Who’s Winning The Fair Value Debate – Might Makes Right

By • Dec 29th, 2008 • Category: Pure Content


I saw a Twitter from Adrienne at Roger CPA Review yesterday.  She was asking for some help.  A friend’s 12-year old was writing a term paper on the causes of the financial crisis.  I should have told her, “Go watch any prime time network news program on the crisis.  It’s written at at twelve year old level.”

The mainstream media demonizes “bad” mortgages, especially if they were given to “marginal” people. They demonize greedy CEOs. Well, you’re getting closer. They demonize the ratings agencies. Does the average consumer with a 12 year old financial education know who or what the ratings agencies do?
They tried to demonize “fair value accounting,” but no one in Congress really understood what the hell anyone else was talking about so it was hard for the Senators and Congress-people to shout down an accounting standard.
It’s just as well they didn’t try to demonize the Big 4. Those still watching network news for their updates have no idea of their role either. I could have just said, “If there’s money in any one’s pocket, the bullies win. And they take your lunch after they knock you down.”
I was reminded of this universal truth when I saw an article in the Washington Post over the weekend on fair value accounting.  Glenn Kessler writes on December 27th that, “Accounting Standards Wilt Under Pressure.”  It’s a good summary of something that happened during the first week of October!

Glenn seems like a good all around business, trade issues, politics and foreign relations reporter. Back in October when this happened, he was writing about Obama and Biden, India and North Korea.  Important topics, for sure.  But where are the reporters who are dedicated to the regulators, the financial crisis, and the accounting industry?  Where was the Washington Post on November 19th when David Tweedie spoke at the FEI Current Issues in Financial Reporting Conference?  They could have interviewed Sir David Tweedie in person, like I did.
At the FEI Conference in November, Sir David contended, when asked about the episode, that he had been strong armed and coerced by the EU Commission.  He had no “political cover” such as “FASB has via the SEC  in the US.”  The Washington Post article repeats this apology, of sorts, and lame excuse from Sir David, again.
“Sir David Tweedie, chairman of the IASB, acknowledged that the body needs more protection from political manipulation before it can claim that it has become the global gold standard.

Tweedie said he nearly resigned over the rule change demanded by European politicians. “I was so frustrated by the whole thing,” he said. “All the time when we are trying to build a global accounting system, and we are pretty close to it, and then suddenly out of left field this thing appears. It’s just absolutely exasperating.”

U.S. standards have been set by the Financial Accounting Standards Board since 1973. “Right now, there is no credibility,” said Robert Denham, chairman of the Financial Accounting Foundation, which oversees the FASB. “If we are going to have global accounting standards, my view is that is not going to work if the IASB is going to be jerked around by the European Commission. That is the very real risk that is posed by the EC coercion and the IASB’s response.”

The episode exposes how small, incremental changes in arcane accounting rules can affect billions of dollars in market value and corporate profitability. In turn, the money at risk raises the political stakes, as desperate companies begin to lobby political leaders to insist on changes that normally would come about only after a careful discussion and evaluation by experts.

…the financial crisis demonstrated how vulnerable the fledgling system is to political pressure.

On Oct. 8, the leaders of France, Germany, Italy, Britain and the European Commission met in Paris to discuss the worldwide economic crisis. They issued a statement saying they were working together “within the European Union and with our international partners” to ensure the safety and stability of the worldwide banking system. But buried within the statement was a sentence warning that European banks should not face a competitive disadvantage with U.S. banks “in terms of accounting rules and their interpretation.” The leaders added ominously: “This issue must be resolved by the end of the month.”

At issue is an accounting standard known as fair value, or mark to market, in which companies disclose how much an asset could fetch on the open market. With the values of assets plummeting, banks were suddenly stuck with paper losses on assets they could no longer sell. With some critics saying the provision was forcing banks to take large write-downs, the SEC and FASB issued guidance in late September that companies could use their own internal models for assigning a value to assets — in essence, a nod to the principles-based international rules.

But European officials smelled a rat. Under rare circumstances, U.S. companies are permitted to reclassify assets they were actively seeking to trade into long-term “loans,” using an accounting rule that was considered weaker than the international equivalent. The international rules did not permit such transfers, and European officials feared that the new guidance was handing the Americans a competitive advantage.

Shortly after the European leaders’ statement, Commissioner Charlie McCreevy of the European Commission, who was in charge of the European Union internal market, signaled he would introduce legal changes, overriding the international rules. McCreevy decided to exploit a loophole in the system — that all accounting rules must be adopted as legislation by the E.U. So McCreevy was going to force the changes on the IASB by threatening to remove — or carve out — the existing regulation, leaving nothing in its place.

“We made it clear what the IASB should accept,” said Oliver Drewes, a spokesman for McCreevy. “There is always the right, and threat and the pressure, that one could go for a carve-out for European companies.”

