D'Alessandro: fair market value accounting is 'perverse"

This from my morning newspaper:

The same accounting rules that bank executives blame for exacerbating the financial crisis are going to make insurance more expensive for Canadians, says the chief executive officer of North America’s biggest insurer.

Dominic D’Alessandro, the long-time head of Manulife Financial Corp., delivered what he described as a sermon on fair value accounting Monday, adding that he plans to spend his upcoming retirement crusading “to expose the fallacy of these accounting and reporting rules that we’re subjecting our businesses to.”

When the final story of the current financial crisis is written, much of it will focus on the “perverse” reporting and accounting practices that the financial industry, and business generally, “have been saddled with,” Mr. D’Alessandro said at Manulife’s investor day.

Welcome to the club, Mr. D’Alessandro. You are a great ally to have on this topic. Out here in the blogosphere wilderness, some of us were railing on about the idiocy of FMV accounting during the summer of 2007 (from our post “Accountants are failing investors with ‘fair value’ accounting” August 6-07):

If anyone thinks the accounting profession has learned anything following the Enron and Worldcom experiences, they haven’t spent much time thinking about the topic of “Fair Value Accounting.” It would be a trifle more accurate to call it “Fairly Insane Accounting.”

—–

– Funds are required to bring into income profits they haven’t yet earned. Overstating profits and the near term value of their firms.

– Institutional investors are allowed to use their own modelling skills to determine what a CDO is really worth, even if the market has gone “no bid”.

– Companies are permitted to ignore third party pricing and to adjudicate the value of their own assets, even if “the market” is telling them it is worth exactly 43% of what they think it is.

Life isn’t black and white. I’ve long since figured that out.

But the accounting industry has done investors no favours with fair value accounting. Depending on who you are and what the topic is, there doesn’t appear to be any consistency in the theories being applied, nor to the fundamental principles of valuation and transparency.

Key lessons of the last 10 years are being ignored.

Arthur Anderson was sacrificed for naught.

As the blame game starts to take shape on Wall Street, and turns into calls for specific reforms, let’s hope someone delves deeper into this topic, as well. Capping executive pay deductability might make politicians feel better, and win some votes on Main Street, but it won’t fix the lunacy of this topic.

MRM