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Smoke and Mirrors Accounting Will Be Expensive for Our Kids

Posted by Larry Doyle on August 18, 2009 2:31 PM |

Why will future generations be forced to pay an ever increasing cost for our current economic turmoils? Very simply, regulators and legislators have not only allowed but promoted the intentional mispricing of assets on financial company books.

There is no doubt that the regulators and legislators effectively forced the FASB to relax the mark-to-market accounting standard to alleviate pressure on capital ratios. Where, however, is the line drawn on this practice? How do we know that financial institutions are not utilizing this practice indiscriminately to support capital ratios and income statements?

I have little doubt we will see future frauds in the years ahead as a result of this practice. The Financial Times addresses the problems embedded in this practice by writing, Disclose the Fair Value of Complex Securities:

Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

Healthy markets and vibrant economies do not rely on opaque and fictitious accounting practices.

Our kids deserve better.


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