Mark-to-market accounting: Fair or foul?

The debate over fair value accounting is heating up.

The SEC, which is neck-deep in a mandated study of fair value (or "mark-to-market) accounting, held a roundtable in which it heard testimony from a variety of Wall Street players, including regulators, bankers and auditors. The purpose of the roundtable, according to the SEC, was to discuss:

• "the usefulness of mark-to-market accounting to investors and regulators;
• "effects of mark-to-market accounting on financial reporting by financial institutions;
• "potential market behavior effects from mark-to-market accounting; and
• "whether aspects of current accounting standards can be improved, and how."

Parts of the testimony were pointed, to say the least. According to CFO.com's David M. Katz, former FDIC Chair William Isaac told the SEC that "the accounting system is destroying too much capital, and therefore diminishing bank lending capacity by some $5 trillion. ... It's due to the accounting system, and I can't come up with any other explanation."

Not so, says Barbara Roper. The director of investor protection at the Consumer Federation of America told National Public Radio's David Kestenbaum that suspending mark-to-market accounting "would be a terrible mistake that would make the current crisis worse, rather than better." According to Roper, it's all about trust, and mark-to-market accounting "makes it possible for investors to trust what companies report about themselves," Kestenbaum reports.

• Listen to Kestenbaum's report in its entirety.

And Roper's not the only one who feels that way, as this previous post indicates.

My question is this: If you're not going to report the market value of an asset, what's the alternative? Roper has an answer: She calls such an alternative "mark-to-myth."

What are your thoughts about mark-to-market accounting?

Comments

[C Gamble NCCPA]

I agree that it is all about trust. Accounting methods do not cause capital to shrink, declining values and bad managment causes capital to disappear. Isaac is telling us that we as CPA's must knowingly mislead the public about the financial condition of a company because the results are unpalatable and unacceptable? How many of us, in an audit or in preparing a tax return, has resisted our client when they told us that it would hurt them for us to be truthful and faithful to our profession? Roper is correct and the market reflects the widespread lack of trust in the numbers and the truthfulness of communication from companies about their financial circumstances. I have heard many times, that "we just don't know what the extent of the loss of value is" or "the true financial condition of this or that company". That statement is a direct indictment of management and CPA's. We must respond forcefully to address our primary mandate - to communicate accurate and useful information about the financial condition of companies to their stakeholders.