More on Accounting as Policy Lever

Debate intensifies on the topic of my Monday post: accounting as a policy tool. (David Zaring captures divergent views.) The intensity shows in today’s NYT column by Floyd Norris, a columnist noted for accounting acumen. I usually agree with Mr. Norris, but have quibbles with today’s column, excerpts of which follow (emphases added):

banks and legislators are pushing for a change in accounting rules to end mark-to-market accounting for financial assets. They are sure that market values are too low, so why not just assume they are really higher? That illogic has caught on [as (1) both of this week’s intervention bills encourage the SEC to consider suspending those rules, in a] push for bad accounting [and (2) the SEC this week issued a statement giving issuers considerable flexibility in measuring fair value amid distressed market conditions].

The American Bankers Association concluded that [the SEC] had slapped down auditors who were forcing banks to unreasonably reduce the value of assets no one was buying. . . . Auditors cringed, awaiting appeals of clients to let them value assets as they please. [Still, the SEC statement] could persuade Congress not to make things worse, and not really give the banks new permission to fudge their books.

It is possible, perhaps probable, that many mortgage securities are undervalued now, amid [prevailing] uncertainty and fear . . . [Pending legislation] calls for the government to buy securities from banks for more than current market value but less than the government hopes they will be worth someday. Whether it will succeed depends in part on whether banks conclude that other banks are solvent after the money arrives and the dodgy securities depart. . . .


First, if (a) it is probable, or even possible, that emotional market conditions mean relevant assets are undervalued and (b) government purchases will target a more accurate value, proposals to tailor fair value accounting standards to reflect those dual realities present no “illogic” and do not amount to a “push for bad accounting.”

Second, neither the SEC statement nor alternatives to fair value accounting, which would apply if those rules are suspended, allow firms to “value assets as they please” or “to fudge their books.”

Serious policy is at stake that such language may obscure. Accounting purists, including Mr. Norris, oppose relaxation or suspension of the standard and there is a good case for accounting purity. (I am an accounting purist as well.)

But accounting purity has given way at least once in the past, in the name of resolving the national emergency presented by 1970s energy crisis. Today, Congress considers financial intervention legislation that is unprecedented.

Certainly it would be imprudent to allow “fudging” of numbers, reporting “as a firm pleases”, or otherwise to endorse “bad accounting.” But it is not obvious that the SEC statement, or alternatives to fair value accounting, does any of that.

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