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Climbing out of the credit crunch
The principal source of the global credit crunch is a failure in corporate governance at banks, which encouraged excessive short-term thinking and a blindness to risk, says the Association of Chartered Certified Accountants (ACCA) in a report released today about the year-long financial crisis.
ACCA’s policy paper Climbing Out of the Credit Crunch, examines five key areas; corporate governance, remuneration and incentives, risk identification and management, accounting and financial reporting, and regulation. ACCA recommends to avoid future failures, accepted practices in all these areas need to change.
“The fundamental responsibilities of a corporate board appear to have been inadequately discharged. Falling short of their role to provide strategic oversight and direction, ensure a strong control environment and challenge the executive, has contributed to the current global economic crisis,” says Michaela Campbell, Acting Head of ACCA Australia and New Zealand.
“We need to ask what inhibited banks’ boards from asking the right questions and understanding the risks that were being run by their managements,” she says.
ACCA’s report suggests remuneration and incentive packages have encouraged short-term thinking.
“Some global banks’ existing incentive and career structures have led to enormous rewards for failure – this needs to change.
“Firstly, we have to question whether the relative share of banks’ income paid as remuneration compared with dividends has been in the best interest of long-term shareholders.
“Secondly, risk management and remuneration/incentive systems must be linked. Executive bonus payments should be deferred until there is incontrovertible evidence that profits have been realised, cash received and accounting transactions cannot be reversed,” she says.
The ACCA paper also cites that increased transparency of regulation plays an essential role in avoiding financial market collapses.
“Most large banks now combine both retail and investment banking activities. The regulatory goal should be to separate retail from investment banking. This will protect retail customers from wholesale risk, or at least to alert them to the risks if they opt to deposit funds in banks that combine the two activities,” says Campbell.
ACCA also says the accountancy profession must come under some scrutiny.
“Accountants, standard-setters and auditors must all learn from the last year. It is clearly unacceptable that poor quality loans can be sliced, diced and parcelled up with an AAA sticker and overvalued on banks’ balance sheets as a consequence.
“ACCA still believes that fair value accounting has an important part to play in modern global financial reporting but we must make sure the model is as robust as we can make it,”
“The financial industry and all involved in it have had to learn hard lessons from the past year. We now need to be bold enough to make the changes needed to climb out of the credit crunch - and make sure the mistakes made are not repeated,” Campbell concludes.
Key recommendations from the ACCA Climbing Out of the Credit Crunch report are:
• Risk management failures need to be addressed. Weaknesses in these areas meant risk management departments in banks did not have sufficient influence, status or power.
• Clearer rather than heavier regulation is needed.
• Lack of training to enable management to understand complex products and the underlying business models has to be addressed.
For a full copy of the report or to arrange an interview with ACCA please contact:
Frances Dwyer or Marsha Rodrom, IMPACT Communications
02 9519 5411 / 0402 382 447, frances@impactcommunications.com.au