Fair-value accounting may not be perfect, but it’s the best we’ve got, according to the SEC. Pursuant to a Congressional mandate to investigate the matter, the Securities and Exchange Commission has released a study that exonerates fair-value marking methods, claiming that the oft-maligned accounting system is not to blame for the financial crisis.
Fair-value accounting, also termed “mark-to-market accounting” is a valuation system that rates assets based on their current marketplace value as opposed to their potential worth in standard market conditions. Critics of the system claim that such valuation has exacerbated the credit crisis, but the SEC has generally rejected this theory.
“The [SEC] observes that fair value accounting did not appear to play a meaningful role in bank failures occurring during 2008,” says the study. “Rather, bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence. For the failed banks that did recognize sizable fair value losses, it does not appear that the reporting of these losses was the reason the bank failed.”
While denying fair-value accounting as a motivator of the credit crisis, the study does point out ways by which the system may yet be improved, notably means of determining fair value in the event that relevant market data is not available. Seven other guidance points are also offered, including examination of liquidity and efforts to educate auditors to the system.