Don’t Suspend Fair Value, Cox Urged

Investors and auditors call on the Securities and Exchange Commission chairman to resist urgings to suspend mark-to-market accounting.
David KatzOctober 15, 2008

Two days after the president of the American Bankers Association asked Securities and Exchange Commission Chairman Christopher Cox to, in effect, weaken the Financial Accounting Standards Board’s fair-value measurement rules, investor and auditor representatives fired off a letter to Cox urging him to let mark-to-market accounting stand as is.

The current financial crisis has put the fair-value debate into bas relief: on the one side are the bankers, who contend that the FASB rules, especially FAS 157, have speeded up the downhill slide; on the other are accountants, investors, and others who feel that mark-to-market accounting should be upheld even in illiquid markets as a way of keeping financial reporting transparent.

Today’s letter seems to be a direct response to the ABA’s letter to Cox. “We are writing to express grave concern regarding recent calls for the SEC to override guidance issued by the Financial Accounting Standards Board (FASB) and the Commission’s staff that would effectively suspend fair value or mark-to-market accounting,” according to today’s letter, which was signed by Cindy Fornelli, executive director of the Center for Audit Quality; Jeffrey Diermeier, president and chief executive officer of the CFA Institute; Barbara Roper director of investor protection of the Consumer Federation of America; and Jeff Mahoney, general counsel of the Council of Institutional Investors. “We believe such urgings are decidedly not in the public interest.”

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In his letter to Cox on Monday, Edward Yingling, the president and chief executive officer of the ABA, Yingling attacked FASB’s position that the risk of a lack of liquidity must be included in measuring the cash flow of distressed assets when they’re sold. The recently enacted financial rescue law, the Emergency Economic Stabilization Act of 2008, affirms the SEC’s power to suspend mark-to-market accounting “for any issuer” and orders the commission to launch a study of whether fair value contributed to the crisis.

To the mark-to-market advocates, however, a “move by the SEC to suspend fair value accounting would be a disservice to the capital markets, would be inconsistent with the views of investors, would harm the credibility and independence of the standards setting process, and would run counter to fundamental notice and comment principles,” they wrote. “With third quarter financial statements now in process and year-end 2008 imminent, such a change could jeopardize already-fragile investor confidence.”

Along with Sir David Tweedie, chairman of the International Accounting Standards board, and other advocates, they contend that “the current crisis of liquidity, credit, and confidence was not caused by fair value accounting; rather, sound accounting principles helped expose the problem.”

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