Accounting Gone Wild

After living and working in Bermuda for most of the past 35 years, I am being thrown out. Imagine that!

By Roger Crombie

As the magazine's Official Nutjob, I have rightly been cordoned off. Stay tuned, it's going to get fringier.

Speaking of madness, do you know about International Financial Reporting Standards (IFRS)? Sounds dull, but, by God, brain-dead dimwits have taken over the asylum.

Jolted by Joe Biden, our Veep (12/01/11)
Know Not of What They Speak (05/01/12)
My Insurance (In)experience (06/01/12)
Has Bermuda Lost its Class? (07/24/12)
My Faith in Unknown Others (02/21/12)

The view has taken hold among accountants that one system is required for all public company accounting. We already have one system and it's called historical accounting. It is a precise tracking of what came in, what went out, what is owed, and what remains. It's worked pretty well since it was invented 6,000 years ago but it will suddenly no longer do, apparently.

Under IFRS, out go gross premiums written, expenses, profit and loss. In come the "building blocks" of some screwy thing, which are: cash flows generated; discounted value of money; a risk adjustment; and Madonna's bust measurement, or something like that.

Under IFRS, "income statements" are forever banished for public companies. Instead, "performance vectors" or some other incomprehensible (expletive deleted) will be presented. Also disappearing: price/earnings ratios, usefulness, meaningful comparatives and common sense.

Historical accounting has a great advantage: it's simple. Money comes in; money goes out; the difference is profit or loss. Simple is important because investors, stockholders, creditors and other interested parties all have very low IQs. I can prove it. In Britain recently, people were asked if they would prefer a high rate or a low mortgage interest rate. Seven out of ten chose a high rate. I suspect Americans are just as dumb (not you, constant reader).

The insurance industry is not exempt from these depredations. Get this: IFRS demands a single accounting method for life and nonlife insurance activities, which is pure, howling madness.

The words "time value of money" should immediately put you off. Sure, a dollar now is better than a dollar later. One example will suffice: a company borrows $100 million at no interest, repayable in 20 years, with inflation forecast at five percent for each of those 20 years. Under IFRS, you'd book the loan today in 2030-value dollars, i.e. at $35.8 million.

That means an immediate "profit" of $64.2 million. IFRS demands that you book that as a "residual margin." Bits of it are then charged against vector thingamajig in each of the 20 years. Statements drawn up like that will be utterly impenetrable.

I've been a Fellow of the Institute of Chartered Accountants in England and Wales since 1977. I have never been more ashamed of the accounting profession, and that's saying something.

Accountants have now achieved the exact antithesis of their job description, which is to bring integrity to financial statements. Good work, chaps.

Heavy, heavy sigh.

ROGER CROMBIE is a columnist for Risk & Insurance®.

September 15, 2010

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