Sir Peter Burt, the former chief executive of the Bank of Scotland and former executive deputy chairman of HBOS, has fired a broadside at proponents of “fair value” accounting, including Sir David Tweedie, accusing them of exacerbating the effects of the credit crunch.
Tweedie, chairman of the International Accounting Standards Board, has extolled the virtues of fair value or “mark-to-market” accounting for some years.
However, Burt says it is wreaking unnecessary havoc on the UK banking sector.
“We’ve all seen football matches that have been ruined by an overly officious referee, who blows his whistle at every minor infringement rather than allowing the game to flow,” said Burt. “That’s a bit like what Tweedie’s doing in the world of accounting.”
Burt believes Tweedie’s approach, which has been adopted wholesale by UK regulators and accountants, is forcing banks to attribute unrealistically low valuations to many assets and to make excessive write-downs or “fair value adjustments.”
Consequences include a massive reduction in their ability to lend and even a possible recession, said Burt.
Tweedie was unavailable for comment. A public debate on “fair value” accounting is expected to be held in Edinburgh later this year.
This article was published in The Sunday Times on 10 August 2008.
The article published (and the version above) was significantly shorter than the version filed. In the original Peter Burt also said that he believed the “tide may have turned” on fair value accounting. He said that he thinks John Varley, chief executive of Barclays, must recently have insisted the bank’s auditors, PricewaterhouseCoopers, impose a more “consistent” and realistic valuation on its collateralised debt obligation portfolio. At Barclays results last Thursday, it emerged that Barclays’s super senior CDO exposures were marked at 61 cents in the dollar, well above the 22 cents that Merrill Lynch achieved in a recent sale. However Varley insists the bank is being “conservative” not aggressive with its writedowns and that its CDO of ABS portfolio was of better quality than recent vintages. Burt also said “it’s time the accountants were put back in their box.”