Financial accounting is essentially about recording who – firms, traders, debtors etc – owes whom – creditors, shareholders, financiers, tax collectors etc – what: trade debts, profit, loans, interest, tax etc. Financial accounting records are kept and audited for their integrity by a trustworthy but competent third party, whose job, in a capitalist economy, is to act on behalf of the owners of the enterprise being audited, and to ensure that the managers of the enterprise, who are appointed to work for those owners, remain accountable. Modern capitalism has become extremely complex, but ultimately we all have a stake in its continued success – which means we have an interest in those who run it remaining accountable, eventually to us. The shares in most large corporations are held by institutions, notably pension funds, whose final beneficiaries, the savers and pensioners of the present and the future – that is, most of us – are the ultimate shareholders of modern capitalism. We are entitled to question whether executive accountability could be improved; and if so, how?

There are, however, potent pressures against greater accountability. Public companies are accountable through stock market listing rules and the regular publication of standardised financial reports, and the same rules do not apply to privately-held funds. Private equity and the funds now rather inappropriately called hedge funds are processes intended to reduce transparency and accountability. Although the present instability in the world’s financial markets stems mostly from an overshoot in asset valuations – the swing followed by a correction that characterises modern capital markets – a significant factor making this overshoot more severe than usual has been the lack of transparency resulting from the securitisation of the underlying debt. It is certainly arguable that, if markets had better information from greater transparency, these overshoots and the corresponding instability would be much less severe.

Sovereign wealth funds are now of increasing importance in the capital markets. The beneficial ownership of these funds lies ultimately with the people of the sovereign nations concerned, and they too have a right to know what is being done with their money. Although many sovereign wealth funds are operated by nations which have yet fully to embrace liberalism and democracy, the governments concerned are still accountable to their people and increasing prosperity will lead them to question their rulers – and the fund managers who invest on their behalf – more closely.



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