The fall of HQ Bank AB - from an accounting perspective

Abstract: Background and problem: In August 2010, HQ Bank’s license was revoked by the SFSA (sw. Finansinspektionen). One of the reasons for the SFSA to revoke the license was HQ Bank’s valuation of the financial instruments. Mr. Johan Dyrefors was the auditor of the bank at that time. Both he and the audit firm KPMG was reported to the SBPA (sw. Revisorsnämnden) since SFSA did not share Mr. Dyrefors opinion that the trading portfolio had been measured in a correct way. Therefore, we investigate how the SFSA and Mr. Dyrefors argue for their notion of the concept of an active market and what supports their opinions in current regulation and previous research, which also is the research question of this thesis. Limitations: This thesis does not investigate the level of activity of the options, which existed in HQ Bank’s trading portfolio, nor their markets activity properties. No deeper investigation of the underlying financial aspects, such as which measure of volatility is the most appropriate or examination of the fitness of valuation models, will be carried out since these topics concern financial economics rather than accounting. Neither the management of the bank nor how it affected the liquidation will be examined. Method: An explanatory case study has been performed in combination with a qualitative text analysis to compare the parties' opinions and legal dogmatics to compare the opinions with the standards and current law. Finally, market data have been extracted from a financial instrument used in both the SFSA’s and Mr. Dyrefors’ line of argumentation. Results and conclusions: Firstly, the parties agree that activity existed on the market, but their interpretation of whether it was large enough to be useful for the valuation diverge. Mr. Dyrefors’ arguments, consistent with some academics, indicate that fair value is problematic when markets are illiquid and spreads are large. Secondly, our findings show that HQ Bank’s definition of an active market lead to a possibility to manipulate the market, though this might not have been the purpose. Finally, lacks of general proofs from both parties’ basis of conclusions reduce creditability in the discussion. As long as assumptions are fully motivated and consistently handled, both opinions may fall within the boundaries of the IAS 39. The fall of HQ Bank clearly indicates that the scope of interpretations in IAS 39 might be too broad. Suggestions for further research: A quantitative study of the level of activity of the options in HQ Bank’s trading portfolio or the properties of their market activity would be interesting, as well as if observable market data was used enough as input in the models and how this affected the accounting. Also, whoever aims to evaluate new valuation techniques, which improve characteristics of reliability, must be encouraged, since both science and regulation seems to be missing solutions to this fundamental accounting issue.