Watering Down Fair Value Accounting is "Crazy"

Moves by Wall Street lobbyists slammed

Excellent article from the Financial Post

Bank lobbyists and politicians are damaging the credibility of corporate reporting and hurting the interests of investors around the world by pulling back on mark-to-market accounting, one of the world's top international accountants warned.

The comments from Tom Jones, vice-chair of the International Accounting Standards Board (IASB), come after U.S. standard-setters unilaterally decided to dilute the controversial accounting rule earlier this month.

In an interview with the Financial Post, Mr. Jones warned of "a loss of credibility" and said the rationale for watering down so-called fair value accounting is "crazy." He also cited concerns about political interference that could undermine the independence of accounting rule setters.

These fears were echoed by other senior accountants, who urged Canadian authorities to resist pressure from big banks to follow the American lead.

In early April, the U.S. Financial Accounting Standards Board pledged to backtrack on fair value accounting under intense pressure from Wall Street and demands from Congress. U.S. lawmakers had even threatened to take the matter into their own hands rather than leave it to the accountants. The resulting FASB rule changes allow banks to use judgment rather than market prices, to value financial instruments.

Despite the urgings of Bay Street, the oversight council of Canada's standards board opted not to move to align with the U.S. when it met earlier this month, though the organization will weigh the matter again after the international accounting board meets this week.

The Canadian stance has received significant backing from the accountancy profession. Chris Clark, chief executive of PricewaterhouseCoopers Canada, said his firm does not support rushing to imitate the Americans and urged authorities to "balance" the demands of banks with "the needs of the investor".

Nouriel Roubini, the New York University economist nicknamed "Dr. Doom" for his prescient forecast of the global economic downturn, yesterday called the U.S. rule changes "a big mistake" that has allowed Wall Street banks to "fudge" their latest set of quarterly accounts.

The changes circumvent capital rules set by bank regulators and would, if adopted, weaken Canada's banking system, said Wayne Landsman, a professor from the University of North Carolina who will speak on the topic at the Rotman School of Management in Toronto on Thursday.

Proponents of fair value, or mark-to-market, accounting say it is the most accurate and independent way to price assets. But bankers say fair value accounting has exacerbated the current financial crisis by unfairly forcing them to take huge writedowns. They say illiquid markets for certain securities have led to fire sale prices that do not represent appropriate valuations, and they have lobbied to be allowed to value certain troubled securities based on their own estimates.

The idea that banks have been forced to write down assets beyond any rational level is "actually crazy," said IASB's Mr. Jones. The market price for troubled financial instruments has probably not even hit the bottom yet, he added.

Mr. Jones insisted there are better answers to the current problems in the banking sector than tinkering with fair value rules. One possibility would be to change the amount of capital that banks are required to set aside by bank regulators, he said.

Politicians and lobbyists in the U.S. seeking to further weaken fair value are having the effect of pressuring global standard setters to follow FASB's lead, Mr. Jones said. European finance ministers, for instance, have already called standard setters outside the U.S. to "level the playing field" on fair value accounting.

The IASB has reacted by urgently cutting short a consultation period on changes to its rules on financial instruments.

The London-based IASB uses a different rule book to the FASB. In recent years, most countries outside the U.S. have adopted or pledged to adopt the IASB rules. At a meeting in the U.K. this month, G20 leaders called for significant progress towards a single set of global accounting standards. Some observers say a single set of rules would make it easier for investors around the world to make informed decisions.

Mr. Jones said the integration plans have not been derailed by the U.S.'s decision to back away from fair value accounting. Full adoption of IASB standards by the U.S. seems unlikely, but some form of convergence is expected in the long term.

"We are going to try to ensure the difference isn't as great as it seems," he added. Mr. Jones noted that IASB rules on fair value also allow companies to exercise judgment in some cases, like the amended U.S. rules.

Separately, members of a joint committee formed by the two accounting organizations to deal with the financial crisis also complained about political interference in their work.

At a London meeting of the Financial Crisis Advisory Group, that was broadcast on the Internet, senior industry experts expressed concern about the politicization of the process of revising accounting standards.

Harvey Goldschmid, the group's joint chair who is a former commissioner of the Securities and Exchange Commission, and IASB chair Sir David Tweedie, were among those who warned of the dangers of political pressure that could weaken the independence of accounting standard setters.
By Duncan Mavin and Eoin Callan
Financial Post