With the chaos in Washington over legislation to bail out Wall Street, looking like nothing so much as the stateroom scene in the Marx Brothers’ “Night at the Opera,” it’s remarkable that only now have the poor accountants shown up.
Should politicians be entrusted to write accounting standards? With the Securities and Exchange Commission already leading the way – here -- relief is proposed of the obligation to “mark to market” the toxic waste on institutional balance sheets – the accumulated tranches of subprime mortgages, credit default swaps and other creative derivatives now freezing up the financial markets.
The idea is that the otherwise imminently sensible Statement 157 of the Financial Accounting Standards Board – and its cognates in Europe, if French President Nicholas Sarkosy and UK Conservative leader David Cameron have their way – would be eased to allow companies to apply their own judgment – such as it may be – in valuing financial holdings that nobody understood or could properly value from the time they were invented and launched into the stream of commerce in the first place.
And why not? The injection of politics into accounting rules has a long and sorry history – from the technology industry’s perfervid opposition to expensing stock options, to Enron’s lobbying for permissive rules on special purpose entities, to the French-led revolt of European banks against the use of “mark to market” rules for derivatives.
So should Congress be trusted to meddle with the intricacies of financial instruments valuation -- in the same way that they railroaded the Sarbanes/Oxley law in the summer of 2002? What they accomplished then, in an exercise in unintended consequences, was to inflict immense cost and disruption on corporate governance, poison the relationships between issuers and auditors, and entrench a bureaucracy at the PCAOB whose principal achievement is its own perpetuation, while – as today's turmoil makes clear -- conspicuously failing to instill corporate virtue by either fiat or paperwork.
Can it be sensible to relieve the holders of locked-up financial instruments of the obligation to confront the reality of their distressed values – when the wreckage extending from Bear Stearns through Merrill and AIG to Washington Mutual and Wachovia is eloquent testimony that the bankers were and remain clueless as to legitimate and reliable valuations? To do so is to perpetuate an environment instinct with hazard, to reduce the already doubtful quality of financial information available to investors, and to foist off to the future the ultimate reckoning in further barrels of red ink.
The rationale that “mark to market” need not be applied so long as the mysterious paper will be held to either maturity or at least a restored and active market suffers two reality checks:
First, this year’s cascade of institutional failures makes questionable any assumption that a particular holder will survive long enough to see its portfolio restored. And second, with the depths of the American recession still unmeasured both in real estate and across the spectrum of household consumption, there is no currently realistic estimate of the ultimate write-offs still to be taken.
All else aside, it’s likely not to work. How can trust and confidence be restored, when financial statement readers will sniff out the bags of garbage still rotting on the balance sheets – whatever their new names or mythified valuations? Reducing rigor and transparency in the name of management judgment leaves the keys to the henhouse in the hands of the foxes.
There is one glaring irony in the “mark to market” discussion – namely the late-arriving opposition of the large accounting firms themselves to the easing of the rules – here. As usual their position is rationally argued and intellectually sound – and as appears usual, they appear to lack both friends and influence.
The accountants have been demonized in the post-Enron era, and have failed to secure relief against the looming risk of catastrophic collapse of their franchise to audit large global companies.
But what they have not grasped is that a shift of accounting standards under the sanction of the Congress amounts to a “Get Out of Jail Free” card – a transfer of responsibility they could never achieve on their own.
For decades the accountants have been pilloried for their accommodation to their clients, in the courts and in the halls of the legislators. A suspension by law-makers of the “mark to market” requirements can no more relieve the consequences of past financial excesses than an attempted repeal of the law of gravity would enable pigs to fly.
But it would allow the accounting firms at last to hand back to the politicians the consequences of their folly.
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