Regulation of the UK financial services industry is now entrusted to a new body with a new name and a new boss. Andrew Bailey, whose signature appears on your banknotes, takes over this month as chief executive of the Prudential Regulation Authority, successor to the FSA.

Initial impressions augur well. In his first post-appointment interview he acknowledged that valuations of bank assets are not “sufficiently prudent” – an interesting choice of words, given that in 2010 the International Accounting Standards Board (IASB) replaced the concept of prudence with “neutrality” (freedom from bias), thereby allowing post-hoc endorsement of the overvaluation of bank assets that inflated the credit bubble to its bursting point.

The prudence concept was dropped to put a stop to the practice of smoothing profits by using excess provisioning. Yet fair value accounting does exactly the same thing by enforcing disclosure of liabilities that will either never materialise or, if they do, will be amply matched by equivalent assets.

Mr Bailey told the Treasury Committee on Banking Standards that “we disagree with the accounting standards, frankly, in terms of the lack of forward-looking provision”. (Oops…another naughty word: only actual liabilities or losses, not provisions, are permitted.)

Hans Hoogervorst, Chairman of the IASB, insists that current IFRS-compliant valuation models include impairment tests that emphasise the need for prudence.

Quite evidently, those tests are not fit for purpose. Only six months ago the Bank of England’s own Policy Committee estimated that bank balance sheets overstated their assets by at least £35 billion.

Question: Can a bank’s accounts be considered true and fair when its reported capital is inflated by billions of pounds of bad loans?

Answer: Yes, if management, in its “neutral” judgement, decides that those loans, though known by one and all to be as rotten as vintage compost, have somehow not reached the IFRS “incurred loss” watershed. And its auditors are persuaded that such judgement is “free from bias”.

Standard-setters like to claim that “true and fair” is a “dynamic concept” and has evolved over the years. Well, that is wrong, and demands correction. The concept, the original QCs stressed back in 1983, is not dynamic. Its meaning is constant and immutable. Only the content of what constitutes true and fair changes over time.

IFRS compliance proves ….. what?

The Financial Reporting Council’s 2011 paper “True and Fair” concludes with the expectation that accounts preparers and auditors will always “stand back and ensure that the accounts as a whole do give a true and fair view” – a view not given by virtue only of compliance with IFRS. Misreporting the financial position of banks is but one example of compliance itself dissembling the truth.

As stated in IAS 1, inappropriate accounting cannot be rectified by additional disclosure. Yet that is the device so often resorted to when company boards and auditors confront the kind of presentational impasse that is rife under IFRS. The result is a surfeit of gratuitous data and well-nigh incomprehensible accounts.

The unholy collusion between government, bank boards, auditors, rating agencies and governance supremos will find some, allegedly neutral, justification for keeping those toxic assets out of the garbage can. But there is a market-imposed limit to just how much fake printed money governments can launder through the banking system in order to feign solvency. A privet hedge cannot keep the tsunami out.

It’s time, Mr Bailey, to call “time”.