Fair value: victim of a witch hunt

Is this the end of fair value? Are politicians in the process of turning
themselves into the authority on accounting standards?

Not since the demise of Andersen and the Enron scandal has accounting held
centre stage in a crisis the way it has become a central issue in resolving the
credit crisis. As politicians in the US, UK and in Europe grappled with plans to
stem the crisis they turned on fair value and mark-to-market accounting, blaming
them at best for contributing to the collapse of the banking system, at worst
for being one of its root causes.

Republicans called for its suspension, Hank Paulson reiterated the right to
suspend in his rescue bill for the US economy, French president Nicholas Sarkozy
and his finance minister Christine Lagarde have identified it as ripe for an

EU president Jose Manuel Barroso has indicated his approval of a suspension
and Tory leader David Cameron this week said something had to be done.

Politicians in short have become convinced that killing mark-to-market
accounting is part of the answer to the credit crisis.

It is not known what Paulson might do with the legislation at this stage but
together the politicians’ actions have left regulators and accountancy
professionals speechless with astonishment.

One regulator told Accountancy Age: ‘Fair value is being used as a
political football by people that don’t know what they are talking about. It’s
political support for the distortion of the truth. It will cause regulators and
auditors trouble.’

Knee jerk reaction

The highest levels of the profession are incredulous. One Big Four partner
said: ‘Generally, politicians know even less about accounting than the rest of
the world.

‘To have a knee-jerk reaction to try and change the accounting rules by next
week seems like an inappropriate way to treat something [The IAS project] that’s
taken 25 years to establish.’

Should the politicians be in this position? Should they be taking control or
should standard setting be treated like the setting of interest rates by central
banks ­ outside the control of politicians?

For US congressmen the question is easily put to one side because political
control of the country’s national standard setter is within their grasp.

But for countries signed up to international accounting standards the
position is very different because the IASB does not answer to any government or
politician. As Nicholas Veron of the Bruegel Institute in Brussels points out,
the fact that politicians should not interfere with international standards, is
a function of geography.

That said the weekend saw French president Nicholas Sarkozy host a summit in
which he dropped his own preference for suspending fair value.

Instead, the European leaders, including Gordon Brown, Angela Merkel of
Germany and Italy’s
Silvio Berlusconi, called, among other things, for the same reclassification
rules for assets that
exist in the US so that Europe’s companies would not be at a competitive

The rule allows for assets to be moved from ‘held for sale’ to ‘held for
investment’ and thus avoiding the application of fair value.

Were the politicians pushing the IASB around? No, the IASB issued a statement
the day before the summit signalling its willingness to look at reclassification
as early as next week.

Its statement made two things clear however. Firstly, reclassification is
‘rare’. Secondly, a change to adopt the rule into IFRS will come along with
anti-abuse measures.

This is then clearly not about allowing wholesale reclassification so that
fair value will not apply. The IASB believes this is merely about levelling the
playing field between the US and European competitors.

The IASB’s reclassification statement could well have been what was needed to
head off a full frontal attack on fair value at the Sarkozy summit. Apart from
the formal statements the board has retained a tactical silence, clearly not
wanting to say anything that might upset rescue plans in the US or worsen the
position of fair value in Europe.

Its cause might have been helped though by last minute lobbying launched on
the eve of the European leaders’ gathering.

Just as everyone was packing their bags to head for Paris, the Association of
British Insurers aggressively entered the fray putting out a statement demanding
that fair value be left alone.

It was a clear indication that investors accept the accounting as it is and
the politicians should heed the investors, it’s their interests at stake. Having
said that, it is clear that no one quite knew what to expect from the meeting,
perhaps least of all the leaders themselves.

The level playing field illustrates another worry. If the US does suspend
fair value, European leaders will feel they need to do the same to maintain a
competitive equilibrium. Everyone is concerned about unilateral action, like the
Irish government’s guarantee for depositors, which attracted so much criticism.

Even if Europe stands by fair value while the US acts, the fall out would be

For one thing the whole project of persuading the largest capital market in
the world to adopt international accounting standards would be called into doubt
because international accounting standards currently embody fair value. This may
be welcomed by some, but not at the cost of fair value.

There is however a much larger fear. If mark-to-market is suspended we might
be saying goodbye for good. As one insider put it: ‘we’re trying to stop Europe
from doing anything temporary. Solutions like this are rarely temporary. If it’s
suspended there’s no way it will be allowed back’.

In the meantime, the credit crunch looks like it might be transforming
accountancy just as it has transformed the capital markets and regulation. But
in such a fluid environment, it remains to be seen whether it will be for the

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