Growth, Jobs and Stability: The Role of the Accounting Profession
Last week in a panel debate broadcast on ABC, Arianna Huffington called the decision by the Financial Accounting Standards Board (FASB) to suspend mark-to-market "absolutely tragic." The issue Arianna identifies resonates with the implications of the actions agreed at the recent G-20 meetings in Washington and London. One of the immediate actions of the G-20 Washington Summit was "strengthening transparency and accountability" particularly with regard to financial reporting. This reflects two concerns: first, why was there no warning about the banking/liquidity crisis? Secondly, has the way bank results were reported created or exacerbated the crisis? This latter point is a criticism of fair value accounting -- or "mark-to-market."
The first issue has attracted less comment but is perhaps more complex. It is easy to look at the details of the accounts with hindsight and see how banks results were boosted by certain transactions. The transparency required by current accounting standards ensures we can see how banks were affected by increases in the market values of financial assets. However, it seems no-one realized the fragility of the markets in such securities. When problems first emerged in the sub-prime debt market, no-one was prepared to recognize the scale of the impact. In reality, we all looked for reasons why the problem would not be contagious.
Should accountants and auditors have identified these issues? Should regulators have realized the vulnerability of banks' capital and reserves? Should governments have recognized that a problem in one bank would affect others? The answer to all these questions is "probably." We believed that real value was being created by these new financial instruments and wanted to believe that the "good times" were here to stay.
The countries that form the G-20 must address this issue. They need to create a more skeptical environment where regulators challenge assumptions, ensuring companies have adequate risk assessment procedures.
That is why the current criticism of "mark-to-market" is so ironic.
Critics of mark-to-market suggest that forcing banks to write down the value of assets to their current depressed market value, creates liquidity issues. They say that the market prices we use are artificially low, feeding a fall in market values. Everyone has recognized the excesses in the banking system and that the lack of liquidity reflects real losses. Mark to market is not blamed for creating the crisis, but worsening it as markets fall. Critics suggest we could allow banks to hold assets at their current values, thus preventing further write-downs and restoring confidence and that consequently we'd see renewed stability in the financial market and liquidity restoration.
This is the opposite of "transparency and accountability." It avoids the need for banks to be accountable by pretending financial assets are worth more than their market value.
The only convincing argument for this is that market values don't reflect an asset's value because the market is not currently stable. The problem is that if a bank wanted, or needed, to realize any of its financial investments, it could only realize the current market value. Mark-to-market ensures transparency. Abandoning mark-to-market merely allows those who want to pretend that the crisis isn't real, to do so. A major concern is that we didn't have a sufficiently critical eye to anticipate the present crisis:abandoning mark-to-market would risk recreating the environment that led to the problems.
Mark-to-market can of course be improved. Let independent accounting standard setters determine the extent to which the current market has shown the need for changes. Let these changes be considered and free from political interference. Above all, let them be consistent given the global nature of banking.
The G-20 is right to have "strengthening accountability and transparency" as one of its objectives; it is important that they do so in financial reporting and do not look for a politically expedient solution that will damage this.
Jeremy Newman is the Global CEO of BDO
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If mark to market is so awful, how did we possibly get along with out it between 1938 and 2008?
It was suspended in 1938 because it was deemed to be exacerbating the great depression...
whoops, meant if MTM is so GREAT, how did we get along without it....sorry
“Mark to market is not blamed for creating the crisis, but worsening it as markets fall. (sic)”
Mark to market is only one way of expressing value, and the recent fetish that it should be the one and only way, a rule change that distorted the market on both the way up and the way down, made this crisis what it is today.
The central fallacy of mark to market it to value everything as if it had just been sold at the value the market just assigned.
In truth, when everything is put up for sale at the same time, what happens is what happened, a crisis.
If mark to market was transparent, it would value everything at fire sale prices at all times, assuming everything was put up for sale at once.
Mark to market is to the financial market is as market capitalization is to the stock market. But even for public companies, there are other ways to value them, for example, ownership equity.
For true transparency, you don’t confine your valuation efforts to one method, and especially not the mark to market method.
Further, the market itself is not monolithic; there are different marks in the same market.
Imagine telling the convenience store to revalue its stock because the exact same items sell for less at the grocery store.
Should Main Street GO DOWN because Wall Street is Going Down?
