June 21, 2013 / 1:01 PM / 4 years ago

Accounting rules mask banks' financial health: investors

LONDON (Reuters) - Major UK shareholder groups took a fresh swipe at “unreliable” accounting rules which make it harder for them to assess the strengths of the companies they invest in.

Traders react on the IG Group trading floor in London March 18, 2013. REUTERS/Neil Hall

Their call for an urgent review of the International Financial Reporting Standards (IFRS) comes after the top financial regulator upped its estimates on bank funding gaps.

“There’s clearly a major problem with the accounting methods. How could the auditors sign off on these banks as going concerns?” said Tim Bush, head of governance and financial analysis at investor group PIRC.

The Prudential Regulation Authority (PRA) said this week that five of Britain’s biggest banks were still 13 billion pounds ($19.5 billion) short of capital, putting long-suffering shareholders at risk of yet more cash calls.

The latest shortfall figures, which follow countless share sales, two taxpayer bailouts and numerous asset disposals, support the case for a rapid shake-up of the rules so investors have a more accurate picture of bank capital and solvency, Bush said.

“Never before has it needed the PRA to come out with the real numbers instead,” Bush said.

“Take the scale of the losses that haven’t been booked. Are they material? Yes, they change the whole picture.”

Bush was speaking for a coalition that includes investor groups within PIRC, the local Authority Pension Fund Forum (LAPFF) and the UK Shareholders’ Association.

In a submission to the Parliamentary Commission on Banking Standards (PCBS) and the European Commission, the investors said IFRS fail to give a “true and fair” view of performance at a company level, undermining confidence and jeopardizing economic stability.

“Long-term shareholders have a strong interest in supporting a system of reporting that delivers a prudent view of companies’ and especially banks’ capital position, incentivizes long term stewardship of invested capital and promotes stable and sustainable economic growth,” the investors said.

UK listed companies have been required to use IFRS as a framework for reporting group accounts since 2005. Critics say that the way the system prioritizes neutrality instead of prudence gives companies and banks too much freedom to play down bad debts or underperforming assets.

The International Accounting Standards Board, which writes the IFRS rules used in over 100 countries, is in the process of finalizing a new rule to address these concerns, following requests by world leaders during the financial crisis.

The expected loss rule will force banks to make provisions for losses much earlier than at present, when provisions are only made when a loss is actually incurred.

The IASB was not immediately available for comment.

The PCBS said on Wednesday the expected loss rule might represent a beneficial change but its tardy implementation was hurting investor confidence in banks.

In a report on standards across the sector, the Commission said “flaws” in IFRS rules meant the current system was “not fit” for regulators’ purposes and called for a separate set of accounts based on prudent principles.

Additional reporting by Huw Jones; Editing by David Cowell

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