A Fair Value Pep Rally?

Critics are conspicuously absent from this week's SEC roundtable on fair value accounting. So what is it that its participants hope to accomplish?

In two days time, the Securities and Exchange Commission will host a roundtable on fair value accounting and auditing standards — that is, the increasingly mandatory practices of valuing the assets and liabilities of companies, and ultimately companies themselves, by their current worth in the marketplace.

That’s a controversial topic, given the difficulty of finding market prices for many features of modern corporate finance, and the fact that some of those mandates seemed to have rolled out around the same time that the credit markets crashed. But this discussion promises to be a more congenial affair than past SEC roundtables — notably a 2005 roundtable on section 404 of the Sarbanes-Oxley Act, in which many participants were openly hostile about the topic. Indeed, this week’s roundtable may more closely resemble the follow-up roundtable held in 2006, when most participants had accepted 404, reluctantly or otherwise, and focused on calling to the SEC’s attention small changes that would ease their compliance efforts.

The first panel of this week’s fair value roundtable is devoted to the “perspective of larger financial institutions and the needs of their investors.” But it is conspicuously devoid of large financial institutions that have been complaining about being forced by fair value accounting to take huge write-downs, including Citigroup and Merrill Lynch, and not to mention Bear Stearns. Also missing are prominent campaigners against fair value, such as Blackstone Group co-founder Stephen Schwarzman, who just last week sounded off about what he perceives as the dangers of FAS 157 to The New York Times.

Long-term observers of sea changes in finance and accounting rules will find no coincidence in the sudden flurry of mainstream media attention to arcane accounting rules — clearly a battle is brewing. The Schwarzman story was one of three accounting stories with fair value angles that appeared in the Times in the first six days of July.

But likewise, there’s a message to be read in the makeup of the SEC’s panels. It suggests the roundtable will be a nuanced discussion — the broad application of fair value accounting itself does not seem to be up for debate. The panel devoted to large financial institutions is stacked with fair value proponents. That includes Bank of America CFO Joe Price, who delivered a defense of fair value at a Federal Reserve Bank of Chicago conference in May. Noting that the financial industry’s current woes are probably more attributable to poor risk assessment than accounting changes, Price said, noting that mark-to market accounting is “an important component” of risk control. “In fact,” he added, “the accounting is more likely making that risk more transparent.”

Price did note that “There’s no question we’re testing a much more market-based accounting process for certain expanded business activities for the first time in a hard disruption, so it is inevitable that we re-examine and improve it.”

Joining price on the panel is Kurt Schact of the CFA Institute, a staunch defender of fair value. And while the private equity world’s Schwarzman didn’t make the cut, Jane B. Adams of hedge fund Maverick Capital did. She’s on record as supporting the CFA’s positions on fair value and serves as member of the group’s Corporate Disclosure Policy Council.


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