This article was published under chapter 7 of a new book by Saleh Hussain under the title "Corporate Governance – Board Performance Evaluation and emerging practices in Corporate Governance"
"The reasons for the financial crisis can all be attributed and blamed on accountants and Chief Financial Officers "CFOs”. An old friend whom I have not seen for the past number of years uttered this statement. He is a well-known journalist who spent years covering economic news generally and in particular financial sector news. In fact, the event both of us were attending was a seminar of two days arranged by professional accountancy bodies/ associations.
I asked him, why was he saying that? His response was "They were the tools by which Boards and executive management applied to inflate the values of assets and investments through financial engineering and improper valuation. The valuation methods they applied were exaggerated and in certain cases baseless. The financial engineering lacked adherence to proper accounting standards or found ways to go around them".
I cannot say that I agree entirely with such statement, yet I cannot ignore the fact that in certain instances some accountants and CFOs, contributed in one way or another to please their respective employers, by inflating the values of balance sheets and profit and loss statements. External auditors were blamed for signing off on inflated financials and, in fact a number of legal cases was filed against some of the big four companies.
During the late nineties of the last century and the first ten years of this century we witnessed an unprecedented upturn in every industry. The financial sector, the real estate sector and the construction sector are some examples. In the process the value of underlying assets in these sectors increased many times causing a great wealth accumulation by the personnel involved specially the top management and Board members.
Accountants and CFOs had to do the job assigned to them which is to come up with the financial statements for the companies they worked for. Generally, they had to apply whatever accounting standards were available and prevailing then to undertake an evaluation of values of assets and investments under their custody. Mind you, most of international accounting standards and IFRSs were only issued over the past few years. In large part, those standards were issued to address the shortcomings in the valuation methods and to correct malpractices.
On the other hand, one cannot deny the fact that financial engineering was in certain cases directed to either bypass certain regulations or to avoid paying extravagant taxes. That was something that some accountants and financial controllers contributed towards willingly or unwillingly.
The practices of some accountants and financial controllers combined with the resultant financial crisis opened widely the eyes of regulators causing them to enhance accounting standards. Those practices were also viewed by regulators and various stakeholders as a breach of the requirements of good practice and corporate governance. Hence the regulators tried their best, and are still trying, to close the loopholes in the governance. In that direction, following governance-related issues were addressed by regulators: