The real value of bank holdings has been generating controversy in the accounting profession as banks find themselves under increasing pressure to be more upfront about the true value of their assets, assuming they can be accurately valued, even with ballpark estimates.
Mark Olson, chairman of the Public Company Accounting Oversight Board, told the Institute of International Bankers this week about some of the challenges of fair value accounting. According to his published remarks, he said, "determining fair value requires training, and many auditors may not have extensive training in valuation techniques." Financial statement preparers can also be biased in their assessment of fair value, so auditors have to make sure that preparers have considered some alternative valuation scenarios.
Internal controls surrounding fair value measurements can also be different than the controls over typical business transactions. The PCAOB has emphasized the need to get behind the prices provided by brokers and other specialists, Olson noted. Auditors and preparers also have to understand whether they're getting a quote based on an active market, a price based on observable inputs, or an estimate based on a model.
If the estimate comes from a model, the preparers and auditors need to understand the model and the reasonableness of its main assumptions. It's easy to imagine that some of those assumptions might not be so reasonable when we're talking about assets that could well be plunging in value from week to week, depending on how risky they are.
However, Olson also told reporters that he doesn't think now is the time to modify the rules on fair value accounting and that the accounting literature provides ways to come up with values even in illiquid markets like the current ones for mortgage securities and credit, according to Reuters.
Some critics believe that the massive writedowns the banks have been taking of late can be blamed in part on fair value accounting. The Financial Accounting Standards Board is planning to weigh in on the subject pretty soon. FASB Chairman Robert Herz recently told The Wall Street Journal that the board intends to look into the rules for how banks value off-balance-sheet vehicles, which have contributed to some of those huge writedowns.
Citigroup had $1.1 trillion sitting in off-balance-sheet vehicles last year. It's almost as if they wanted to go into competition with the federal government over deficit amounts if those assets go south.
The accounting oversight boards are increasingly going to be called on to get involved in sorting out how to properly value these holdings. It can't be a guessing game so somebody has to set the rules. And if those rules need to be adjusted or better enforced to keep pace with the deteriorating economic climate, then the accountants will have to be the ones toting up the losses and calling out the numbers as they see them.
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