Accounting and the economic cycle

Paul Boyle, the outgoing chief executive of the UK’s Financial Reporting Council (FRC), recently argued in a speech to the FRC Annual Open Meeting against proposals to use accounting as a public policy tool to reduce pro-cyclicality and challenged the proposition that accounting measures that show volatility should be adjusted to create an impression of stability. Part of the FRC’s remit is to instil public confidence in corporate reporting and governance in the UK by influencing market participants to do a better job than they would have otherwise done. This influence is exerted by setting standards which are, normally, expected to be followed, by drawing attention to current risks and providing guidance, by monitoring the application of standards - which raises awareness that there is a risk that poor practice will be identified - and by the FRC’s investigation and enforcement activities, the object of which is to further increase the incentives for good performance. The operating bodies of the FRC are: the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Professional Oversight Board, the Financial Reporting Review Panel and the Accounting and Actuarial Discipline Board. The following is an edited version of Mr Boyle’s speech to the FRC’s Annual Open Meeting in London

The financial crisis has generated a philosophical debate about the role of accounting, notably the extent to which accounting is pro-cyclical, exacerbating booms and busts.