In recent days, the Bank of England has called for banks to produce more prudent accounts. It is worried that banks’ failure to recognise likely defaults – associated with so-called zombie companies – is holding back lending, and thus growth. Hewlett-Packard’s decision to write off 80 per cent of the value of its 2011 acquisition of Autonomy, the UK software company, highlights the vital role of robust accounts outside the banking sector. We, along with other investors, believe that prudence needs to be restored to accounting in all companies if we are to have confidence in the numbers and to support sustained economic growth.
As long-term shareholders, we depend on accounts to provide a reliable view of a company’s capital, to evaluate the performance of executives and to give managements incentives to create enduring value. Directors require prudent accounts to fulfil their legal responsibilities: to determine that a company is solvent and how much money can be distributed to shareholders without eating into capital.
To achieve this, accounts must emphasise realisable values and incorporate likely losses. They should provide a “true and fair” view of a business, not exaggerated by shortlived market fluctuations.