An international group of accountants, regulators, bankers and business luminaries met to discuss the impact of the financial crisis and the implications for financial reporting.
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The meeting in New York on Friday was the second involving the Financial Crisis Advisory Group, whose members were announced in December (see Financial Crisis Group Attracts International Cast). The participants addressed a number of issues, including fair value accounting and the various approaches taken by the accounting standards boards.
“The complexity of our current method of valuation is beyond what most people can deal with,” said former SEC commissioner Harvey Goldschmid. “There’s an inconsistency between the two boards and that needs to be reconciled.”
“I find it hard to believe that we would be seriously asking accountants to engineer results for financial stability,” said former SEC Chief Accountant Don Nicolaisen (pictured). “It strikes me as contrary to the what the purpose of accounting is. I can’t possibly support that. The role of accounting is to give as an accurate a picture as you can.”
He noted that there was a great deal of uncertainty when assigning a reasonable range of fair value to some financial instruments, along with a lack of public confidence. “Looking at where the market has valued certain securities, there is a great deal of mistrust in the marks being used in financial institutions today,” he said.
Others discussed the problem of uncertainty of valuing illiquid assets and the perils of risk management.
“Where do we put the limit in the future of this analysis of risk?” asked Michel Prada, former chairman of the French regulator Autorite des Marches Financiers. “I’m not sure you can anticipate the next cycle and decide, because there will be a cycle, you will change your provisions. You need to stick to reality, and the reality is you have some information for the future, like contractual commitments, but where do we put the limits? There is a tendency to be overambitious.
“I think that accountants have to rely on information that is delivered by other people who are supposed to do their job of risk analysis, valuation, whatever,” he noted. “Obviously there are others who should do their job better, but it doesn’t mean that accounting is the end of the game. I’m much more in favor of repairing the kinks of fair value than trying to answer all the questions of risk management.”
International Accounting Standards Board Chairman Sir David Tweedie discussed a method used in Spain that provides more of an expected loss model for the future rather than an incurred loss model. “We don’t want to dampen down the income statement in good times and put it back in bad times,” he said. “In bad times you give the wrong signals to the market.”