بحران حسابداری ارزش منصفانه:درک مباحث اخیر

The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or US GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Fourth, although it is difficult to fault the FVA standards per se, implementation issues are a potential concern, especially with respect to litigation. Finally, we identify several avenues for future research.

The recent financial crisis has turned the spotlight on fair-value accounting (FVA) and led to a major policy debate involving among others the US Congress, the European Commission as well as banking and accounting regulators around the world. Critics argue that FVA, often also called mark-to-market accounting (MTM),1 has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the US and around the world.2 On the other extreme, proponents of FVA argue that it merely played the role of the proverbial messenger that is now being shot (e.g., Turner, 2008 and Veron, 2008).3 In our view, there are problems with both positions. FVA is neither responsible for the crisis nor is it merely a measurement system that reports asset values without having economic effects of its own. In this article, we attempt to make sense of the current fair-value debate and discuss whether many of the arguments in this debate hold up to further scrutiny. We come to the following four conclusions. First, much of the controversy about FVA results from confusion about what is new and different about FVA as well as different views about the purpose of FVA. In our view, the debate about FVA takes us back to several old accounting issues, like the tradeoff between relevance and reliability, which have been debated for decades. Except in rare circumstances, standard setters will always face these issues and tradeoffs; FVA is just another example. This insight is helpful to better understand some of the arguments brought forward in the debate. Second, there are legitimate concerns about marking asset values to market prices in times of financial crisis once we recognize that there are ties to contracts and regulation or that managers and investors may care about market reactions over the short term. However, it is not obvious that these problems are best addressed with changes to the accounting system. These problems could also (and perhaps more appropriately) be addressed by adjusting contracts and regulation. Moreover, the concern about the downward spiral is most pronounced for FVA in its pure form but it does not apply in the same way to FVA as stipulated by US GAAP or IFRS. Both standards allow for deviations from market prices under certain circumstances (e.g., prices from fire sales). Thus, it is not clear that the standards themselves are the source of the problem. However, as our third conclusion highlights, there could be implementation problems in practice. It is important to recognize that accounting rules interact with other elements of the institutional framework, which could give rise to unintended consequences. For instance, we point out that managers’ concerns about litigation could make a deviation from market prices less likely even when it would be appropriate. Concerns about SEC enforcement could have similar effects. At the same time, it is important to recognize that giving management more flexibility to deal with potential problems of FVA (e.g., in times of crisis) also opens the door for manipulation. For instance, managers could use deviations from allegedly depressed market values to avoid losses and impairments. Judging from evidence in other areas in accounting (e.g., loans and goodwill) as well as the US savings and loans (S&L) crisis, this concern should not be underestimated. Thus, standard setters and enforcement agencies face a delicate tradeoff (e.g., between contagion effects and timely impairment). Fourth, we emphasize that a return to historical cost accounting (HCA) is unlikely to be a remedy to the problems with FVA. HCA has a set of problems as well and it is possible that for certain assets they are as severe, or even worse, than the problems with FVA. For instance, HCA likely provides incentives to engage in so-called “gains trading” or to securitize and sell assets. Moreover, lack of transparency under HCA could make matters worse during crises. We conclude our article with several suggestions for future research. Based on extant empirical evidence, it is difficult to evaluate the role of FVA in the current crisis. In particular, we need more work on the question of whether market prices significantly deviated from fundamental values during this crisis and more evidence that FVA did have an effect above and beyond the procyclicality of asset values and bank lending. The paper proceeds as follows. First, we provide a quick overview over FVA and some of the key arguments for and against FVA. Second, we compare FVA and HCA and shortly discuss fundamental tradeoffs involved when choosing one or the other. Third, we discuss the concern that FVA contributes to contagion and procyclicality as well as ways to address this concern, including how current accounting practices help to alleviate problems of contagion. Fourth, we consider potential implementation problems. Fifth, we take a closer look at the banks’ positions on FVA. Sixth, we conclude with suggestions for future research.

