with righteous indignation. He is an ordinary bank manager doing his best to do his job which is to provide finance and services to businesses at an acceptable profit. He and I spoke recently about how he believed that business can work with their relationship managers to improve their chances of getting the finance they need to develop their businesses.

Having a strong, honest and positive relationship with your bank he maintains is crucial.  Relationship managers should be seen as trusted advisors who can become advocates for your business. They should be able to give you an honest assessment of what the bank is looking for, what risks it will perceive in your business and what tools the credit team use to decide whether to provide finance or not. They will explain what risk weighted assets are and why they matter, why structured finance is almost certainly the way forward and why cash forecasts are much more important than profit forecasts. By working with them in this way, you will put them in the best possible position to argue your case within the bank.

I can hear the catcalls already. Yes he would say that wouldn’t he. In the end the banks won’t lend whatever you do. The terms and conditions will be too strict. It is easy to be cynical but surely it makes sense to at least understand the rules of the game and give yourself the best chance of being successful, doesn’t it?

Banking is a simple business really. You lend money to a business that then pays it back with interest. And Martin would be the first to point out that this simplicity was something that banks clearly forgot about during the almost surreal atmosphere of the mid-noughties, where boom and bust had been abolished, and a brave new world of gravity defying economic paradigms was being heralded. Banks are still feeling their way post Lehman Brothers, and to me it makes sense to work with them to get them back on course.

OK maybe love your banker is still a step too far for some people. But even if you still want to see them as your enemy the old maxim of keeping them closer still applies. As Martin says when the customer, finance director or accountant and bank work closely and effectively together, it can be a formidable force. If “we are all in this together” has a hollow ring about it nowadays, then think of it as getting out of it together. It is likely to be the only way……

Is Frederick Forsyth a communist?

No of course he’s not.

But disrupted by the weather, I caught a bit of the Daily Politics this week and was staggered to hear Frederick Forsyth positively raging about how bankers have got away with it and the establishment is protecting them despite collecting tens of millions in salaries and bonuses whilst they presided over the failure of our banks.

It sounds like he’s tapped in to the feelings of the man in the street (or in his case the bridle path). I recently also had the pleasure of hearing Vince Cable speak. Apart from some fascinating views on the creation of “narrow” banks ie. banks which only take deposits and lend money (now there’s a thought!), he mentioned how his constituents in Twickenham come up to him and rage about bankers, and when he looks under their arm they’re carrying not The Morning Star but The Daily Telegraph!

I suspect that bankers haven’t got away with it! This story is bubbling away and will boil over at some point.

Ash Mehta