Comments on FASB’s fair value amendment reflect FAS 157 distress

by Kurt Schulzke on April 2, 2009

Lenders have been hammered by the pathologically procyclical impact of FAS 157’s mark-to-market regime.  Hardly surprising, therefore, that banks and credit unions came out in force to support the latest FASB “clarification” of FAS 157.  Some other commenters, mostly from the “analyst” community, emphatically disagree.

Yesterday, the Financial Accounting Standards Board’s comment period closed on yet another proposed FASB Staff Position — denominated FSP FAS 157e — clarifying FASB Statement 157, the highly contentious standard on fair value measurement and disclosure.

Between its March 17 issuance and April 2 at 7:30 eastern time, FAS 157e garnered 367 comment letters (counting mine transmitted near midnight on April 1), more than triple the 102 comments posted last October on FAS it’s immediate predecessor, FSP FAS 157d.  The single largest bloc of commenters were banks and credit unions nearly unanimous in their support of the proposal, with some modifications.

The proposal has, however, come in for withering criticism from some quarters, mostly financial analysts and valuation “professionals,” whose lifestyles are heavily subsidized by FAS 157’s arcane, risk-metric-rich framework.  Others, like the New York Times’ Floyd Norris, view any liberalization of fair value standards as undermining the “integrity” of financial accounting.

As my comment letter explains, I disagree with Norris & Co. on several points including the notion that financial accounting and the FASB had any integrity to lose in the first place.  Individually, yes.  Institutionally, not.

The FASB has always been dominated — as the current FASB members’ bios demonstrate — by big-firm and big-academy politics.  In a professional sense, they are congenitally disconnected from the market they dominate with only spasmodic oversight by Congress.

I’ve been in the financial reporting business for nearly 30 years as a CPA, attorney, consultant, author and college professor.  I can say with authority that financial standards and statements are like sausage and pickles: once you’ve seen them made, you’ll find it hard to trust them ever again.

Financial statements are only as trustworthy as the management who prepares them while their luck holds and market conditions remain static.  The idea that accounting, valuation or risk management practitioners can provide reliable “forward-looking information” that magically invests financial statements with predictive capacity is nonsense.  By their very nature, financial statements are historical and always will be.  Anyone who still believes otherwise — including, apparently, all current FASB members — needs to read Nassim Taleb’s The Black Swan.