An article today titled ‘Criticism of U.S. accounting changes mounts, and IASB said the rationale for watering down fair value is “crazy”’, reports that Tom Jones, vice-chair of the International Accounting Standards Board, has said Wall Street lobbyists and U.S. politicians are damaging the credibility of corporate reporting and hurting the interests of investors around the world by pulling-back on fair value accounting. In an interview with the Financial Post, Jones warned of “a loss of credibility” and said the rationale for watering down fair value is “crazy.” He also cited concerns about political interference that could undermine the independence of accounting rule setters, a fear that was echoed Monday by other senior accountants. Criticism of those seeking to do away with fair value accounting was echoed by Nouriel Roubini, the widely reported New York University economist and founder of the RGE Monitor website. On Monday Mr. Roubini called the U.S. rule changes “a big mistake” that have allowed Wall Street banks to “fudge” their latest set of quarterly accounts. The article also reports that at a London meeting of the Financial Crisis Advisory Group, senior industry experts expressed concern about the politicization of the process of revising accounting standards. Harvey Goldschmid, the group’s joint chair who is a former commissioner of the Securities and Exchange Commission, and IASB chair Sir David Tweedie, were among those who warned of the dangers of political pressure that could weaken the independence of accounting standard setters.

This is precisely what I have said in different ways in several posts on this blog dating back to September, when the SEC first became involved in the mark-to-market debate. Importantly in my view, the recent rise in the U.S. stock market indices frequently has been attributed at least in part to Q1 positive earnings reports from some of the large U.S. banks. The open question is: Would they have been profitable under the old mark-to-market rules. The sad truth is that no one likely will ever know, or if they would not have been will only know ‘too late’. Ultimately; however, Mr. Market will price stocks based on free cash flow and solid ‘properly valued asset’ balance sheets, not based on highly subjective decisions made within the accounting reporting rules of the time.

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An article yesterday says ‘Wall Street rallies on mark-to-market easing’ on Thursday after FASB – the U.S. Federal Accounting Standards Board that sets U.S. accounting standards – agreed to give banks more flexibility in applying mark-to-market accounting to their toxic assets. The same article says “Optimism was also boosted as leaders of the G20 nations agreed to put an additional trillion dollars into the ailing global economy through extra funding for groups like the IMF”.

Please take the time to read the last two of my prior posts on Mark-to-Market accounting. I consider the reaction of the stock markets to the aforementioned news – if indeed that has contributed to the U.S. market indexes rising yesterday morning – as truly ludicrous. Not only will this change make the financial statements that will be produced by the banks going forward less reliable in my opinion, it is not earnings and book value – which are the only things this change results in – that ultimately determine share value. It is after-tax discretionary cash flow that dictates value in the end. This is something that not all stock analysts seem to focus on. If they did, accounting changes that simply enable manipulation of numbers would be disregarded by Wall Street.

A ‘Money and Markets’ article today titled ‘Mark to Market Madness … Geithner Plan Shenanigans … the Economy … and More’ is as negative on the Mark-to-Market changes as I am.

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An article yesterday titled ‘FASB Plan To Allow Cos More Leeway Under Mark-To-Market’ says “Accounting rule-makers have proposed allowing companies to use more leeway in valuing their assets under “mark-to-market” accounting, a move that could ease balance-sheet pressures many companies say they are feeling during the economic crisis, and that the Financial Accounting Standards Board (FASB) agreed Monday on proposed guidance that would make it easier for companies to use their own models, estimates and judgment in determining the “fair value” of their assets. The new proposal clarifies and modifies when companies can find that trading in an asset has occurred in an inactive market and under distressed circumstances, and in such circumstances would enable companies to use their own valuation techniques in pricing the asset, instead of relying on what they contend are market prices that are temporarily weighed down and unnaturally low. FASB says this approach will require companies to exercise ” significant judgment.” FASB plans a final vote on the matter on April 2, after providing a 15 day public comment period.

I have spent my adult life as a fee earner giving objective opinions on company share and asset valuations. My firm – Campbell Valuation Partners Limited – does that every day, and potentially stands to benefit hugely from such the suggested change. That said, I completely disagree with what FASB is proposing. If implemented, and I am virtually certain it will be (what with U.S. government and SEC pressure on FASB to enable U.S. financial companies to no longer play by the ‘transparency rules’ existing market-to-market rules enforce) the result inevitably will be inconsistent reporting among financial institutions as their managements ‘lipstick up’ their balance sheets and profit and loss statements from what they would be under existing mark-to-market rules. I think this may lead to potential stock market losses for investors whose investment advisors rely on those ‘tarted-up’ financial statements to make financial stock recommendations. Investors savey enough to know that share value ultimately is driven by discretionary free cash flow – which can’t be ‘played with’ – and not by subjectively determined accounting numbers ought not to be hurt by these proposed changes. Less sophisticated investors in my view likely are going to suffer a bad result in the end. Simply put, the world stock markets may go up in the near-term, but changing accounting rules, and hence what financial statements say will not solve the current economic problems. Old sayings are ‘old sayings’ because they have stood the test of time. ‘Figures lie, and liar’s figure’ is a venerable old saying – in my view we are seeing ‘first hand’ the beginnings of application of that old saying.

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An article Thursday titled ‘U.S. nears mark-to-market accounting guidance’ reported U.S. accounting rule makers and regulators said they were pushing ahead with new guidance on mark-to-market accounting, saying Financial Accounting Standards Board (FASB) member Lawrence Smith said Wednesday FASB would ‘in the real short term’ include guidance on whether a market is active or inactive and whether a transaction is distressed.  SEC Chairman Mary Schapiro told Congress she was keeping the pressure on FASB, saying “FASB has committed to us that the guidance will be out in the second quarter”.  The article says the mark-to-market accounting rule is defended by investor advocates, but that the banking industry has pleaded for a suspension or modification of the rule.  The article further reports the SEC and FASB oppose suspension or elimination of the rule, and that Fed Chairman Bernancke is against suspension but called for improvements.  On Thursday before a Congressional hearing the Office of the Comptroller of the Currency said it was inappropriate to suspend the accounting rule.

See my post of yesterday on this subject.  As I have previously said, in my view allowing management subjectivity to assess whether markets are ‘normal’ or ‘not normal’ – which seems to be a mantra of those who want to change the rule – would be a ‘recipe for disaster’ from a ‘reliance on financial statements’ point of view.

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