In an editorial "How to Restore Trust In Wall Street" in the Wall Street Journal, Arthur Leavitt, a former SEC chair and and Lynn Turner, a former SEC chief accountant make the case for more and better, not less, fair value accounting .
- Banking and financial services trade groups are aggressively lobbying the SEC to suspend the mark-to-market, or fair-value, accounting standards, claiming that fair-value accounting standard has distorted banks' balance sheets, and has contributed to the market volatility.
- On the contrary, that gets things backward--it is accounting sleights-of-hand that hid the true risk of assets and liabilities these firms were carrying, distorted the markets, and caused investors to lose the confidence necessary for markets to function properly.
- Restoring public trust requires better quality, accuracy, and relevance in financial reporting and expanding, not reducing fair value reporting of the securities positions and loan commitments of all financial institutions.
Only fair value accounting brings transparency to the market and determines whether or not a financial institution has sufficient capital and liquidity to justify receiving loans and capital. - Contrary to what the critics claim -- fair value is not liquidation value. It does not reflect ultimate settlement amounts, but the current value in arms-length transactions. It is an accurate reflection of the value of an asset or cost of a liability, and what taxpayers should pay for assets.
- Those who blame fair-value accounting for the current crisis are shooting the messenger. Fair value does not make markets more volatile; it just makes the risk profile more transparent.
- Blame lies with Lehman, AIG, Fannie Mae, Freddie Mac and others who made poor investment and strategic decisions and took on dangerous risks--blame should not be placed on the process by which the market learned about the them.
- Tough medicine must be taken in order to vastly improve financial reporting, bring transparency to the markets.
