This event will cover: 

• Financialisation, and how financial reporting has been influenced by it
• The ‘creativity’ that is being applied through financial reporting
• How changes to reporting requirements are giving a skewed image of reality
• Why auditing is falling short of what’s really needed
• Why some corporates are hollowing out their equity reserves in a drive to deliver shareholder-value
• The urgent need to account for climate-change related risks properly
• The financial conjuring trick around Solvency II that is creating the illusion of financial strength
• The deregulatory agenda; and why we need to push back against it to help resist the weakening of hard-earned consumer protections
• How risk is being transferred from insurers to policyholders in a ‘heads they win, tails we lose’ manner
• Why changes to the charging cap for pensions can lead to poorer outcomes for pensioners; and even the security of pension schemes are being put at risk
• Why what is going on will worsen the wealth inequality problem
• The true consequences of demutualization
• How liabilities are being hidden from view through secrecy jurisdictions that are out of reach of regulators

Here’s more detail on what will be covered by our speakers:

Christiane Hölz:

Where do we stand today?

Retail investors rely on sound financial information of firms. Here, financial reporting, traditionally seen as a means to provide transparency and accountability, helps. But it has evolved into a more complex system influenced by financialisation. While it provides greater access to information and comparability, it also demands increased vigilance in interpreting financial data and understanding potential biases. More data is not necessarily better data but can create information asymmetry, favouring institutional and sophisticated investors over retail investors. In addition, executives may become creative when presenting financial information, e.g. valuation techniques, alternative performance measures with year-over-year changes, off-balance sheet financing etc. And every change in accounting standards opens opportunities for creativity. Translating all this to non-financial reporting, we are at a decisive moment for change now.

External auditing is therefore key but recent scandals like Wirecard and SVB have shown that also in this area there are shortcomings. While auditor standards exist, it is the soft factors, e.g. the critical attitude/impartiality/independence, that determine the quality of an audit.

There is a need to explore targeted solutions beyond investor education, such as strengthening transparency, reviewing the role of auditors, and embracing technological advancements.

Professor Colin Haslam 

Colin is Emeritus Professor of Accounting and Finance at Queen Mary University of London. In recent years he has helped jointly organise the European Law Institute (ELI) Special Interest Group (SIG) for Accounting and Business Law. This has culminated in a report published by the ELI: Guidance on Company Capital and Financial Accounting for Corporate Sustainability. In this TTF event he will set out how financial reporting practice has become increasingly financialized. This process of financialization, he argues, is the product of a broad regulatory project that has reinforced shareholder-investor interests within general purpose financial reporting. This ushered in fair value accounting (FVA) where a variety of company asset classes can be adjusted to speculative market values at a time when many companies are hollowing out their equity reserves in a drive to deliver shareholder-value. Companies should be consolidating, not hollowing out, equity reserves at a time of imminent climate crisis. Climate change has the potential to undermine speculative asset values constructed out of uncertain forward-looking assessments and inflated liability provisioning to ameliorate future climate risk(s). In circumstances where there is an increased threat to asset values and pressure to inflate liability provisioning should we not be augmenting, rather than diluting, the financial buffer afforded by equity capital reserves?  Maintaining equity capital will need to become the regulatory order of the day if companies are to be governed as sustainable a going-concerns. 

Mick McAteer: 

Post Brexit, there is a major programme of financial deregulation underway in the UK. The assertion by the government and opposition Labour Party is that this will boost the competitiveness of the UK financial sector and wider economy, and enable the financial sector to fund the green transition and levelling up.

Let’s look at these claims that ‘reforms’ will unlock investment and turbocharge growth. One of the most dangerous reforms is the weakening of a critical piece of EU insurance prudential regulation called Solvency II. Some of the UK’s leading insurers already look much stronger than they really are due to a financial conjuring trick[1] allowed for in Solvency II. This conjuring trick might create the illusion of financial strength but it allows insurers to create very real financial windfalls for their shareholders while transferring the risk of losses on high risk assets to policyholders. A case of ‘heads they win, tails we lose’.

