Groups Defend Fair Value Accounting

The Center for Audit Quality, the CFA Institute, the Council of Institutional Investors and the Consumer Federation of America have written to the Securities and Exchange Commission opposing demands for the SEC to override the Financial Accounting Standards Board's rules on fair value accounting.

The letter to SEC Chairman Christopher Cox came on the heels of a letter from American Bankers Association president and CEO Edward Yingling calling on the SEC to override FASB's recently issued guidance on fair value accounting (see Bankers Ask SEC to Overrule FASB on Fair Value). The ABA and some other groups such as the Financial Services Roundtable have blamed fair value and mark-to-market accounting for exacerbating the credit crisis by forcing banks to sharply lower their valuations of assets such as mortgage-backed securities that they cannot sell. The SEC has begun work on a study of mark-to-market accounting and its impact on the credit crisis, in accordance with a provision of the financial rescue bill, and plans to deliver it by January 2.

SEC Chief Accountant Conrad Hewitt appears to be inclined to accede to the ABA's requests, however. In a letter to FASB Chairman Robert Herz, he wrote that in limited cases banks will be able to account for perpetual preferred securities as debt, allowing them to delay writing down their value, according to Bloomberg News.

FASB and the CAQ have argued that fair value is a necessity, however, and that suspending the rules would harm the public interest. They believe that what banks need is further guidance for how to implement standards such as FAS 157.

"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," said the letter, signed by CAQ executive director Cindy Fornelli, CFA Institute CEO Jeffrey Diermeier, Consumer Federation of America director of investor protection Barbara Roper and Council of Institutional Investors general counsel Jeff Mahoney. "With third-quarter financial statements now in process and year-end 2008 imminent, such a change could jeopardize already-fragile investor confidence."

"No one disputes that these are trying economic times," they added. "However, the current crisis of liquidity, credit and confidence was not caused by fair value accounting; rather, sound accounting principles helped expose the problem. Fair value accounting with robust disclosures provides more accurate, timely and comparable information to investors than amounts that would be reported under other alternative accounting approaches."

The letter closes with a call for more transparency to protect investors.

"Investors have a right to know the current value of an investment, even if the investment is falling short of past or future expectations," said the letter. "It, therefore, is imperative at this critical juncture that we not engage in activities that would further obscure reality from investors and do more to damage confidence in the marketplace. We urge the SEC to be clear in rejecting urgings that are contrary to this imperative."