Enron was an omen of dangers of fair value rules

A letter from Prof Mike Page of Portsmouth University in today's FT argues for suspension of the fair value rules. The letter stands out against the current of interested preparers and users striving to maintain the existing rules. IASB has promised to look at classification of financial instruments, but this is no substitute for a more radical reappraisal of the role of financial reporting in regulation.

From Prof Mike Page.

"Calls for the suspension of marking to market and fair value rules should be supported, not because the rules were the cause of the crash, but because they were the cause of the bubble that preceded it. In bending the knee before the illusory power of the market, accounting standard setters have ignored the unintended consequences. Marking to market was an invitation for operators in financial markets to make up numbers and pay themselves accordingly. Enron was a warning of what could happen. We know market prices are highly variable and accounting standard setters should now acknowledge that the role of accounting is not to mimic market prices but to provide a more reliable alternative.

Apologists for marking to market say there is no alternative, since it is impossible to calculate the intrinsic value of some instruments. If this is the case, what were institutions doing buying instruments for which they had no idea of the intrinsic value?

In the wake of this crisis the International Accounting Standards Board and US Financial Accounting Standards Board need to acknowledge, through their joint project to create a conceptual framework for financial reporting, that it is the function of financial reporting, not to pander to the markets' whims, but to create a sound basis for evaluating the stewardship of management and preventing opportunistic behaviour."