BIG WS Banks="Mark-to-Market Rule" Relaxed = L I E about Debts' Values
BIG WS Banks=Profited Despite Bad Loans="Previously Illegal" Accounting Maneuvers
BIG WS Banks=Profits because of FED and Treasury FUNDS
BIG WS Banks=Reported HUGE profits from UNREGULATED trading
BIG WS Banks=More downbeat=Housing/Market Crash destroyed Americans' wealth= Defaults
BIG WS Banks=Say NO light at end of tunnel
____________________
INSANITY=Repeated Failure to Honor Obligations
Paulson/Geithner=Repeated $12.8 Trillion=Banks while Main Street Drowns in High Rate DEBTS
Volcker="Long SLOG" using Current Methods
Bernanke = Collapse Lending = "long-lasting" damage to home prices, wealth, credit scores.
Loan Losses=Consumer PAIN=Banks HARMED=Time for TRICKLE UP to SOLVE
Citigroup=paid out all profits to preferred shareholders, leaving a net quarterly loss of 18 cents
RICH=RICHER!
JPM =No Evidence of Recovery=Sees Increase in Loan Losses
Obama+Bernanke=Signs Spending on Homes and Consumer Goods MIGHT STOP FALLING.
Citigroup=10.2% loss on credit cards=Massive RATE INCREASES Demoralizing Americans.
FED+Bailouts=$12.8Trillion to Banks=Decline in Lending for Main Street = INSANITY!
Goldman=Wells Fargo= Large Questionable Profits
Financial Analysts=All Major banks=Large Losses/collapsed without government Welfare
Financial Analysts=Profits Not Sustainable = END of investment profits and accounting rules
Competition on Wall Street=Diminished as smaller Number of Banks
Enough Spent on BIG WS Banks, Leave Wall Street Alone to clean itself UP!
Only way Main Street Economy can Improve is "TRICKLE UP" Rates for Businesses/People's DEBTS
Actually, since the government is going to guarantee 85% of the cost of buying any assets the banks want to sell, the price should = 6x market price.
Wow. A representative of teh accounting industry, teh fine people who brought us Enron, Worldcom and all those great examples of professional integrity, would prefer a standard which is incredibly inaccurate, simplified and destructive to teh economy but which provides a liability shield for accountants. What a shocker! What next, a huffpo opinion in which a CEO of drugh cartel tells us why restrictions on selling crack to 12 year olds are a bad thing.
Please show a little respect and stop embarrassing yourself. First, it is Andersen not Anderson.
Second, your really should take a couple of Intermediate Accounting courses and then rethink your rants.
really...
First, I took more than a few accounting classes during graduate school. An MBA at University of Chicago kind of requires that.
Second, the accounting industry has done nothing to deserve even a "little" respect. FASB, acting as a tool of the big 4, basically abandoned any pretense of ethical or professional responsibility and threw the economy in the fire in order to save its own skin. End of story. It's beyond shameful; it's criminal.
Mark to market was a flimsy, overly simplified and idiotic standard by any rational measure. But what it did extremely well was create a simple, solid liability shield for an industry still recovering from its last scandal with Andersen. By instituting Mark to market after it became apparent that this issue was going to erupt, FASB basically had one goal: to protect its constutuents from liability for their role in this mess. To hell with the fact it made the situation much worse and was a gross act of self-interested malfeasance.
This situation won't be resolved until public irsatisfied. And although we are focusing on teh bankers now, the accountants and FASB have to be next, just as Enron started with Enron and moved to Andersen.
Jeremy, I for one do not flinch at the idea of calling this thing by words such as ... "swindle," "fraud," or "cheat."
In every case, these swindlers took legitimate financial principles and applied them in a deceitful way.
Yes, there really are long-term assets (like a two-thirds finished building) whose "value if sold today" do not reflect "value when sold at the time and in the condition that we contemplate." But that's not the whole story: there is a surrounding context, and the statement is valid only within and because of that context.
A security, unless it plainly states otherwise, is a "demand note." If the security represents an obligation, it presumes that the obligation can in fact be exercised. When, e.g. a credit-rating agency makes a statement upon which, of course, you will rely, that statement is presumed and required to be "rely-ABLE."
"Mark to market" is the only reasonable basis for a demand-security, or for any obligation at all (you never know when ka-ka might occur). I think that the Accounting Board, which is not a government entity, is trying in their own way to help this swindling to continue. It is so patently absurd that it is laughable... but nobody's laughing.
