A little off topic perhaps, and definitely controversial, as we delve into the world of economics. But this does have relevancy for accountants and for accountants that do business across borders especially.
And the question is, ‘when did the rules change’?
In a great article in Ireland’s Sunday Business Post, David McWilliams asks:
“Two years ago, Iceland was judged by Transparency International to be the least corrupt country in the world. The place is totally bilingual, and life expectancy is the best in Europe. The prime minister is the world’s only openly gay leader, and it has the oldest parliament on the planet. The country has no enemies. It doesn’t even have an army.
So how did a country with the highest level of educational achievement in Europe, free energy and a brilliant health service come to be regarded as a financial pariah? How come financial markets can judge a place like Iceland as delinquent and yet regard a place like Dubai - where women don’t have the vote and an immigrant underclass slaves away with no rights - as a safe haven? How do we explain this quandary?”
Add to this the fact that global economic recovery might well hinge on the willingness of China (a country whose democratic and human rights record is, well, mixed) to purchase even more western, specifically US, debt.
It is also worth pointing out that the UN also judged Iceland, as recently as last year, as having the world’s highest standard of living.
Viewed with 20/20 hindsight, a couple of things are clear:
1. The UN, and others, when rating wealth, do not appear to distinguish between true wealth and cash flows. Iceland had great cash flows as their companies and citizens bought up assets globally. These assets came encumbered with debt, which did not matter as long as cash flows allowed payments to continue. As asset values and cash flows declined, the debt remained, and goodbye Icelandic economy.
2. The ‘accepted model’ that non-democracies spend too much on their own internal corruption, armed services and security operations to be successful as a ‘business’ may no longer be the case.
3. The ‘global financial system’ is far from the well-oiled machine that many would have us believe. What it actually is is another question, and perhaps it is too early (and too volatile) to tell.
4. The long marriage of successful capitalism to successful democracy is strained, and other models may yet emerge that, at least in the short term, are as valid.
So where does this leave the accountant? The biggest effect is on risk. Very few accountants, advising a client expanding into places such as Iceland, the Baltic States or Ireland, would have got a hearing if they started telling the client about the risks involved. The economic collapse has led to a precipitous decline in asset value, as well as the potential loss in foreign exchange as their currencies decline.
Additionally, if that new found ‘poverty’ in such locations translates into a state where the rule of law is less strong, or where corporate and individual malfeasance rises, then the risk profile in audits will change.
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