I was at a reception last night with our friends from International Accounting Standards present, when someone brought up the subject of ‘prudence’ in accounting. As usual, battle lines formed straight away, although luckily no one was hurt.
Many readers of this blog may not be familiar with this battleground. Try this letter from the Financial Reporting Council, and practically anything written by the Local Authority Pension Fund Forum on ‘prudence’, see also many things written by Jonathan Ford of the FT.
I can try and explain the dispute by the following analogy. There is a dispute between various parties on the subject of lift safety.
Party A, a standard setter, insists there is only one measure of lift safety, namely the weight of the people entering the lift. The weighing machine must be as accurate as science can make it, and must in consequence be totally neutral: it must not overstate, nor understate, the heaviness of those entering the lift. The strength of the cables is a subjective judgment and so is no business of standard setters. The standard setters are also supported by the lift engineers, who are somewhat unsure how to assess cable strength, their training back in 1880 not having equipped them with this skill.
Party B by contrast is insistent that safety involves cable strength. Therefore the needle on the weighing machine must be bent in some way for safety and ‘prudence’. This means the weight of the people is overstated, but needs must. They bitterly inveigh against the standard setters and engineers alike, saying that the focus on unbiased weighing instruments has wrongly absolved them of safety responsibilities and the interest of lift users, which is a general public interest. Some of Party B also trained in 1880 or earlier, when bending of needles was common practice.
Party C insists that there are two things going on here, namely the weight of the passengers, and the strength of the cables. A neutral and unbiased estimate of weight is crucial, however a prudent estimate of cable strength is fundamental to public safety.
However no one listens to Party C. There I leave it.