Balony. The FASB only impelemnted mark to market out of self-interest. It was shoddy, dishonest and asinine; but it provided a liability shield against claims like those against Anderson earlier in this decade.
As if by magic, the FASB created a perfect get out of jail free card for accounting firms who made bad calls on valuing this type of asset. All they had to do was pull the current selling price 5 seconds before printing their audit and copy and paste it and --voila---instant liability shield for crappy accounting.
Here's a much simpler solution and doesn't require any extra work. Have the banks publish both and let the market decide how reasonable the banks are in their "judgment" of the worth of their assets.
Those who want to suspend accounting rules are in the same club as those who choose to deny dinosaurs.
Science and accounting should both be based on facts, not on politics. The problem with marked to market is not the accounting - it is what you do with the accounting. Accounting rules should seek the truth about a companies situation, just as since should seek the truth about those bones in the ground.
What you choose to do with that truth falls in the realm of politics (and religion, a form of politics). If you want to close down banks whenever their assets dip in value below a certain point is a political decision. Deciding to wait and see if the impairment is permanent is also a political decision. But do not deny the public the knowledge of the fact that an impairment has occurred.
Politicians need to stay away from accounting principles. The US needs to adopt IFRS as soon as possible to further reduce the temptation for Congress to meddle.
The accounting must also represent fact. Honest business (and these particular financiers are anything but honest) deal with real money and therefore real fact.
The Government of the United States is the bearer of the ultimate fiduciary duty: a duty to "we, the people of the United States." There is one and only one way by which laws and regulations are made, and "FASB is not it."
If these mega-so-called-banks were still actually banks, then they would as a matter of course have a stable of obligations that are quite conservative in nature, and they would not be seeking a mid-stream change of the rules that would authorize and facilitate further speculation. The folly and ruin, and the very considerable public harm that it has directly caused, is quite obvious. So it becomes a matter of public policy.
"What would a willing buyer pay a willing seller." But also, "when and where and under what conditions might a buyer and seller wish to meet?" For a demand security, that is "at any time for any reason." For a supporting obligation (e.g. a CDO), the same. Hence, "mark to market." Any other interpretation would naturally engender what did happen: "what do you want the number to be?"
I do not understand why you say that the bearer of the ultimate fiduciary duty lies with the Feds? Don't you think that it lies with the companies themselves and if there has been fraud or any appearance of fraud. then the corporate veil is pierced and you go after the deep pockets who profited from the fraud...Like Charles Keating and Kenny Lay...and the boards of directors.
What are the primary differences between IFRS and GAAP?
As far as we can tell thus far, the differences are largely based on perspective. GAAP, as you know, is rule-based and tends to take a piecemeal approach to reporting. At the end of the day, auditors report on the financials taken as a whole, but they audit sections of the reports based on rule compliance.
IFRS is more based on reflecting a big picture approach to reporting based on agreed upon definitions.
So, for example, GAAP has four tests to determine whether a lease is capital or operating. This leads to a lot of manipulation by firms to construct leases that fit the letter of an operating lease but are, in spirit, capital leases.
IFRS attempts to reflect the spirit. Of course, there are concerns that IFRS will not provide consistency or comparability and will intensify disagreements between auditors and management.
That's my take. If anyone else in the profession would like to chime in I would be interested to hear your opinions.
Ok, the gig is up and all that golden glitter is just lead with a paint job. The question is what is the true cost of being honest. If all the banks and other investors report their assest at their current value, what does it mean to the rest of us? My sense is that making the suckers pay will be very painful. It's already painful.
Accountants follow rules. If the rules have holes, they are not responsible.
I believed that a CFO is supposed to be so seasoned and well informed, that they are in that position to calculate the risks intelligently and avoid them for the good of the company. The accountants record and organize the results of the CFO's wisdom.
For quite a while now CFO's seem to do nothing but calculate how to lie and enrich themselves and those few other ones in the executive levels that actually hire them. The financial elite perfect the art of incest, the accountants report what they can, to an awful lot of investors, and regulators, who do not care to listen.
That is not true, accountants have been held liable many times.
It was interesting for Spitzer to say that once he took AIG to court, then they could not find a CFO because of the screwy accounting that they were practicing.
