The collapse of the American investment bank Lehman Brothers five years ago unravelled the worst financial crisis since the Great Depression. Although green shoots of recovery are emerging in some western economies, the profound mistrust in financial institutions might have yet a long-lasting effect.
Influential figures of the accounting industry have shared with The International Accounting Bulletin and The Accountant their views on how Lehman Brothers’ bankruptcy has changed the rules of the game for the profession.
This is the first in a series of articles aimed at identifying not only what lessons can be drawn from the credit crunch but also what the profession can do to prevent another financial debacle.
Sue Almond, technical director of the Association of Chartered Certified Accountants (ACCA) and Jeff Thompson, chief executive of the US Institute of Management Accountants (IMA) kick off with their comments.
Wake-up callACCA’s Almond remarks the financial crisis meant everyone, and not just the profession, had to take a hard look at what needs to change to guard against another crisis happening again.
"If ever there was a wake-up call, this was it," she notes adding: "The benefits of long-term business sustainability, with less emphasis on short-term profits, is critical. At a very general level we have seen the profession take on a more business-strategic role in its outlook, being more alert to risk and its impact on business strategy".
Almond says ACCA’s members are providing feedback and letting the institute know what specific risks businesses face on a short, medium and long term basis.
"Developments such as Integrated Reporting and the general increased emphasis on non-financial reporting focus on providing a broader, more complete, picture of the business," she notes.
Almond also observes growing debates on important issues such as achieving more open reporting by auditors and notes there is the likelihood that "in the not too distant future, the auditors reports on large, complex institutions will refer to some of the key challenges in the audit, as well as the going concern."
At ACCA it is perceived a movement towards truly global accounting standards, Almond says, which is a sign of an appetite in much of the profession for a more transparent framework. Almond remarks this applies on a global scale to reflect the multi-national nature of business and the global reach of the profession.
Risk and rewardAlmond believes corporate governance is an area where there may still be some work to be done and standards could be developed to become more effective.
"One of the key aspects of sound corporate governance is ensuring that there is an appropriate balance between risk and reward. This was proved to be badly lacking in some financial institutions in the lead-up to the credit crunch. It is also an area heavily influenced by corporate culture and values – an area ACCA is focussing on in its current research".
Almond thinks guarding against another global crisis such as the current one is not just the task of the accountancy profession and a collaborative effort form different stakeholders is needed.
"The whole board needs to be tuned into the benefits of better corporate governance, not just the finance director, and key stakeholders need to work together to make sure that the standards that underpin the appropriate business behaviours are developed in an integrated way that supports long-term, sustainable business."
Safer but still not safe enoughAt IMA, chief executive Jeff Thomson says the fact that business and commerce are globally connected should be taken into account.
"There is no such thing as regional disruptions which stay self-contained. It is therefore important to take a globally connected perspective when considering best practices and frameworks in the areas of corporate governance, enterprise risk management (ERM), internal controls and, prevention and detection of fraud," Thomson says.
Thomson emphasises that those bodies of knowledge listed above should not be "one-hit wonders" or applied with a "just in time" approach.
"There must be a realization that corporate governance, ERM, internal controls and fraud methodologies are good for business as sustainable business practices and policies," he says.
Thomson believes the profession needs to do more to prevent future cases such as Lehman Brothers, especially it should be up to scratch and develop the skills needed to be prepared for any potential challenge.
"There is a severe talent gap in the accountancy profession with more emphasis needed on governance, risk management, internal controls, fraud prevention and detection, and ethics training. Academia, companies, and accounting associations around the globe all must take stock to address the issue and raise the bar through certification, education and sharing of best practices".
From a risk management perspective in particular, Thomson sees the case for identifying, discussing and treating more effectively what he calls "interactive" risks.
"These are risks that may be identified in different silos or departments, in different countries or regions, or in different hierarchies of the same organization (e.g., trading floor at point of sale, analyst level who never faces customers). Risks separately identified often have connection points which if un-treated could lead to catastrophic consequences," he explains.
When it comes to the US banking industry, Thomson says he tends to agree with those who believe we are safer but still not safe enough.
"While the amount of capital at the six largest US lenders has almost doubled since 2008, the overall banking system still is too leveraged, too complicated and too inter-connected to totally mitigate another financial disaster. However, with 2010 Dodd-Frank and lingering impacts of the 2008 crisis, there is no doubt the global economy and its institutions are better prepared," Thomson concludes.
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