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THE Federal Reserve Board of the US has recently reported that few banks have encountered significant problems with the accuracy or completeness of financial statements submitted to them, but many are tightening up lending practices after widely-publicised accounting scandals and accusations about the roles of banks in cover-ups of unexpected business failures.

The Fed's report is based on a survey conducted from May through July. Key findings:

The trend over the past year in the number of firms submitting erroneous or misleading financial statements as part of the loan approval process was described as: a "notable increase" by 5.4 per cent of the banks surveyed and "some increase" by 12.5 per cent. The vast majority (80.4 per cent) reported no change in the frequency of erroneous or misleading statements.

Loans to companies with accounting problems represented more than 5 per cent of total business loans at three large US banks. The majority (58 per cent) said these loans represent less than 1 per cent.

Their own experiences notwithstanding, most banks have taken action in response to the accounting scandals. Examples: Some began to request additional financial detail during the approval process. Others increased the frequency or intensity of monitoring. Still others are enforcing loan covenants more strictly.

A significant minority (23.5 per cent) further tightened loan standards and terms for both businesses and households, down slightly from the 25 per cent who had reported tightening credit standards in the previous three-month period.

Only one bank reported that it had eased standards for business loans. This was the first financial institution to report easing standards since 1999. The Fed did not name the bank.

Participants in the survey included 56 large US banks and 20 foreign banks with US operations.

Accountants adapt

GLOBAL reporting guidelines to be issued in the US shortly provide timely new ways for accountants to help their clients as they battle a storm of public distrust caused by accounting scandals and workplace greed. Developed by the Global Reporting Initiative (GRI), these guidelines expand business reporting of corporate responsibility from environmental, health and safety matters to new frontiers involving social and ethical issues.

The initial impact will be felt most keenly by major accounting firms, who are monitoring the growth of corporate responsibility reporting and gearing up to provide services in this area. Examples:

A study by KPMG found that 45 per cent of the Global Top 250 companies now provide these reports, up from 35 per cent in 1999.

A PricewaterhouseCoopers survey found 73 per cent are now issuing or plan to issue a report, and 55 per cent of those currently issuing a report are following the GRI guidelines. Most clients (89 per cent) agree the area will receive even more emphasis over the next five years.

Deloitte already has a Web site devoted to the subject. Last month, the firm introduced a scorecard to assess the quality of companies' corporate responsibility reports. It plans to host a workshop in Johannesburg on September 2 entitled, `When Trust is Challenged: Dilemmas and Opportunities in Corporate Transparency.'

The expanded guidelines could not have arrived at a better time. There are as yet no authoritative pronouncements or endorsements by US standard-setters (that is, the Financial Accounting Standards Board and the American Institute of CPAs). GRI's development work had a headstart because it was begun long before the start of the current crisis of confidence in business leaders. Perhaps because of the unusual source and evolution of the guidelines, the movement acquired a number of names over the years, ranging from triple-bottom line reporting or sustainability reporting to non-financial and corporate responsibility reporting. To help its members understand the movement, the AICPA recently published a primer of frequently asked questions (FAQs) that include a partial list of US companies already reporting on corporate responsibility, along with an explanation of why the public accounting profession should get involved.

(Source: AccountingWEB)

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