Auditors Face Reality Check With Fair-Value Accounting

Auditors, bankers, financial professionals and legislators hoping for less stringent accounting standards in 2009 because of the current economic downturn are out of luck. Their reality check came Dec. 31 courtesy of the Securities and Exchange Commission (SEC), which ruled it would not suspend the so-called “mark-to-market,” or fair-value, accounting rule that requires financial institutions to value hard-to-sell assets at current market prices.

Critics blame the rule, defined in the Financial Accounting Standards Board’s Statement No. 157, for the excessive write-downs that have taken place in the wake of the subprime crisis and credit crunch. Those in favor of fair-value accounting contend any changes would do more harm than good to investors.

The SEC has ruled on the side of investors. In a 200-plus-page report examining a possible connection between fair-value accounting and the nation’s financial meltdown, the SEC compared the idea of suspending the accounting standards to “shooting the messenger and hiding from capital providers the true economic condition of a financial institution.”

The SEC did offer eight recommendations for refining the rule’s application when valuing hard-to-price assets, however. Among the agency’s proposals: the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.

The SEC’s report was mandated as part of Congress’ $700 billion bailout package in October.

Now that the SEC has agreed to maintain fair-value accounting standards, companies that hold various structured finance products such as mortgage-backed securities and collateralized debt obligations will be required to value those assets at current market prices, even if it means market values are substantially lower than the values previously assigned. As for auditors, their work will likely get even more involved, as they begin punching in overtime to ensure clients don’t miscalculate the true value of their holdings.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

This entry was posted on Wednesday, January 7th, 2009 at 7:48 pmand is filed under General Investor Information, SEC Investigation. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.