When we discussed fair value accounting in Module 4, I was very set
against it and believed it gave businesses the tools to manipulate
their books like Enron did (Segal, 2022). After reading Fair Value
Under Fire it reminded me that the intention of fair value accounting
was to make businesses more transparent, but I still think it is
problematic (McCollum, 2008). According to McCollum, in
September 2008 the American Banking Association President
Edward Yingling asked the Securities and Exchange Commission for
fair value accounting guidance to be suspended (2008). Since this
occurred in 2008 this request was likely driven by the housing
market collapse and all the people who went upside-down on their
home loans, so the banks wanted to hide how poorly they were
doing. The request was denied but I think this shows how quick
banks and corporations are to take measures to hide their problems
(McCollum, 2008). I understand that in this case fair value accounting
was causing the banks to be more transparent than they would have
liked.
I understand that fair value accounting helps to show when an asset
that could be sold is valued much higher than the residual value,
investors and management need to know this to make educated
decisions about how to manage their assets. I know that it is just as
important to know when the current value of an asset or investment
is far less than what it was purchased for. I personally think that
businesses should maintain their historical value books and then
present their fair value figures separately. When you compare the
two side by side it provides the investors with the opportunity to ask
educated questions about the financials. For example, Enron had
purchased a new facility and booked it at the value of everything
being up and running and profitable, which may have technically
been okay using fair value, but I think investors need to see in black
and white the differences between the actual profitability of the
facility and the projected profitability (Segal, 2022).
I found it very interesting that human resources risks are typically
not investigated on a regular basis or disclosed with financials
(McCollum, 2008). Items like regulatory compliance are very
important and help to prevent a lawsuit. Talent management and
succession planning are also very important as you never know when
somebody might leave a position suddenly (McCollum, 2008). It is
very important to assess these human resources items when
considering the overall health of a business.
References
McCollum, T. (2008). Fair Value Under Fire. Internal Auditor, 65(6),
13–14.
Segal, T. (2022, February 8). Enron scandal: The fall of a wall street
darling. Investopedia. Retrieved March 24, 2022,
from https://www.investopedia.com/updates/enron-scandal-
summary/