More on that financial conjuring trick: It’s called the Matching Adjustment. It allows insurers to bring forward future returns (which are not yet earned) to be included in estimates of current regulatory capital. It means insurers have to put up less ‘real’ money to safeguard against risk and losses. It is perhaps better called the ‘Magic Adjustment’ for the illusion of financial strength it creates. Details can be found here: Submission to HM Treasury Review of Solvency II consultation | The Financial Inclusion Centre

If anything, UK insurance prudential regulation should be toughened given the state of the sector. Yet, the government is allowing insurers to make greater use of this financial conjuring trick in the Solvency II reforms potentially further weakening the strength of insurers’ balance sheets.

Remember, that this could have major real world effects as UK insurers provide the pension incomes of millions of UK consumers. Moreover, UK employers have been transferring defined benefit pension liabilities to insurers at scale. The Solvency II reforms will further undermine the security of peoples’ pensions. 

In a separate move, based on the recommendation of a working group dominated by industry representatives, the government is weakening the charge cap rules which limit the amount City institutions can extract in fees for managing workers’ pensions.

The impact of the Solvency II deregulation is unlikely to be restricted to the UK. EU insurance lobbies are aware that the UK insurance sector is being given a significant competitive advantage through the Solvency II deregulation. They are pushing EU policymakers and regulators for reforms to the EU Solvency II regime to ‘encourage’ investment in the green transition and EU economic growth.

The UK government is weakening consumer protection and undermining the security of peoples’ pensions without the quid pro quo of applying rules that would ensure the City plays its part in funding net zero and levelling up.

The deregulation would allow City institutions to give shareholders further windfalls and extract higher fees from pension pots. The government even acknowledges that insurers could not be prevented from using these new found ‘freedoms’ to give shareholders further windfalls.

Even if the City did surprise us and invest more in the green transition, levelling up, or social infrastructure (such as social housing), this would be a very costly way to raise funds compared to direct government funding. Private finance institutions will demand high returns for providing investment. These returns have to be paid for. And it is ordinary households who will pay for those returns through higher charges and bills, greater value extracted from deprived areas of the country, and a further upward transfer of wealth. Remember, investment returns are a significant contributor to wealth inequality in the UK. There are more efficient, equitable ways to fund a just and fair green transition, levelling up, and affordable housing.

Tom Gober:

My career spans 37 years, through decades of rapid demutualization. I’ve seen a rapid transition away from pure commitment to Mutual policyholders, to a new mouth to feed – the investor. Investors have a much louder mouth and more voracious appetite than policyholders. As large Mutuals converted to for-profit, publicly-traded life insurers, there were immediate and ever-increasing demands for stockholder dividends, stock buybacks and ever-higher stock prices.

Pressures to produce profits even in bad years when there were none led to a series of strategies I consider to be sleight-of-hand or financial engineering. While they usually start small, over time the surplus “fluff”  grew so large, the sleight-of-hand had to become more complex and less transparent. The most significant – Hiding Liabilities. Life & Annuity insurers use what they describe as reinsurance to “offload” several trillion dollars of future claims liabilities. But these are not traditional reinsurance transactions with independent, well-capitalised reinsurers. They’re internal only – ceded to sister companies in what are called secrecy jurisdictions; out of reach of the US regulators. It just so happens that these most significant schemes today have been my primary focus throughout my 37 years, including white-collar criminal cases with the US Department of Justice. Click here to read a recently published article on this topic featuring Tom Gober.

With Christiane in Germany, Tom in the USA and both Colin and Mick in the UK, we are going to be treated to a truly international set of perspectives on very important issues. 

Collectively, we will be endeavouring to shine a big bright light on the shenanigans that have been going on that are of real concern – various types of sleight of hand are being used in the way that financial reporting is being conducted. 

Furthermore, the collective understanding we achieve will lead to the production of a Statement of Concern that captures the key issues we believe need to be addressed.