“It’s a myth that numbers in any form can replace judgment,” said Jack Friedman, Chairman of Directors Roundtable, at its sold-out conference on fair value in New York City last week. “It’s also a myth that auditors or lawyers [or their appraisers] can guarantee others’ good and bad judgments.” The debate over fair value—its reliability and usefulness compared to historical cost-accounting—rages on, according to all of the Roundtable speakers, especially as market analysts try to pinpoint the cause (and cure) of the current economic turmoil. But the two sides are not all that far apart, said Robert Herz, current FASB Chair (whose opinions were not necessarily those of the FASB. “They are, however, the opinions of the chairman of FASB,” he joked). “There are a lot more judgments buried in the cost-based income statements and balance sheets of your traditional tangible goods company than most CFOs would care to admit,” he said. Neither cost accounting nor mark-to-market elections entirely eliminate the assumptions that can broadly alter the information that financial statements and their disclosures provide.
What everyone agreed on: Fair value accounting is not to blame for the current crisis. Herz blames quality of the assets; he believed mortgage-backed securities were problematic before valuation concerns stopped active trading. “You have complex securitizations creating synthetic and magnified exposures related to the same loans,” he said. “In difficult market conditions, accounting judgments can be challenging but reported results must reflect what is happening in the market. This is not about fair value accounting,” he repeated.
Fair value could have mitigated the mess? The same theme was heard at last week’s “Fair Value Media Roundtable” sponsored by the CFA Institute Centre for Market Integrity, also in New York. “It’s clear we’ve got ourselves a serious problem,” said Jeffrey Diermeier, CFA’s President and CEO, in his opening remarks. “But the problem is not fair value.” In fact, fair value in the current environment has been “more helpful than hurtful,” he says. The accounting standards introduced “a high dose of realism,” and “if we’d had more transparent disclosures using fair value for financial reporting, we wouldn’t be in the depths of the mess we’re currently in.” A full write-up of the discussion will be in the next (May 2008) issue of the Business Valuation Update™.
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