Accounting Reforms Needed in Bailout

by Jennifer Baty

Conservatives are quick to point to the impact of the Community Reinvestment Act on this economic mess we're in, but perhaps the changes to accounting methods mandated by the Sarbanes-Oxley Act of 2002 (SOX) may be more to blame.   Newt Gingrich in his recent commentary  opined on the impact of "fair value" accounting required by SOX on the implosion in the financial sector:

Mark-to-market accounting (also known as "fair value" accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don't just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.

Moreover, when a company in financial distress begins fire sales of its assets to raise capital to meet regulatory requirements, the market-bottom prices it sells out for become the new standard for the valuation of all similar securities held by other companies under mark-to-market. This has begun a downward death spiral for financial companies large and small.

Will SOX reforms be included in the next "bailout" bill? While we certainly want to keep accounting methods transparent and ethical, we should not hang on to methods that actually cause devaluation, setting up investors and markets for dramatic losses. Reform and/or elimination of market-to-market accounting methods makes good sense, and using a three-year rolling average for valuation seems a reasonable compromise.

Let's hope that Washington will take the time to craft a bill that is comprehensive enough to include such reforms, rather than rush through another one that will only put a band-aid on deep, festering wounds which ask the taxpayers for more of what we don't have.

- Jennifer Baty

Comments

[Will from NYC]

Someone help me out here 2002... who was President and who was running congress.

This bill was introduced to prevent companies from overstating asset values. It was a response to Enron and Worldcom scandals where management cooked the books to keep the stock inflated. This is not the reason for today meltdown...

lack of oversight pure and simple by George Bush's appointees.

[JB]

Will, mark-to-market accounting is not an accurate methodology in illiquid markets.

[Will from NYC]

well from my perspective loosening rules that were put in place to protect investors for unscrupulous business people like Enron is NOT a step in the right direction... its same old pandering to Wall Street.

[Ralf Seiffe]

The market crushed Enron long before the meddlers in Congress got around to SarbOx, passing it in a rush like what's happening in the bail out. Will, the real crooks are the the folks who created the subprime mess by trying to repeal the laws of economics. They once worked for Fannie and Freddie where they cooked the books on a far larger scale than Enron for the same venal reasons. They now advise Obama. Wake up!

[Will from NYC]

And all the retirees with Enron in their portfolio all the employees? I know they are just people who don't enhance your wallet so you're fine with other folks being victims. As long as its not you? right? typical. The folks who got tricked by Enron's book keeping they got crushed too.... the reason for this mess is the hands off,eyes shut, hands out,nose snorting attitude of Bush Appointees... how about the Agency that's supposed to over see the oil industry... cocaine, sex, and no enforcement... they got caught. The Republicans McCain been boot licking are these same folks... KEATING 5??? McCain was CAUGHT chatised... he's lucky it was GOP congress at the time they saved his career.

Ralf Enough of your BS about ... John McCain is up to his elbows in Lobbyists and Fannie and Freddie folks so STFU... you are just passing along Karl Rove accusations to muddy the waters...
I see now the Fannie and Freddie accusations are just total utter distractions...and blaming minorities yet again for the greed of Wall Street and the ineptitude of the Republican Bush Administration.

Hey if your happy about the war, the economy, the job market, the oil situation, our borders, immigration stick with John McCain.. you'll get what you deserve. It will be the same do nothing, incompetent group of folks Bush has now... how you with that???

Most of the country has had enough of the Republicans. ta ta.

[Michael Carter]

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