Forum warns on standards reform
The world's banks and big corporations were put on notice yesterday by the Financial Stability Forum (FSF) that reporting and disclosure standards needed a comprehensive overhaul in the wake of the bankruptcy of United States energy giant Enron.
'This [Enron] was taken very seriously,' FSF chairman Andrew Crockett said. 'The forum agreed it was very important to have a substantive response to a number of areas of weakness - in the areas of corporate governance, transparency, and more generally in areas of accounting standards.'
He was speaking at a press conference after a two-day meeting of the FSF in Hong Kong - its first since the collapse of Enron.
He said it was remarkable, given the scale of the collapse, that Enron had not by itself endangered financial stability or resulted in the failure of any financial institution.
'That's a positive element which shows that in some areas - risk management and capitalisation - financial institutions had done sufficient to withstand a shock of that magnitude,' he said.
But he said disturbing doubts had emerged as a result of Enron's failure over what constituted true market valuation.
'The systemic implications were not so much an immediate threat to financial stability but in the rather long-run consequences for the integrity of financial markets.'
Mr Crockett said responses that were too rapid and simplistic would themselves pose dangers. The problems presented cut across national jurisdictions, industries and regulatory authorities, and the FSF heard submissions during its two-day meeting in Hong Kong from the International Organisation of Securities Commissions, the International Accounting Standards Board and relevant US authorities.
The experience of Enron and other significant corporate failures had highlighted multiple failures.
Mr Crockett said: 'There have been failures of checks and balances, failures of corporate governance, and of external auditing; shortcomings in accounting standards and failures of counter-parties or market mechanisms.'
This raised major issues for the integrity of financial markets, he said, but the FSF was opposed to quick-fix solutions. Arguments supporting the rotation of auditors could be countered by arguments which suggested this was not a useful response. The same would apply to outlawing special-purpose vehicles (used by Enron and some banks to keep derivative contracts off their balance sheets).
Mr Crockett said he would present the next meeting of G7 finance ministers and central bank governors in April with a report on the scope of the problems highlighted by the Enron collapse.
The activity of hedge funds, which critics said had contributed to the Asian financial crisis of 1997-98, had also come under discussion at the forum.
The consensus was that hedge funds had become smaller, their degree of leverage was lower, and counter-party oversight had improved.
There had been significant changes in hedge funds - in some cases the result of deliberate action by the funds themselves and in others the result of market circumstances.
The degree of turbulence in financial markets in the late 1990s meant that hedge funds had themselves scaled back the degree to which they were prepared to leverage their deals, while reduced liquidity had also led to a scaling back.