Accountants can only write down what the business people tell them, or report what others have written down. Numbers don't lie, and even if you don't have to pay them off, accountants generally don't either. What is too much to expect from accountants is being able to judge lying in their business patrons unless it's obvious. Even the obvious lies don't necessarily show themselves in mere numbers either.
Mark to Market may be the wise way to account, but the reality is, the market moves quicker than the mark to pen.
Things are seldom what they seem.
"don't lie, and even if you don't have to pay them off, accountants generally don't either."
Yeah. Just ask all those folks who used to have Enron pensions how honest accountants are. Be sure to mention the name Arthur Anderson.
AA's lawyer and a partner shredded documents which contained numbers recorded by accountants which held the truth in a failed attempt to save their own butts and those of the Enron corporate officers who ordered fraudulent accounts to be created to hide losses.
It was the executives to blame, not the accountants.
There are history books about accounting and there is responsiblity for verifying independently inventories and legal obligations. We need more information about international accounting standards. They could be more clearly defined (less loopholes) than what we have here.
Why can't Obama force Wall Street to do what he has done:
IMMEDIATELY REMOVE "OFF-THE-BOOKS" ACCOUNTING or "OFF-BALANCE-SHEET" ACCOUNTING!
Obama put the Wars and Emergency Relief "ON-THE-BOOKS" for his Budget and WALL STREET must put its TOXIC ASSETS ON-THE-BOOKS for their Budgets! It is time to be TRUTHFUL!
Wall Street and CNBC Collusion and Corruption!
Cramer Said a week ago the Depression is Over:
1. Weaken "Market-to-Market" so Banks can LIE about value of $700 Trillion in Toxic Assets! Wall Street gives Avg of $7.5 Million to Each Senator and $1.86 Million to Each House Member/4 years!
2. As Cramer said, "Obama is on Our Side, Bernanke is on Our Side, and Geithner is on Our Side with this FABULOUS Public Private Banking Plan!" Another give-away to the RICH!
3. Another $Trillion in Main Street Money is Being Given to the Corrupt Banksters, Hedge Fundsters, and Tradsters and they LOVE it!
4. NOT "1" Executive has been Fired, Fined, Investigated, Prosecuted, or Imprisoned! So WS can NOT GO TO JA1L and the Secrets of How Big the Crisis is Can Stay Hidden!
"Wall Street has TAKE MAIN STREET AGAIN" and Cramer has DECLARED VICTORY!
"Bush DECLARED VICTORY TOO" on a Aircraft Carrier in May 2, 2003 but we still have 140,000 troops there and it is April 2009, 6 years later and still NO VICTORY!
PT, I agree, Americans can lie to each other as much as they want, as with Bush's declaration 6 years ago, Cramer doesn't understand that this is beyond our control. We can't declare victory or that the recession is over.
Cramer can blather on and on...But I do agree it is like Bush saying Mission Accomplished ....and if you believe either of them, then we have swamp in Florida to selll...
Does the FACT they want the "MARK-TO-MARKET" Rule changed to avoid Bankruptcy bother anyone else?
I find this JUST MORE OF THE "CULTURE OF FAKE ACCOUNTING in OUR SYSTEMS of Government and Corporations" that GREW UP starting with Arthur Anderson and ENRON!
ENRON Changed NOTHING and the EV1L came Back Bigger and Stronger due to Lack of Adequate Punishment of the CR1M1NALS!
Is that what we see AGAIN?
The fake accounting which began with Anderson is what caused FASB to implement mark to market in the first place. They saw the crap coming down teh pipes from the implosion and implemented a simple "wash our hands of responsibility" rule to create a liability shield.
basically teh economy was tanked so that accountants could avoid another Anderson type scandal. If mark to market was the panacea fringies think it was, it would have been put in place before the market had already crashed in late 2007.
It was a pure CYA move by teh accounting industry. Nothing more.
Can you point to any evidence to back up your claims? Thanks.
The market is broken.,. non functioning... its a finanical crisis... It happens.
Do you weigh yourself on a broken scale?
It uise to be only Repugs that thought markets were perfect, now its some DEMs also.
Lets nationalize banks, where- by they are under government fund (funny) accounting rules... not GAAP, no mark to Market at all... no such thing as insolvency... and have the most insolvent enterpise in the world if it followed GAAP... run them! LOL....
regards
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