Accounting should not pander to the market’s whims

Posted on

The Tyngewick Gawcott blog reproduces a letter from Mike Page of Portsmouth University that has appeared in the FT. It makes the case for abolishing fair value rules in accounting, and not just suspending them.

This makes sense. The Republican and Tory position of suspending them does not: that is a request to use them to fuel the upside and ignore the consequence in the downside.

As Mike says:

We know market prices are highly variable and accounting standard setters should now acknowledge that the role of accounting is not to mimic market prices but to provide a more reliable alternative.

Apologists for marking to market say there is no alternative, since it is impossible to calculate the intrinsic value of some instruments. If this is the case, what were institutions doing buying instruments for which they had no idea of the intrinsic value?

In the wake of this crisis the International Accounting Standards Board and US Financial Accounting Standards Board need to acknowledge, through their joint project to create a conceptual framework for financial reporting, that it is the function of financial reporting, not to pander to the market's whims, but to create a sound basis for evaluating the stewardship of management and preventing opportunistic behaviour.

I do not want to undermine the move towards international accounting standards. That would be a serious mistake. But, they will need reform like so much else in the financial system. And this may well be a necessary part of that reform.