Some have blamed the accountants for the financial crisis. They claim that having been forced to measure the toxic assets at fair value and recognize large losses after adjusting the prices to fair value made it harder for companies to do business and raise capital.

Are the accountants now to blame for the excessive risk taking of financial institutions? I don’t think so! The question is, what would have been the alternative to fair value accounting? Historical cost accounting? I believe most accountants and investors would agree that historical cost becomes less and less relevant over time for financial instrument, as transactions are conducted based on historical cost, but rather market values. That is one of the reasons (besides goodwill) you see companies being acquired significantly below or above book value, because the historical costs of certain assets do not reflect the real economic value, and good analysts and investors will realize that and adjust for that. And the option of amortised costs for debt makes sense as long as the entity plans to hold the investment until maturity and there has been no credit losses, which is often not the case.

Agreed, while some say don’t shoot the messenger, the messenger should make sure the message is comunicated in a way that is not be misleading, and maybe letting all the fair value changes flow through the so sensitive and highly focused on Profit & Loss for assets where there was no market was a bit misleading. Fair value determined through transaction prices or broker quotes is not really a good indication of the value of an asset if the transactions are disorderly or distressed, as is commonly the case in dislocated markets where there is no market activity, and I think there has been room for improvement, as the recently issued accounting guidances have shown after the Emergency Economic Stabilization Act of 2008 decided that the SEC is to conduct a study on mark-to-market accounting standards. For example has FASB issued accounting guidance, SFAS 115-2 allowing entities to separate losses due to impairement of financial assets in credit losses and losses due to other factors, such as interest rate movements or inactive markets, and only recognizing credit losses in the P&L while recognizing the remaining impairment losses in OCI. Also, SFAS 157-4 under certain circumstances allows significant adjustments to transactions or quoted prices can be made to the fair value as a result of recently issued guidance using other unobservable inputs from models for example to more accurately reflect fair value.

The only reason accountants got into the line of fire with their fair value accounting is because of the bad state of the markets. Would the markets have been booming, nobody would have gotten the idea to demonize fair value accounting, it would rather have been seen as the most relevant measure of financial assets. Accounting might come close, but will never fully reflect the economic power of a company adequately at all times.

In the end, it has to be acknowledged that accounting will problably never be able to please all stakeholders, buyers and sellers, regulators, managements, at the same time, as all have different interests and perspectives. Accounting might come close, but will never fully reflect the economic power of a company adequately.