US reforms dodge fair value accounting reform

US Treasury Secretary Tim Geithner’s recently announced proposals for US recovery have attracted extreme criticism in many quarters for failing to address the issue of Fair Value Accounting.  Alex Pollock of  the Washington-based American Enterprise Institute and a long-standing critic of mark-to-market accounting rules sees a missed opportunity for a more radical overhaul, as outlined in a recent Accountancy Age analysis of the proposals.

FASB, the US accounting standards setter recently announced a relaxation of  the fair value accounting rules for bank assets in a move which will allow them to ignore market prices where the market for those assets is judged to be illiquid or distressed.  Arianne Huffington recently went head to head with Senator Barney Frank on US television  alleging that banks will now use ‘mark-to-fantasy’.

Although the US stock markets reacted positively to the proposals the move is likely to alarm many investors who have long argued that relaxing fair value accounting rules will make company accounts less transparent and potentially misleading.

While appearing a seemingly dry and technical subject, accounting disclosures look set to be the focus of more intense investor scrutiny in coming months. As illustrated by so many corporate governance failures, including Enron, the problem with accounting standards is that there is a trade-off between the reliability of  information, its relevance and its intended audience.