Friday, April 3, 2009

Financial Accounting Standards Board: U.S. is Socialist

As we noted recently, we've been easing up on the Wall Street Journal and the Washington Post, probably because it is getting increasingly difficult to tell the difference between the two — except that the Journal has funnier comics. The announcement in the Post today of yesterday's change in basic accounting rules by the Financial Accounting Standards Board, however, demanded a letter not just to the Post, but to the Journal as well. Ordinarily you'd not think that changes in accounting rules would be of interest ("I became an accountant because I didn't have enough personality to be an actuary."), but you might want to reconsider that opinion in light of what was done yesterday.

Dear Sir(s):

The decision yesterday by the Financial Accounting Standards Board to permit companies to assign asset values based on considerations other than cost or market adequately illustrates the dangers of a command, State-run economy, and permitting the State to dictate accounting practice to "fix" a rule that never should have been promulgated in the first place.

"Marking to market" permits a company to recognize gains that have not been realized. A company can thereby inflate its earnings by recognizing as income profits that do not exist. When the securities involved show dramatic price increases fueled by speculation, as in the recent home mortgage bubble, losses when the bubble bursts are consequently far greater in scale than they otherwise would have been.

One of the most basic accounting principles is that the financial statements of a company fairly and accurately present the position of the company for the users of the statements. Allowing recognition of unrealized speculative gains undermines this principle by deceiving users with inflated gains that might not ever be realized. Attempting to "fix" the marking to market rule by allowing companies effectively to set their own values for assets without reference to any objective, third party source is a further violation of the principle by misleading users with subjective or phony valuations.

The only solution to the travesty of the marking to market rule is to abolish the rule and return to the conservative practice of valuing securities at the lower of cost or market, recognizing gains only when realized by disposal of the assets. Instead, by permitting the federal government to dictate accounting rules for political purposes instead of to reflect reality, and claiming that the market is "broken" and no longer valid for determining just prices, the FASB has tacitly acknowledged that the United States is now socialist.