Monday, April 27, 2009

SFAS 157 and Congress

"Plenty of banks have succumbed to the credit crunch. Now, accounting rules look set to join the list of casualties. Accounting rule makes will vote Thursday on proposals to soften 'mark-to-market' accounting, the controversial rules requiring companies to peg their investments' value to the market's ups and downs. Many banks blame the rules for worsening their current problems, by locking in losses that they say are merely temporary. The banks' claims are largely bogus--after all, no accounting rule forced them to create and invest in the toxic seecurities that helped cause this crisis. But the [FASB] is being pressured to water down the rule. ... Under the plan, all banks would have to do is say they don't intend to sell an 'avaliable-for-sale' investment that has incurred mark-to-market losses and probably won't be forced to sell before it recovers. Then, only 'credit losses,' the amount a company expects to lose if it holds an investment to maturity, would have to be recognized in earnings. ... The loophole is big enough to fit a bloated bank balance sheet through: The risk is that banks wouldn't admit to a major credit loss on such securities unless the losses really were so obvious they simply couldn't be ignored", my emphasis, Michael Rapoport at the WSJ, 1 April 2009.

"US accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases. ... For the most part, the board ratified proposals it had put out for comment two weeks earlier, including changes that would lessen the need for banks to take an earnings hit when assets run into trouble. Financial stocks led the market up in the morning in the expectation thet the rules would be approved, but faded and ended roughly on a par with the broader market. ... 'We are an independent standard setter and it's important that we maintain our independence,' said Lawrence Smith. But he said the board can't 'ignore what's going on around us' as banks plead for help. ... Patrick Finnegan, director of financial reporting policy for the CFA Institute, said the move gives managers too much room to fudge the truth. 'Financial statements are not there to reflect management's assumptions,' said Mr. Finnegan", Kara Scannell at the WSJ, 3 April 2009.

"Some of the biggest corporate blowups of the past 20 years, like Enron, occurred chiefly because managers could exploit accounting rules that gave them great liberty in pricing assets", Peter Eavis at the WSJ, 4 April 2009.

Thurgood Marshall (TM) said something about SFAS 157. But TM died in 1993. So? His words live on. When I find the quotation, I will post it. Stay tuned. But TM wasn't a CPA. So? He left us some wisdom. We should apply it.

Smith, shut up. You fraud. Your job was: tell Barney Frank, "Go to hell".

Amen Eavis.

1 comment:

Anonymous said...

I worked in a company that had a warehouse full of goods... the manager couldn't show profits from factory production so he jiggled the inventory values and presto/magic reported "profits" to corporate headquarters...

Eventually some smart soul from corporate came and looked in the warehouse and made "reversals"... that's how I learned about accounting magic for "available for sale"... duh duh dud.