The preceding sections illustrate that the debate about FVA is full of arguments that do not hold up to further scrutiny and need more economic analysis. Moreover, it is important to recognize that standard setters face tradeoffs, and in this regard FVA is no exception. One example is the tradeoff between relevance and reliability, which is at the heart of the debate of when to deviate from market prices in determining fair values. Another example is that FVA recognizes losses early thereby forcing banks to take appropriate measures early and making it more difficult to hide potential problems that only grow larger and would make crises more severe. But this benefit gives rise to another set of tradeoffs. First, FVA introduces volatility in the financial statement in “normal times” (when prompt action is not needed). Second, full FVA can give rise to contagion effects in times of crisis, which need to be addressed – be it in the accounting system or with prudential regulation. In our view, it may be better to design prudential regulation that accepts FVA as a starting point but sets explicit counter-cyclical capital requirements than to implicitly address the issue of financial stability in the accounting system by using historical costs. It is an illusion to believe that ignoring market prices or current information provides a foundation for a more solid banking system. But we admit that the tradeoff between transparency and financial stability as well as the interactions between accounting and prudential regulation needs further analysis (see also Landsman, 2006). In addition, we have several other suggestions for future research. First and foremost, we need to make more progress on the question of whether FVA did in fact contribute to the financial crisis through contagion effects. At present, there is little research that would answer or even directly speak to this question. The SEC study mandated by Economic Stabilization Act of 2008 argues that FVA did not cause bank failures because the fraction of assets reported at fair value was small in most cases, and in those cases where the fraction of fair-value assets was larger, the share price reflected even higher losses than were reported by the bank. While this argument and the accompanying evidence point to real losses as the source of bank failures, they do not provide convincing evidence that there was no contagion. The failure of some banks could have increased market illiquidity, which in turn may have spilled over to other banks via FVA. Moreover, it is tricky to use banks’ share prices as evidence that FVA did not have any negative effects for banks with a large fraction of fair-value assets since the share price may already reflect the negative real effects of FVA (e.g., asset fire sales in illiquid market). A first step towards making progress on the role of FVA in the crisis is to be more explicit about the mechanism of contagion. A simple reference to models that show contagion effects in pure mark-to-market settings is not sufficient to explain the role of FVA in practice. However, the main challenge in finding evidence on contagion effects related to or caused by FVA likely lies in isolating accounting effects and separating them from contagion effects due to correlated (real) risks. This is not a trivial exercise. One important step would be to show that prices were indeed distorted and deviated substantially from fundamental values, which is not an easy task either. Evidence on this issue is only just emerging (e.g., Coval, Jurek, & Stafford, 2009). Similarly, we do not have evidence that banks’ write-downs on securities were indeed excessive relative to their fundamentals. Interestingly, banks have also not put forward such evidence even though they should have strong incentives to do. As we noted earlier, banks are not constrained by the accounting standards from providing additional disclosures about the fundamental values of their assets. But it is possible that litigation risks or concerns about investor rationality inhibit such disclosures. This brings us to a second avenue for future research. Our analysis suggests that implementation problems and, in particular, litigation risks could have played a role for the performance of FVA standards and banks’ reporting practices in the crisis. It would be interesting for future research to explore this possibility and to study the interactions between FVA and other important elements of the institutional framework (e.g., litigation system, SEC enforcement). Understanding these interactions and the role of FVA in the current crisis is also crucial for the decision of whether or not to expand the use of FVA to other assets and other areas of accounting. Third, although most of the debate seems to be focused on the role of FVA in the crisis, it seems equally important to ask and study to what extent HCA (e.g., for loans) may have played a role. We already noted that HCA may have fed into the securitization boom. Moreover, there is evidence suggesting that banks’ loan losses exceeded fair-value losses on securities (e.g., Citigroup, 2009 and Merrill Lynch, 2008). It is conceivable that the opacity of banks’ loan books and the lack of strict impairment rules have considerably contributed to the current crisis and investor uncertainty. Along similar lines, it would be worthwhile to analyze the role of off-balance sheet vehicles and retained positions in asset securitizations in the crisis. The disclosures for these positions are often difficult to understand and may have been insufficient (e.g., KPMG, 2008). Again, it could be that the opacity of these positions played a larger role for the sharp market reactions than the write-downs per se. Put differently, the accounting aspect of the crisis could very well be a transparency problem, rather than an overreaction to fair-value information (see also Shadow Committee, 2008). A related issue is the question of how investors respond to additional disclosures that firms provide in times of crisis. There are a few studies that examine firms’ responses to transparency crises and their economic consequences (e.g., Leuz & Schrand, 2008). The current crisis provides an interesting setting to further explore these issues. An analysis of European banks’ annual reports by KPMG (2008) suggests that, in 2007, banks increased their disclosures related to financial instruments, in part due to the beginning of the crisis. It would be interesting to study what determines disclosure (or non-disclosure), how investors reacted to these disclosures and whether there are signs that investors overreact to such disclosures. Finally, it is important to recognize that accounting rules and changes in them are shaped by political processes (like any other regulation). The role of the political forces further complicates the analysis. For instance, it is possible that changing the accounting rules in a crisis as a result of political pressures leads to worse outcomes than sticking to a particular regime (e.g., Brunnermeier et al., 2009). In this regard, the intense lobbying and political interference with the standard setting process during the current crisis provide a fertile ground for further study. In sum, the fair-value debate is far from over and much remains to be done.