Make no mistake, fair value, or marking to market is under a full blooded frontal assault by those who have had their fingers singed by the credit crunch.

Here's a quick survey of the personalities demanding some sort of change.

James Dancy, vice president of AIC Investment Services.

'…fair value accounting can provide neither transparent nor complete information. Even more importantly, it succumbs to animal spirits. The pro-cyclicality of fair value reporting in this market environment is well understood by market participants and its mechanisms were well described by Paul De Grauwe in his article on the opposite page, "Act now to stop the markets' vicious circle".

'While there are many merits to fair value accounting, more needs to be done to lessen the impact of pro-cyclicality. We can only hope that the accountants, when crafting future drafts, poke their heads out of the library and walk down Main Street from time to time.'

Prof Paul De Grauwe of Leuven   University was even tougher on fair value, using some real doom and destruction language in the Financial Times

'Occasionally, as a result of bad news or foolish behaviour of some of these institutions, lenders withdraw their funds, thereby creating (or aggravating) solvency problems, which in turn lead to further withdrawals. The market then starts to co-ordinate lenders into massive withdrawals, leading to massive solvency problems at financial institutions that, without the withdrawals, would have been perfectly all right.

He goes on...

'Today the accounting rule of marking to market is driving us at high speed into the abyss. A speed limit must be imposed. It can be achieved only by temporarily allowing financial institutions not to mark to market.'

Christopher Whalen, a so called 'firebrand' US banking analyst, was reported on Financial Week as saying,

'In the absence of fair-value accounting, the tens of billions of dollars in trading book losses reported by Citigroup, Merrill Lynch and other global investment firms might have been greatly re-duced or avoided entirely,” said Mr. Whalen, who co-founded Institutional Risk Analytics.'

Martin Sullivan, CEO of American International Group, having written down $11bn, said he wanted a...

'"short-term interpretation or amendment” to current accounting standards.'

Those in charge of maintaining the fair value/marking to market standards must be feeeling the heat reading comments like these in the press. It will be interesting to see how the current reviews of IAS39 or FAS157 turn.

Update 28 March.

I just found this from Steve Forbes of Forbes magazine...

'The Bush administration must take two steps immediately to quickly halt the unending, enervating credit crisis: shore up the anemic dollar and, for the time being, suspend "marking to market" those new financial instruments, such as packages of subprime mortgages.'

The attack continues then.

March 27, 2008 | Permalink | Comments (0) | TrackBack (0)

You've got to feel for Jeremy Newman. No sooner has he got the top job running BDO International than someone throws a spanner in the works and says that it might have to stump up $500 to settle a legal dispute.

It was US branch BDO Seidman that lost the case against Banco Espirito Santo, but BDO International assumed that it was clear of the damage after a judge ruled them out of the equation.

This week we learn however that International will now have to go back before an appeals to court to explain why it should not be considered jointly liable for the damages.

Thing is, Newman is due to take over running International later this year and it looks very much like one of his first jobs could be sorting out the debacle. International is unlikely to have that kind of money in its own coffers, which could mean asking around the member firms. Not a pleasant task at all as your first agenda item in a new job.

March 14, 2008 | Permalink | Comments (1) | TrackBack (0)

There is a furore currently underway over Societe General’s accounting treatment of the six billions euros by rogue trader Jerome Kerviel.

In short, Soc Gen has placed the loss in the 2007 accounts instead of this year’s, using a little known ‘opt-out’ of the ‘true and fair’ provision in international accounting standards.

The provision allows for the opt-out in the event of strict adherence to the true and fair principle mangling the results such that they cannot be properly understood. The opt-out is very, very rarely used however, and many in the profession have cried foul over Soc Gen’s reliance on the low profile accounting treatment.

And suddenly the US has thrown a spotlight on the issue after Floyd Norris in the New York Times highlighted the anger that is brewing over Soc Gen’s approach.

He quotes former IASB and FASB member Anthony T Cope saying: ‘They are manipulating earnings.'

Norris’s question is who enforces the standards designed by the IASB? The board doesn’t have that power and nor does anyone else in Europe, on the face of it.

Here in the UK it’s arguable that the Financial Reporting Review Panel could have a tilt at it, if it was reported to them.

Surely the auditors would have something to say, but both Ernst & Young and Deloitte appear comfortable with the decision.

But the issue of enforcement touches another issue, that of US involvement in IFRS. The IASB is hoping to have the US fully on board with IFRS this year, but Soc Gen’s questionable use of the opt out must raise questions about the willingness to abide by the standards in Europe.

US observers may very well ask, 'Well, what happens if we abide by the standards and Europe doesn’t? Isn't that unfair?'

At the moment there still appears to be optimism at the IASB that everything is going as planned, but incidents like Soc Gen won’t help the cause.

March 11, 2008 | Permalink | Comments (0) | TrackBack (0)

We're all waiting to hear whether Alistair Darling will make any changes to his non-dom policy in tomorrow's Budget, his first.

Perhaps a little mischieviously, I can't help but draw attention to two opinions on non-doms I've read over the past week.

They're interesting because they fly in the face of the great weight of opinion which has bluntly tried to rubbish the chancellor's policy. Many may have threatened to pack their bags and leave these shores over non-dom taxation, but two economists have taken a contradictory view.

First Willem Buiter of the London School of Economics. He writes:

The explosion of indignation that greeted this proposal was deafening and largely bereft of logic other than the financial self-interest of those non-doms who would be adversely affected by the proposal.

Taking no prisoners, he goes on:

The unequal treatment of equals introduced by the creation of the non-dom (resident but non-domiciled for the purpose of income tax and inheritance tax) category undermines respect for the law among the tax paying public at large.

Then there is Martin Wolf, associate editor and chief economist of the FT. He writes of the non-dom complaints:

From long experience, I am deeply sceptical of special interest “the sky is falling” pleading. More fundamentally, I am opposed to this particular pleading because it is subversive of any enduring political compact among citizens. If we take the principle that successful people are too important and too mobile to pay tax to its logical conclusion, political community will collapse.

So while many think the chancellor cack-handed, they don't necessarily think his policy wrong in principle. Not everyone is shouting him down. Wonder if he'll take heart from that when deciding what to say in the Commons on his big day.

March 11, 2008 | Permalink | Comments (6) | TrackBack (0)