Change is in the air: learning to deal with it

Citation

Bruce, R. (2003), "Change is in the air: learning to deal with it", Balance Sheet, Vol. 11 No. 4. https://doi.org/10.1108/bs.2003.26511daa.001

Change is in the air: learning to deal with it

As ever it is the veteran of the analyst community, David Damant, who puts his finger on it. His article in this issue of Balance Sheet could not start in a more challenging or optimistic way. "The proposals for a new format for the income statement", he says, "represent the greatest revolution in the appearance of financial reporting since the introduction of double entry book-keeping more than 500 years ago". After all these years of squabbles over the difficulties of financial reporting it would be gratifying to think that Damant is correct. Backing up his article is one from a rising star at the International Accounting Standards Board, Richard Barker, who explains the theory and practice behind the new proposals. At Balance Sheet we hope that by publishing these two articles at this stage in the history of financial reporting we can provide as optimistic a way forward as Damant predicts. At the end of his article he reminds us of what Sherlock Holmes says to Dr Watson as the mystery is unraveled towards the end of The Hound of the Baskervilles. "Difficulty after difficulty clears away before us", said the great detective and we can only hope that Damant is right and that the dense mist which has always seemed to hang over the Grimpen Mire of financial reporting rules is about to start to lift.

The other great challenge of our times is that of the seemingly interminable arguments over bank liquidity and regulation which have now resulted in what we must call Basel II. In this issue we have three expert views. Robert Hudson, the head of group risk analytics at Standard Chartered, provides a view from a treasury standpoint. He wonders if this might really be the last word in risk management. He does not say this as an optimist. He says this "not because of the excellence of the analysis but because of the effort required to comply". Banks will require huge resource and effort to implement Basel II. "There will be little time left over for innovation and creative development", says Hudson. "A more risk-sensitive accord was what everyone wanted. Now that we have it, will it be worth the cost?"

Adding their voices to this debate are Thomas Garside and Jens Bech of Mercer Wyman. They provide a full guide to what is required of banks under Basel II and suggest that "it is now up to the banking industry to respond to the new rules of the game". They suggest that the "strategic landscape of the banking industry" will change. David Syer, director of operational risk solutions at Algorithmics Incorporated, would agree. The regulations surrounding operational risk issues have changed under Basel II and Syer points to where banks are going to have to change their approach.

Another stalwart of previous issues of Balance Sheet weighs in with a comprehensive overview of operational risk issues. Yen Yee Chong is about to have his latest magnum opus, Handling Investment Risk, published and we are privileged to be able to bring readers an extensive extract. Chong, as ever, provides good sharp advice allied to perceptive case studies.

We also examine another of the great issues of our times in a timely piece from Graham Phillips and Jerry Dawson of PricewaterhouseCoopers on the regulation and distribution of hedge funds in Europe. Once more it is the old story – differences in regulation distort any efforts to create a global market. This time it is a European model of enormous complexity that is struggling against a relatively simpler model in the USA. As they put it: "We believe that, in order to compete with US hedge fund managers, the regulatory environment in Europe needs to continue to evolve and to move towards the US model with flexible regulation and fewer barriers to distribution. This means that European and national regulators must continue to harmonize the rules between countries by addressing the current regulatory barriers; however, the harmonization must be workable."

Meanwhile our trio of columnists this month attack very different tasks. Kari Hale, the head of Deloitte & Touche Global Financial Services Industry Governance and Regulation, provides a guide for businesses to prepare for regulatory visits from the main London-based regulator, the Financial Services Authority. And Michael Mainelli, provocative as ever, revisits the age-old question of the balance between liquidity and transparency which once again has come to the fore with changes looming on European rules.

Matthew Leitch takes a look at internal controls and wonders whether people realize quite how much effort they are putting into processes like evaluation rather than getting on with the central task of taking action. Looking through the rest of this issue of Balance Sheet you can quite easily see his point. Regulation and changes in regulation can blind you to the central task of running effective businesses. We hope this issue of Balance Sheet, having taken change as its theme, will have helped restore that focus.

Robert BruceEditor