Sir, Stella Fearnley (Letters, August 19) is right to say that hypothetical mark-to-market accounting allowed companies to overstate profits in the good times. That is why Enron, for example, was so keen to use it. Then, in the recent financial crisis, in extremely depressed thin markets, it wrongly made some companies with liquidity problems look as though they were insolvent. Such pro-cyclicality has been seriously destabilising.
The UK Accounting Standards Board should have listened 15 years ago when the (then) six major accountancy firms all expressed strong doubts about the so-called Statement of Principles. Instead the ASB preferred to follow the Conceptual Framework of the US Financial Accounting Standards Board, as did the International Accounting Standards Board.
What a pity that ultra-theoretical standard-setters around the world have chosen to jettison prudence, a generally accepted accounting convention derived from more than 100 years of experience. This high-risk approach has led to absurdly lengthy and unrealistic annual reports that are now virtually incomprehensible.
Emeritus Professor of Finance and Accounting,
Cranfield School of Management,