The role played by the financial market in determining the levels of performance that can be recorded by the economy is not in doubt. The 2008 economic crisis is a vivid reminder to all policy makers and even governments to ensure that issues that affect the economy are objectively addressed.
The Financial Accounting Standards Board (FASB) which is a key player in the financial sector appears to be oblivious of its role in the economy and has once again used its mandate to develop a standard that is not relevant to business let alone accounting. The move to adopt the mark-to-market accounting standard is a dark mark in American accounting history that may in fact lead to poor practices within the financial systems that have proven to be potent to the economy.
It took America nearly 15 years to develop its constitutions; strategic management specialist have time and again pointed to the close relationship that exists between rapid change and failure and the FASB has for years taken months in seeking suggestions and deliberating upon them before making any proclamation that may affect the nature of the business environment. All these are events or standards that the business world and America as a whole has come to accepted as being reflective of factors that affect the business environment.
The speed with which the mark-market standards moved from proposal to being a standard brings about questions on objectivity. A look at the last two times that America has found itself in crisis it has been the financial systems that duped to investors by inflating their performance or potential. It is unlikely that such a hurried process which eliminates systems that have protected American investors will be of any good.
FASB’s modification of its rules is often waited upon with anticipation by all players in the business world. The change in the fair value rules or standards is the main area of controversy in FASB’s changes. While the banking and financial institutions have praised the move as an effort to reduce the negative effect that previous standards had on developing a ‘clear picture’ of their performance, investors are worried stiff on the effect that it will have on disclosures by banking and financial institutions that are traditionally known for overvaluing their assets and even performance.
The fair value accounting rules had been blamed by a number of financial institutions that are notably under pressure from the 2008 economic crisis for being irrelevant to inactive markets.
The mark-to-market accounting system that has been presented by FASB allows companies to use their judgment to gauge prices of some investments and backed securities. Analysts were quick to note that the measures could in fact impact on the net income and affect bank write downs. Pro mark-to-market standard institutions have hailed the changes with statements like ‘the mortgage and market was not working and something had to change’. This is reflective of the true objective behind the move. Investors who have been defrauded by American institutions in a number of occasions are wary of the changes that place them in a position where they are susceptible to exploitation by the financial community.
The integrity of a development is largely dependent on the process that culminated in its existence. Under this consideration, investors are innocent of ‘unnecessary suspicion developed from poor past experiences’. The series of event that culminated into the existence of the mark-to-market standard is a reflection of the negative effect that the congress can have on effective decision making. In his presentation on March 12th the chair of FASB did not mince his words in pointing out the faults that are inherent of the mark-to-market standards that the financial community was pushing for.
The definition presented by Herz which should be presumed of FASB’s definition of fair value is that it is the worth of an asset being exchanged between two informed parties. In ending his statement the chair stated that America is in a challenging time that requires improvements in nearly all sectors and by trying to suppress financial information offered to investors there is little that will have been done to change the conditions. His statement is a pointer to the misinformed objective that the change may affect the position that America currently is in and the existence of fair value system within financial practices.
Whatever happened between 12th March and April 2nd is best left to Americans’ imagination. The congress’ pressure has especially been cited by the media and being central to the changes that FASB made in fair accounting standards. The same rule which had been dimmed lacking in objectivity became relevant to the American dilemma in a space of three weeks. The hurried implementation of the change is the unspoken variables that belie its objectives.
A pro derived from the development is the awareness that America is in a desperate position which needs to be addressed with immediate effect. Moreover, the negative effect that bad performance within financial institutions had on the stock market may soon be historical events as financial agencies have been given a leeway to confuse investors and hide poor performance. Profits that have not been evidenced since the likes of Enron went down may soon be usual and the same can be said of the pain that investors underwent in the turn of the century.
The cons are clear especially sidelining of the effects that the operational environment has on operations. The development allows for businesses to operate in a manner suggestive of independence from the operational environment while investors who may be aware of the prevailing environment are subjected to these daydreams. The results may be increased wrangles within management boards, unethical practices within financial institutions and reduced confidence on financial disclosures which goes against their objectives.
If any one thought that the FASB is perturbed by the controversies surrounding the development then they are in for a big surprise. The FASB has practically done nothing and has sat back with some postulating that the next step they take may involve providing organizations with an environment where they can alter the value of all their assets at will. The standards used by investors and financial players under the environment developed by the mark-to-market standards is non-uniform and may lead to a number of upheavals and even miscommunication that negatively affect value generation.
It is evident from Herz’s speech on March 12th that the mark-to-market standard is a non-objective measure to curb the effects of the 2008 crisis. The pressure placed on the FASB by the congress whose affiliation to financial heavyweight is not a mystery is central to the change. This is not the first time such a development is being recorded for the French President played a pivotal role in some controversial changes made by the GAAP.
Investors should only worry for the short term for such subjective developments have historically proven to be uneventful. It is only a matter of time before the follies in the mark-to-market standard that are actually known to all parties in the business fraternity manifests in the practical environment with dire results. Changes that are appreciative of the operational environment will then be the only way out.
Courtney from Study Moose
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