Accounting for Profit

The Economic Crisis has become a crisis of trust between people, business, banks and government - and now you can add accountants into the mix.

Recent changes to the way the global body on accounting, the IASB, keeps books, will soon show a global recovery that is non-existent. Last October, the IASB, changed the rules to enable companies more leeway in disclosing assets and liabilities to favour the balance sheet. Deutsche Bank, for example, shifted $32b off their balance sheets. This enabled them to post a profit of $120m istead of a loss of $970m. When the profit was announced shares in the bank's stock soared 19%.

The accounting changes were made because of pressure from the EU. The IASB was formed to standardize accounting practices globally so investors and auditors could compare apples with apples. 130 countries have agreed to the new international standards - the major holdout to date is the US.

In the US, accounting standards are maintained by the Financial Accounting Standards Board. The FASB standards are considered more conservative and transparent than those elsewhere in the world, because of the larger number of lawsuits in the US. But pressure is being brought to bear on the US to change their standards. The SEC has ordered all companies to adopt the new standards by 2016, but 100 selected American companies can use the standards in 2009.

If Deutsche Bank's experience with the change is any indication, US banks will report startling turnarounds in Fiscal 2010. If just one of the major banks, probably Citigroup, accepts the new standard and reports a profit, then the other banks will be forced to follow. Just like derivatives trading, nobody will want to be left behind. Pundits and spokespeople will celebrate the end of the recession and the start of a new bull market. But in fact, it will be a bull with no balls.