Prompted by the fall of the house of Lehman Brothers this week—and the continuing woes on Wall Street—some critics are pointing sharper fingers at fair value for financial reporting standards. While politicians and pundits are blaming loose oversight of the financial markets and institutions during the last decade, a new CNBC blog by Jeffrey Bowyer (Chief Economist, Benchmark Financial Network) says that Sarbanes Oxley was a major source of the problem, along with “stuff like FASB 157, which forces firms to ‘mark to market’ even when the market has collapsed.” Bowyer adds:
Under political pressure, the financial accounting system now takes localized panic pricing and imposes it on the whole system. These companies built their balance sheets over many decades under what was then the Generally Accepted Accounting Principles. Did we think that changing those rules in a flurry of legislative retribution would not have tremendously disruptive effects on those balance sheets? Did our legislators think about the effects at all? Apparently not.
But a more moderate view, posted on Monday ’s FEI blog (September 15, 2008), suggests that the timing of FAS 157, requiring implementation of the market participants methodology for fair value measurements, “was one element that, when combined with the subprime crisis and suddenly illiquid markets, appears to have been caught up in a ‘perfect storm’ of sorts.” Even now the FASB, IASB and the SEC are working with various roundtables and other forums to gather feedback on fair value for financial reporting standards, FEI notes, as well as issues relating to securitization, consolidation and off-balance sheet entities.