Investors: Stem the Anti-Fair Value Tide

Investors, perhaps futilely, call on FASB to rethink proposals issued under high political pressure.

Investor advocates are hoping the Financial Accounting Standards Board has been playing some cruel April Fool’s Day joke that will unravel on Thursday morning.

Chances are, though, that FASB will move ahead with two speedily crafted proposals that would change some of the ways companies apply fair-value accounting to their financial assets. After all, it’s highly unlikely that the board’s chairman, Robert Herz, wants to once again be hauled before Congress and badgered into turning around new guidance expeditiously or risk legislative intervention. “We can have the guidance in three weeks, but whether that will fix everything is another [issue],” he told lawmakers last month during a heated discussion.

If at least three of the five FASB members vote in favor the proposals at their meeting on Thursday morning, Herz will have met his promised deadline, just as the G20 leaders wrap up their latest meeting on the financial crisis in London. But the quick turnaround isn’t impressing investor advocates, who are hoping — possibly against hope — that FASB won’t give in to the political pressure and instead slow down the consideration of their two fair-value proposals. The comment period ends today, giving the board only hours to go over more than 400 letters.

The feedback has ranged from generally favorable (mainly from financial institutions) to harshly critical. Jack Ciesielski, president of RG Associates, an investment research firm, and publisher of the Analyst’s Accounting Observer newsletter, said the new “flawed” and “hastily developed” guidelines “will create difficulties for the FASB’s long-term credibility as a standard-setter.”

The CFA Institute Centre for Financial Market Integrity, a research and policy organization representing investment professionals, gave FASB a similar warning. In the organization’s letter, managing director Kurt Schacht and chairman Gerald White expressed their “objections to the FASB flouting its own due process rules and requiring hasty and significant amendments” and “concerns about the politicization of accounting standard-setting and erosion of the credibility of the FASB.”

Without investors’ support of the new changes, any assumption that a perceived rollback of the fair-value rules will improve the financial downturn could be moot. “It will be counter-productive,” says Robert Willens, a frequent contributor who runs a tax and accounting consultancy, “because investors will know that the numbers don’t mean anything, and the level of cynicism about FASB will rise.”

The critics view the proposed FASB staff positions as crippling the concept of fair-value accounting and believe they will result in untimely data for investors, lack of transparency, reduced comparability, inconsistency, and possible manipulation as more judgment would be allowed by management.

Banks have fired back that the current fair-value measurement standards don’t allow them to reflect the true economic reality of their financial instruments. Instead, they say, the strictures have unduly led to large writedowns, exacerbating the widespread financial crisis by spawning a so-called procyclical effect in the credit markets.

Investors, however, are saying that the proposed changes will allow firms to make their financial condition appear rosier than reality.


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