Financial Crisis Brings out Fair Value Attackers

By Eva Lang

Count the bankers as among the voices beating up on Fair Value reporting during this period of financial uncertainty. In a September 23, 2008, letter to SEC Chairman Christopher Cox, the American Bankers Association called SFAS 157 “flawed.” The bankers point out that “As financial markets thin out or even seize up, as trades become fewer and more volatile, and in general as trading values become increasingly unreliable, it is daily more apparent that for many assets, especially under current conditions, there is not a true “fair value”.” In this letter the bankers go as far as to ask the SEC to make FASB stop issuing new accounting standards. The bankers are not alone in attacking fair value accounting as other financial services trade groups are speaking against it as well.

Arthur Levitt and Lynn Turner (former chair and former chief accountant for the SEC) addressed this issue bluntly in today’s Wall Street Journal by saying directly that “to ask for a suspension in fair-value accounting is to ask the market to suspend its judgment.” The pair points to the need for restoring public trust and that calls for improving the quality, accuracy, and relevance of our financial reporting. They feel that fair value reporting is the best way to give investors the information and transparency needed to make decisions. The article calls for companies to disclose how fair value was determined, including the key assumptions they used, the risks they present, the range of movement of these assets, why the company expects the fair value to recover if the asset's value has shrunk, and a track record and outlook for the investment horizon. Their conclusion is that blaming fair-value accounting for the current crisis are guilty of the financial equivalent of shooting the messenger. Fair value does not make markets more volatile; it just makes the risk profile more transparent.