February 12, 2009
Accountants Count What Is Easy To Count
We have a problem. There exists a major player in the economy that gets to rig the rules for their benefit and their benefit alone. It comes at major cost to every single person in the economically advanced world...
And you thought the answer was bankers.
The FASB (Financial Accounting Standards Board) is a group of accountants who get to set the rules for GAAP (Generally Accepted Accounting Principles.) Imagine if bankers elected a panel of bankers to be the Senate.
They've stuck us with mark to market accounting. The idea of this issue seems so obvious on the surface. If there is a market price for an asset, and your business holds such an asset, then you have to value that asset at the market price. Of course that doesn't consider the actual cash flow of the asset or a lack of liquidity in the market for that asset. Why not you might ask?
Well, accountants regulating accounting would like to make sure its easy for them to take no responsibility for figuring out what something is worth. Why not rig the rules so the audit is easy and the securities plaintiff's bar can't sue you?
Brian Wesbury writes a decent essay explaining the mark to market issue. What surprises me is that academic economists I otherwise respect (paging Russ Roberts) seem wedded to mark to market. These are the sorts of folks who normally ask what incentives the rulemakers face and they don't seem to be thinking through FASB's incentives on the issue...
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