A letter appeared in the Financial Times this morning from Mark Cardale (Chairman, UK Shareholders Association) and someone called Dean Buckner (Policy Director, UK Shareholders Association).
You report (April 27) that the Prudential Regulation Authority has “given guidance on accounting to make sure banks don’t take a mechanical approach that would gobble up all the capital that’s been freed up before it can be used”.The PRA (a division of the Bank of England) is responsible for capital adequacy only, and has no business interfering with the reporting of the statutory balance sheet. Statutory reporting is governed by the True and Fair requirement set out in the Companies Act, and it is the responsibility of company directors and auditors, not the bank, to provide assurance the financial statements meet that requirement, and taken as a whole, are free from material misstatement.
In any case, such a misstatement could defeat the bank’s primary objective of financial stability, which depends crucially on the loss-absorbing capital provided by shareholders. If shareholders lack confidence that capital has been correctly priced, they will take their funds elsewhere.
This report should be profoundly disturbing to shareholders.
Mark Cardale Chairman, UK Shareholders Association
Dr Dean Buckner Policy Director, UK Shareholders Association
Someone called Kevin Dowd commented.
A damning indictment!
The PRA has no authority to interfere with the reporting of the statutory balance sheet and it is most important that the PRA respect the existing rule of law in this regard. The responsibility for statutory reporting relies with company directors (and indirectly, with the auditors they employ to prepare the accounts for them) and it is their (the directors’) responsibility to ensure that the financial statements they make are free from material error.
For the PRA to encourage firms to cross that (‘free from material error’) line is a serious matter.
Consider the following:
Exhibit A: False accounting is a criminal offence under the Theft Act (http://www.legislation.gov.uk/ukpga/1968/60/section/17). The Act states that false accounting occurs “Where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another,— (a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or (b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular;”
Exhibit B: incitement is the offence of encouraging another to commit a crime.
The exam question is: how does the PRA encouraging firms to change the way they would report items on the statutory balance sheet differ from the PRA inciting firms to commit the criminal offence of false accounting?
I am sure there is a perfectly innocent explanation, but I just don’t see what it is.
Harsh.