Thursday, February 28, 2008

Models and Accounting

"The smart money keeps looking dumb. ... When conversations turn to the use of market values, 'the inital response is often, "I don't like the answer the market is giving me," says Mark Olson, chairman of the audit-firm regulator the [PCAOB]. 'But you can't ignore what the market is telling you.' ... Allowing managment to base values on models that look to long-term values, rather than on current, potentially stressed market conditions, also opens the door to abuses. That allowed Enron Corp. to book profits that didn't exist. ... The debate about the appropriateness of the market-value approach aside, using market values holds another challenge for investors. It requires them to think differently about debt insturments and loans, viewing them like stocks whose value can swing from day to day or quarter to quarter", my emphasis, David Reilly (DR) at the WSJ, 20 February 2008.

Yes, DR, using models let Enron report whatever profit it wanted. I await the SEC's saying major banks are lobbying for "Enron-style" accounting. I won't hold my breath. That the Big 87654 let their clients account for loans based on models shows how poor their audits are. I suspect many now objecting to using market values would not if they liked the market values. What are "long-term values" anyway? Debt instruments vary in value. That investors did not see this is a result of their being mesmerized by historical cost accounting.


Anonymous said...

You're a CPA and you still think Enron booked profits it didn't actually have? Surely you're aware that is false.

Mark to market accounting allows entities to book the full value of a contract on the day its signed. Because contracts were always maturing - every day of Enron's existance - there was never any time when the money reflected on the books was not also actually available.

Buzz Saw said...

Some models have nice ASSets. ;)

Independent Accountant said...

Yes, I'm a CPA and that's exactly what I think. Who are you? Why do you think Enron went bankrupt? Because of some insignificant Nigerian barge deals?
What does the term "full value" mean? You write, "there was never any time when the money reflected on the books was not actually available". Really? You mean assets, not money don't you? If the contracts were realizable in cash, why did Enron collapse? What's your opinion?