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Fair value accounng is the pracce of measuring assets and liabilies at esmates of their
current value” (Ramanna, 2020). Historical costs values assets at the costs of their inial purchase
price. Fair value accounng was parally blamed for bad accounng methods that contributed to
the Wall Street crash in 1929 (Ramanna, 2020). In the period from 1930 through the 1970s fair
value accounng “was virtually banned by the U.S. Securies and Exchange Commission
(Ramanna, 2020). It is speculated that the reason fair value accounng is gaining popularity is
due the increase of members on the Fair Accounng Standards Board (FASB) who have “a
background in the 1nancial services industry—de1ned for our purposes as investment banking or
investment management—are more likely to propose the use of fair value methods” (Ramanna,
2020). FASB is responsible for se3ng the standards that companies follow to adhere to GAAP
rules (Kenton, 2021).
I chose the arcle Enron scandal: The fall of a wall street darling
to learn how fair value
accounng contributed to the demise of Enron. Mulple accounng methods were used together
to create a false image of how Enron was doing, the 1rst method employed was fair value
accounng. In 1992 Enron CEO Je<rey Skilling received approval from the Securies and
Exchange Commission to move Enron from historical costs accounng to fair value accounng
(Segal, 2022). This set the stage for Enron to do things like build a brand-new power plant and
book projected pro1ts as real pro1ts even though no money had been made yet. They also
combined fair value accounng with creang “o<-balance-sheet special purpose vehicles (SPVs),
also known as special purposes enes (SPEs), to hide Enron’s mountains of debt and toxic assets
from investors and creditors(Segal, 2022). These methods also were not illegal but were used in
ways that were later deemed illegal. Eventually all the lying and manipulang of the books caught
up with Enron and they 1led for bankruptcy in December 2001 and were banned from the New
York Stock Exchange the next month (Segal, 2022).
The author of the Enron arcle didn't really take a stance on fair value accounng, they just took
stated facts. However, the Why fair value is the rule
arcle I cite in the 1rst paragraph takes a
more 1rm stance against fair value accounng and tries to expose how corrupt it is, and I agree. I
think fair value accounng is another thing that gives corporaons more opportunies to mislead
the public as to what they do and how they operate. If everyone was on the historical costs
method, it would be a lot more diEcult to falsely represent the books. I also do not 1nd it
coincidental that investment bankers and investment managers would be in favor of this method,
it makes it easier for their clients to think they are making money. I think fair value accounng
creates an unnecessary risk, one that is not outweighed by the alleged bene1ts of showing values
at the current market value. Real people are impacted when businesses are run poorly, it isn’t
just the CEO. When Enron went under many people were blindsided when they lost their jobs
and their pensions.
References
Kenton, W. (2021, May 19). Financial Accounng Standards Board (FASB). Investopedia. Retrieved
March 24, 2022, from hGps://www.investopedia.com/terms/f/fasb.asp#:~:text=The
%20Financial%20Accounng%20Standards%20Board%20(FASB)%20is%20an
%20independent%20nonpro1t,accepted%20accounng%20principles%20(GAAP).
Ramanna, K. (2020, October 24). Why "fair value" is the rule. Harvard Business Review. Retrieved
March 23, 2022, from hGps://hbr.org/2013/03/why-fair-value-is-the-rule
Segal, T. (2022, February 8). Enron scandal: The fall of a wall street darling. Investopedia.
Retrieved March 24, 2022, from hGps://www.investopedia.com/updates/enron-scandal-
summary/
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