The UK's accounting and auditing system is deeply flawed allowing banks to hide risks, boost profits and damage to the wider economy.
That's the view of nine leading investor groups that have written a joint letter to business secretary Vince Cable, calling on him to dramatically reform the International Financial Reporting Standards (IFRS), which Britain fully embraced in 2005.
The letter's joint authors, who say they represent around £1.34trn in assets held by organisations such as the London Pension Fund, Threadneedle Investments, and Railpen, say the accounting rules are "harming" shareholders and destabilising banks and the economy.
The letter, seen by The Daily Telegraph, states: 'We believe that... the accounting and auditing systems in the UK are harming long-term shareholders by undermining our ability to reliably assess capital held by companies (especially banks); clouding our understanding of executives performance (and the relating problem of assessing remuneration); and by contributing to macroeconomic instability.'
At the heart of the investors' complaints is the IFRS.
Despite the UK's Accounting Council and London-headquartered International Accounting Standards Board (IASB) full backing for IFRS, the complainants say they empower banks to disguise risks and boost profits and bonuses. They claim IFRS is preventing banks from making prudent provisions for widely anticipated loan losses.
They say banks can hide poor loans, while profits can be boosted, thereby enabling banks to award larger salaries and bonuses.
The letter says executives are rewarded on the basis of "paper profits" rather than real profits earned and that mark-to-market valuations has increased volatility on sentiment, rather than economic reality.
The letter's authors echo the sentiments of the Hundred Group's deputy chairman and CFO of Pearson PLC, Robin Freestone, who recently criticised changes in accounting over the last few years of transition from UK GAAP to IFRS.
He said that although IFRS is helping companies to tell the story of their business, a lot more work is still needed, especially in areas such as leverage.
Freestone bemoaned that fact that 'net debt' reporting is no longer a required disclosure, cash on the balance sheet is not equal to cash in the cashflow statement and that there is no real control over distributions/excess leverage as the 'distributable reserves concept has been invalidated and is not reported.
He said: 'The thing that is really missing is management's contribution. What are they really contributing? How can we establish what they're doing and how well they're doing it?'
Freestone called for a 'joining the dots' approach, saying there needs to be full reconciliation of the adjusted numbers, with greater consistency of what the adjustments entailed with some standardisation.
The Future of Banking Commission's 2011 report also concluded that the existing rules were an "important factor in allowing the behaviour that lead to the banking crisis".