Accounting aspects of the current financial crisis

One of the characteristics of the growth of the financial services industry in recent years has been the extraordinary speed and range of innovation in products, services and indeed in organisational structures through which financial services are delivered. There are questions about whether accounting techniques have been able to keep up with the rate of innovation. In a recent speech on the limitations of accounting models to the IEA/Marketforce conference on The Future of the Financial System, Paul Boyle, chief executive of the UK’s Financial Reporting Council (FRC), points out that some of the innovation has been motivated to achieve regulatory arbitrage, such as exploiting the large difference in the capital requirements which apply to those assets required by companies to be held in the banking book compared to those which could be held in the trading book. The FRC is an independent regulator responsible for promoting confidence in corporate reporting and governance. In this edited extract from his speech, Mr. Boyle addresses the controversy over mark-to-market and mark-to-model valuations