The Politics behind Accounting Standards

The article, titled "Accounting Standards Wild Under Pressure", in Washinton Post details how quickly we, the accountants, change our stance. And we are suppose to issue independent opinions?

Mark-to-Market: The debate continues

It seems odd that in the environment of continuing loss of income, employment and wealth in the real economies, discussions on the arcane accounting treatment are still festering. In the past week, I came across two separate news articles that reported views and comments by some of the most senior regulators and executives in the business world on the subject of Mark-to-Market accounting.

SEC head says accounting rules must be neutral (Associated Press; 8 Dec 2008)

Behind Schwarzman Spat With Wasserstein Lies FASB Rule No. 115 (Bloomberg; 8 Dec 2008)


Granted, the issue was not fully resolved by the accounting bodies which, after intense lobbying and protest, allowed certain exemptions from the application of the treatment. But that was two months ago- a long time by 2008 standard (Obama was elected barely a few weeks ago but it seems he has been acting as president for months ). Between the two months, the crisis has spread from wall street to main streets around the world.

And we are still debating how we post a number to a balance sheet that was read by less than a fraction of a percentage of the world population?

Next Change: Mark-to-Market Accounting in EU

It is reported that, after SEC in the U.S. relaxed the Mark-to-Market accounting rules, EU is also looking into changing the application of the valuation method, particularly to the banks and financial institutions that carry on their Balance Sheets substantial amounts of sub-standard assets.

The logic is, I guess, by lifting the requirement for revaluing the carrying amount of such assets which would erode the accounting capitals since the book values are substantially below the assets' market value, the capital adequacy ratio of these institutions would be in much healthier shape.

But should the marketplace be sophisticated enough to differentiate between accounting capital and economic capital?

Besides, mark-to-market has already been practiced form years resulting in many of the assets being carried at previous periods' market prices.  So, if mark-to-market were to be suspended and if historical prices were to be adopted, these assets will have to be revised down also.  Given the inflated prices go back several years, these assets will have to be written down to historical prices which in effect neutralises the original intension of the suspension.

Or would the authorities then say: " higher of the historical or market value"?

Mark-to-Market Accounting- developing story

It seems that the accounting principle of fair-market accounting, a.k.a. mark-to-market accounting, is roundly criticised as the cause of the financial crisis.  To the extent, as reported by Financial Times, IAS will have to hold an emergency meeting "to discuss certain topics made controversial by the credit crunch- including "fair value" and off-balance sheet accounting."

Further, it has just been reported the U.S. politicians are exerting pressure on SEC to suspend the accounting practice.

I think in times of desperation and in hope of finding a silver bullet, some of us may reach out and suggest or implement solutions that seemingly tackle the symptoms without necessarily finding the cure.

Accounting, in a nutshell, is just the presentation of the financial status of a company using a specific set of measuring rules.  It does not change the underlying qualities of the assets and liabilities of the company.  In other words, whether fair-market accounting is adopted or not, the quality of the subprime mortgage assets are unchanged.  So, if we assume that the crisis is fundamentally due to the asset qualities at the financial institutions, we should deal with the cleaning out the houses and not just wiping the windows.

Besides, if one were to repeal the use of fair-market accounting, as I have previously written, we should also retroactively restate the previous financial years' financial statements in which excessive profits are recorded by adopting fair-market accounting.  In that case, is there any way we can recoup the bonuses paid out to the Management for their 'good performances'?

Mark-to-Market Accounting

The Economist's article on Fair Value Accounting in its 20th September 2008 edition.  

It seems to me that whatever the accounting bodies do over the debate of valuation accounting, which may take years in deciding and implementing, we are way behind the curve in developing new standards when the real world transactions are evolving so rapidly.

SEC to adopt IFRS

As reported on BBC on 28 August 2008

In an effort to align with the international investing community, SEC decides to adopt the International Financial Reporting Standards, without reconciliation. Even more radical, it is proposed that IFRS may replace US GAAP entirely in a few years' time. That is a big step towards connecting with the world for the paradoxically closed country/economy (according to Fareed Zakaria, U.S. is one of the last 3 remaing countries (Liberia and Myanmar are the other two) that has not adopted the metric system).

The reason behind the move has got to be the diminishing market share of New York in the capital market, in the lights of Sarbanes-Oxley Regulations and the emergence/reemergence of Hong Kong, Shanghai and London.

One wonders what is the futures for the professionals (accountants, lawyers etc) who specialise in US GAAP.