November 10, 2008 / 6:56 PM / 11 years ago

Audit watchdog weighs more fair value guidance

SAN FRANCISCO (Reuters) - The audit watchdog agency is considering issuing additional guidance on fair value accounting, which banks have blamed for forcing them to report dismal results, chairman Mark Olson told Reuters on Monday.

Public Company Accounting Oversight Board Chairman Mark Olson makes remarks at the Reuters Regulation Summit, in Washington, February 7, 2008. REUTERS/Mike Theiler

Olson, who leads the Public Company Accounting Oversight Board (PCAOB), said U.S. accounting regulators need to keep examining consequences of the standard, but lawmakers should not get involved.

Fair value accounting requires assets such as mortgage-backed securities to be valued at market prices. It has been blamed for billions of dollars in writedowns by some U.S. banks. Accountants say the approach gives investors a clearer window into banks’ balance sheets.

Olson said fair value accounting, also known as mark-to-market accounting, is difficult to apply in current market conditions when there is no market for some mortgage-related assets.

“We’re looking at how fair value accounting is standing up to the stresses of today’s economy,” Olson said. “We’re looking if there is a need for additional guidance.”

Olson said the guidance the PCAOB issued last year on fair value accounting is “still solid”, but gaps in auditors’ understanding of how the standard should be applied may remain.

The 2007 guidance gave auditors more information related to disclosures and fair value measurements. Olson said he did not know yet what additional guidance might look like.

Accounting regulators such as the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board need to keep discussing the effects of fair value, he said. Late in September, the SEC reminded financial services firms that it was unnecessary to use fire sale prices when evaluating hard to price assets under fair value accounting rules.

Olson said he is “agnostic” about the validity of fair value but warned against a radical change to the standard.

“In times like this, we don’t look for major change,” he said. “(Changes in fair value) can mean millions or billions of dollars of difference in balance sheets or earnings results, so the stakes are pretty high.”

Some Republican lawmakers are calling to suspend fair value accounting standards.

But Olson said it is not Congress’s place to set accounting standards. “It takes a long time to pass laws, and accounting and auditing standards move very rapidly,” he said. “If they’re locked into statute, they would be very difficult to adjust.”

Looking forward to regulatory reform under a new administration, Olson said, “Everything’s on the table” as far as restructuring.

“Every regulator’s role will be considered. We’ve never been in an environment like this,” he said.

Olson, a former Federal Reserve Board governor, said the Fed could get an expanded role because of confidence in the institution and in the measures it has taken to bring more stability to the credit markets.

The Fed and U.S. Treasury Department boosted bailout aid to giant insurer American International Group (AIG.N). The Treasury Department’s Troubled Asset Relief Program (TARP) will buy $40 billion of AIG stock to maintain stability in the financial system.

“I think the lender of last resort role has become very dominant,” Olson said. “I don’t know what the future role of the Fed will be, but it will be major.”

Editing by Leslie Gevirtz

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