The coming crisis: looking forward

Citation

Bruce, R. (2002), "The coming crisis: looking forward", Balance Sheet, Vol. 10 No. 1. https://doi.org/10.1108/bs.2002.26510aaa.001

The coming crisis: looking forward

The coming crisis: looking forward

As the world struggles to make sense of economic downturn, at least one thing is certain. This year will see an increase in corporate crises. And the blame for these corporate crises will be laid in part, whether fairly or not, at the doors of those who create the financial reporting rules and those who regulate those rules. At the heart of the arguments will be the nature of financial instruments. The year of 2001 was a time when the proposals for making the effect of financial instruments more transparent and understandable were hotly debated. Now the responses to the original proposals are in and the time for further progress is nigh. This is why the first half of this issue of Balance Sheet, the first of a new year, is devoted to the many aspects that the disclosure of financial instruments create.

Late last year a seminar held under the auspices of the Association for Investment Management and Research in London provided a key meeting point for the many views and positions held. The chair of the Financial Instruments Task Force of the AIMR is David Damant, a veteran of such battles. So it is appropriate that his article in this issue should set the scene. His starting point is the collapse of Enron but he makes it clear that there is more of the same to come and that much of the business world will continue to be baffled by the issues. "The trouble", he argues, "is that what is unfamiliar is criticised as something which cannot be understood".

The stakes in this argument are high. As Damant points out in his concluding words: "If the capital markets are not aware of the risks each company is running, to an extent undreamed of before these devices, and the structure of that risk, then the cost of capital could go up sharply".

To add to the understanding which Damant is calling for, the next article in this special section provides an overview of the thoughts of all the various people and organisations which have responded to the original proposals. Ian Hague of the Canadian Accounting Standards department was a leading member of the group which produced the original proposals. More to the point he has also been a member of the team analysing the responses. His conclusions are clear. More testing of a rigorous nature is required.

Next we have an edited version of the AIMR's own response. As a summation of the views of the investment and analyst community this provides the most thorough examination of the arguments yet published and will stand as the benchmark for future progress.

But there are also more immediate tasks for the preparers of financial information, particularly for those working within financial institutions. By the year 2005 all major listed European companies will have to publish their accounts under the rules laid down by the International Accounting Standards Board. That will mean coping with the existing rules and any subsequent revisions on disclosing the effects of financial instruments. Richard Moore of Ernst & Young is the expert in the field and he provides guidance.

Meanwhile the UK Auditing Practices Board has just published guidance on auditing the use of derivatives and financial instruments. Keith Billing was the director of that project. No one knows the field better and he explains how the guidance should work.

Regulation of the fast-growing and complex world of credit derivatives is the expertise of John Hitchins and his team at PricewaterhouseCoopers. As the authors of two of the recent key books on the topic they provide advice on how banks can cope with the problems which such products bring in their wake and with the infrastructure required to deal with them.

And finally in this special section Professor Arlette Wilson and Dan Heitger of Auburn University provide a guide to dealing with every aspect of the complex business of accounting for foreign currency hedges.

There are lessons to be learned in all areas of world banking is these complicated times. Robert Fielder of Algorithmics takes the crisis in the banking system in Japan as his model and talks through the lessons which can be learned in the field of risk management structures. Kimberly Ferranti takes a look at the installation of an interest rate risk analysis system for ABN AMRO's North American headquarters in Chicago. And Tim Ambler of the London Business School talks through the research which he and his team carried out into the controversial field of market metrics. The question of just how intangibles should be shown on the contemporary balance sheet is another which will be debated through the year.

2002 is not going to be short of argument and we hope that this issue of Balance Sheet magazine will provide the agenda which will carry some of this work to resolution.

Robert BruceEditor