More accounting research needed 'to avoid risks'

News Article - 24 May 2012
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Firms need to conduct deeper research into their accounts if they want to avoid the collapse of their companies, an expert has suggested.

Professor of accounting Paul Klumpes, of Imperial College London, states that while regulatory bodies such as the Accounting Standards Board and the Financial Accounting Standards Board have taken steps to address inefficient use of capital, shareholders also encounter problems, the Financial Times reports.

Citing the author of an article, The appliance of financial science, Gillian Tett, the professor recalls Ms Tett quoting Professor Robert Merton as saying that more capital could be released by businesses if they could rid themselves of market risk.

Mr Merton stated that companies had been inefficient with capital because they had not considered which risks they were able to handle at an advantage.

However, while the accountancy bodies have expanded the scope for value reporting which hedges exposures, the disclosures are not transparent enough for shareholders to make management assessments, Professor Klumpes states.

He adds that research should be conducted into the implications of risks in relation to the redefinition of a range of contingent claim-related classes of debt and equity instruments "from an institutional to a functional form".

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