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A look at confidence accounting

By Daniel Broby - Posted on 18 August 2016

Daniel Broby of the Centre for Financial Regulation and Innovation in the Department of Accounting and Finance endorses a call for fairer representation of risks around financial results in the banking sector.

The Association of Chartered Certified Accountants (ACCA) and the Chartered Institute for Securities & Investment (CISI), both recognised partners of the University’s Department of Accounting and Finance, together with Long Finance, jointly issued a “Proposal on Confidence Accounting”.

Academics in the Strathclyde Business School are supportive of the debate around this and believe such a development will make the banking sector more transparent.

The term Confidence Accounting refers to the use of probability distributions, rather than discrete values, in auditing and accounting. The proposal calls for banks and professional services firms to adopt it to add clarity to accounts. The move would result in a shift from using specific values in accounts to the use of interval estimates and confidence levels. It would make accounting and auditing more risk and outcome centric.

In a world of Confidence Accounting, the end results of audits would be presentations of distributions for major entries in the profit and loss, balance sheet and cashflow statements.

The proposed benefits of Confidence Accounting include a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market variations. In addition to a fairer representation, its introduction could reduce the size and complexity of annual reports.

We see the debate moving beyond the accounting profession towards a set of accounting standards for financial companies that puts risk right up there with the concepts of true and fair.

Accountants and auditors could provide greater social benefit by moving towards better measurement of risk. Predictive analytics already exist and as such the implementation of Confidence Accounting would be the next logical step. Its introduction would allow management to provide investors with valuable insight into the future.

Here at the Centre for Financial Regulation and Innovation (CeFRI), set up by the Accounting and Finance department at Strathclyde Business School, we put initiatives and innovation in the finance sector under the spotlight. CeFRI aims to ensure that regulation and oversight in financial markets is fit for purpose.



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