Tweedie said the rulemaking body had only four days to act before McCreevy pushed through a change in the law, even though accounting changes of this magnitude would normally take months to achieve.


It’s interesting to observe that the Europeans believe that the process is so pure and non-politicized in the US. The article quoted, written by a US journalist, in the Washington Post no less, never questions this contention.  And yet, we have seen the same kind of politicizing of accounting standards, the same kind of bending of laws and regulations intended to protect the investor, and some deplorably lax regulatory oversight of folks who were fleecing even sophisticated investors of billions.
Dennis Howlett takes a jabbing stab this morning at explaining how bad it really is here in the US:
“If the crippled banking system is to be brought back to good health there has to be a fundamental rethink about where power really lays in the setting of and upholding of standards. It cannot be acceptable under any regime for private agencies – the Fed is NOT a government body – to dictate what is in what amounts to its best, private interests alone. It is a perpetuation of this ludicrous and dangerous state of affairs that faces the incoming US president which has a knock on effect around the world.”

Who is primarily responsible for the strongly political approach to financial system regulation and oversight?  (Remember, the PCAOB, too, comes under the jurisdiction of the SEC.)
The same SEC that protects the FASB, according to Tweedie, from the teeming, uneducated, misunderstanding masses.
From Broc Romanek at The Corporate Counsel.Net

“…While some read the Chairman’s remarks as candid and refreshing, I read them differently. I took them as not taking responsibility for the SEC’s failures. In seeming to throw the Staff under the bus – on his way out of the agency’s doors no less – the Chairman violates the “tone at the top” mantra as well as the one of “accountability” that the SEC is supposed to drum into our corporate leaders.

From the beginning, I didn’t like it that a sitting Congressman was appointed as the head of an independent agency. The SEC was already being “politicized” before Cox arrived, but this trend accelerated on his watch. And some say that Cox cared more about how the media perceived him than how the Staff performed (one of his responses to the credit crunch was hiring two more PR guys). It has been written that he fought budget increases for the SEC (albeit with some urging from Commissioner Atkins), even when those in Congress responsible for the SEC’s oversight urged him to seek more resources. Anyway, the SEC is in dire straights these days and a new Chair couldn’t come at a better time.”
















Unlike the U.S. board, the international board has no regulator like the SEC to help shield it from political pressure. So the IASB was at the mercy of the European Commission.

“There had been pressure on him, I suspect, from some of the European leaders,” Tweedie said, referring to McCreevy. “It was quite clear it was going to be pushed through and that would have been a disaster. We were faced with this hole being blown in the European accounting, and we just wanted to step in and control it.” “

is
Email this author | All posts by

6 Responses »

  1. “Politicized” is probably not the right word. If something is a very open political football, you can’t get away with very much. What we have is a situation where a small number of people have their way, with a tremendous amount of hypocritical cover proclaiming them “independent”.

    That can do far, far more damage than anything overtly political. As you show, our press is incapable of reporting on what is happening – but would that be at least a bit more visible if someone starting yelling and screaming?

    I tend to be in favor of making bodies like this highly political and making sure that they have a lot to fight about. By that, I mean not just political but Jerry Spinger-ical. “If the chair’s in the air, the result might be fair,” I always say.

    That may not sound reasonable, but it’s a lot better than what we have.

  2. Francine:
    I have a number of posts about FASB 157 and the flap over it. I read the WaPo article, Yves Smith having a link to it.
    As to accounting being politicized, this is old news. In 1962 the US created investment credits (IC). The APB came up with Opinion 2 which required ICs be amortized. Big Business was outraged and lobbied Congress to pass a law permitting “flow-through” accounting for ICs. Congress did, then the APB issued Opinion 4 in 1964 stating Congress has spoken, “flow-through” accounting for ICs is kosher.
    The current flap over FASB 157 is absurd in my opinion. Futher, the WaPo went easy on the SEC in the article. “Shoot the messenger” is the story here.

  3. […] and “fair value” and “mark-to-market.” After all, this latest crisis put accounting and GAAP on the front page again, on the lips of CNBC commentators, on the desks of Congressmen and Senators who would have […]

  4. […] storefront, sham auditor David Friehling. Is it any wonder the auditors were not in the room when real valuations and the fates were decided for Lehman, Merrill Lynch, Bear Stearns, Wachovia, […]

  5. […] looking for a “safe harbors” for exercising their “judgment.” And, of course, any approach that causes confusion and complexity is the “next big thing” driving large fees for the firms. Any […]

  6. […] looking for a “safe harbors” for exercising their “judgment.” And, of course, any approach that causes confusion and complexity is the “next big thing” driving large fees for the firms. Any […]

Leave a Reply