The US Presidential campaign is almost over. As the Grateful Dead would say, ‘What a long, strange trip it’s been’.

In the 60 days before the election, the US Congress passed the $700bn (£429bn) Emergency Economic Stabilization Act of 2008 (EESA), major global financial institutions went bankrupt or were taken over by governments, and central banks forced liquidity into global financial markets.

We may even see a second economic stimulus package in the US this year. And at the end of October, the SEC plans public hearings to explore suspension of FAS 157 and mark-to-market accounting.

Strangest of all? Accounting standards are now discussed on talk shows. The political, economic, and business worlds have collided. It all makes me giddy. Our arcane science of accounting is in the limelight.

I’ve been writing about accountants and their obscure alchemy on my blog for the last two years. I’ve watched as the US Congress, regulators, business leaders, academics, lawyers, standards setters, and the Big Four audit firms wrangle over issues such as mark-to-market accounting, regulation of private equity and hedge funds, limits on executive compensation, and better corporate governance.

Unfortunately, this debate is taking place because of the inability of accountants to defend their accounting. Absent other scapegoats, accounting standards may take the blame for the worst crisis to threaten capitalism since the 1930s.

Depending on whom you ask, regulators were either over-regulating, under-regulating, or not sufficiently enforcing regulations. The confusion comes because the accounting standard that’s being blamed for exacerbating the financial crisis is FAS 157. In theory, FAS 157 is simple. Not so in its application to the financial services industry and to the ‘innovative’ financial instruments used to fund the global housing boom.

Securitising sub-prime mortgages and then selling and reselling them passed the higher than average default risk along as long as the housing boom music was playing. When that music stopped, quite abruptly for some, many of our largest global institutions were left holding booby prizes, securities with difficult to discern value.

Obama and McCain both voted for the US bailout package. Both supported US Treasury secretary Paulson. If the polls are an indicator, Obama will win on 4 November, and then be burdened by the impact on the economy and politics of decisions of the Bush administration and congress during the last 60 days.

Though he has not commented directly on the FAS 157 issue, if elected, Obama will likely support accounting standards that reflect the true value of assets. And he may have three experienced former SEC chairmen to help him implement his economic plan: David Ruder, William Donaldson, and Arthur Levitt have endorsed Obama.

Big Four audit firm leaders met with SEC chairman Cox on 3 October to express disapproval of the suspension of FAS 157 rules. Suspending the rules, PwC’s chairman Dennis Nally said, could ‘plant the seeds for the next crisis’. FASB has said that criticising fair value accounting is ‘shooting the messenger.’

The Big Four are right when it comes to maintaining the integrity of FAS 157 and fair value. But their immediate concerns are based more on fear of liability than professional principle. They fear being forced to sign financial statement opinions with no option to veto management’s estimates or valuations of material balances. But their behind-the-scenes lobbying to delay or drop the idea of suspending FAS 157 may head off a reactive, short-sighted, politically motivated disregard for the rules until the election is decided.

A new president and his team must work with Congress, Treasury, and the SEC to develop a reasonable approach to getting back to ‘true and fair’. Hopefully, a new administration will help major financial institutions to restore integrity, as well as transparency, to the global banking system. A strange trip, but it’s
time to roll with the changes.

Francine McKenna leads McKenna Partners LLC, a specialised consultancy, advising other professional services firms, especially those with interests in Latin America. She blogs at: retheauditors.com