Accounting Horizons

THE SUMMARY OF “FAIR VALUE ACCOUNTING”

The historical cost principle has always been viewed as the foundation of accounting in the United States. However, a combination of efforts by the FASB and IASB to converge U.S.GAAP with IFRS, in addition to increased demands for more relevant financial data by investors, has created a transition towards valuation based accounting. The first major set of GAAP standards issued that fully reflected the efforts of the convergence project was the creation of SFAS 157 & 159.

Though fair value accounting was established to improve the usefulness of information in the financial statements, there is no doubt that a toll has been taken on auditors. Without properly understanding how to value inactively traded mortgage assets, some professionals believe that the auditors helped facilitate the credit crisis. While this accusation may be harsh, it again draws attention to the plethora of challenges facing the field.

In the opinion of the authors, the FASB, the PCAOB, and the IASB did not fully anticipate the ramifications that expanded use of fair value accounting could have on the auditing industry. The cases of alleged ordinary negligence prior to the enactment of FAS 157 & FAS 159 should have been a warning sign that it may be too soon to force the expanded use of fair value accounting on auditors and accountants alike. While an outright IFRS adoption is not expected to occur in the U.S. until at least 2014, these difficulties have had ripple effects throughout the industry. Although increased transparency is positive in the long-term, adequate time for training should have been allowed. Based on the research results and the authors’ opinions, the credit crisis was the financial industry’s own doing and not the auditors.

Major questions to consider are: should the auditors have issued an adverse opinion or disclaimer when there is no market for a particular asset or liability? Is the fair value lower of higher than...