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……

Not just a Swallow?

It would seem that those on green shoots watch have had a whale of a time over the past couple of weeks with a number of positive bits of economic news emerging, as well as the apparently successful G20 summit in London.

The banking situation seems to be improving, with the news of record profitability for Wells Fargo in the US, and reports of a marked increase in the amount of loans being written under the Enterprise Finance Guarantee Scheme.

There are continuing signs of relatively robust consumer activity, and with property prices seemingly within sight of the bottom, cash buyers are interested again. A 90% mortgage product has recently been introduced by HSBC which could provoke a small boost to the housing market.

Also, although they have significantly increased, insolvencies and repossessions have not reached the predicted levels.

Then there are the many people who are securely in work and have been benefiting from significantly reduced mortgage payments. Once they have paid off some debt, they will be looking to spend again, although without necessarily borrowing to do so.

All the above would seem to support the idea that there are some signs of confidence returning, and as we all know it is confidence rather than credit which will drive economic recovery.

This blog has made no secret of its belief that the economy, or more pertinently the ordinary people and businesses that inhabit the real economy, is more resilient and positive than the various media outlets have given it credit for, and that many businesses have acted decisively and imaginatively to combat the impact of the downturn (one reason perhaps that the retail apocalypse predicted for the quarter rent day of 25th March did not come to pass was that fact that many businesses had already negotiated better deals with their landlords).

However there are still a number of macro economic clouds on the horizon, including the number of large corporate refinancings that are due over the next year or so, the state of government finances and the medium term action that will be required to improve them, and the feeling that for all the talk of deflation, the underlying inflation rate remains at a persistently uncomfortable level. Unemployment is also likely to increase further during the rest of the year.

As Aristotle is credited with saying “One swallow does not a summer make”. The selection of positive news above does not mean that the current economic problems have gone away. Careful planning and flexible use of resources remains the key, whether it is developing a new product, investing in new capacity or taking on new people, particularly at a senior level. There are some reasons to feel good at last, but that does not mean caution should be thrown to the wind.

Antony Doggwiler