Congressional Accounting Hearings

March 12th, 2009 - 1 Comment

The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises is holding a hearing today to examine mark-to-market accounting rules, which require companies to value assets at their current market value. Many experts in the financial industry contend that these rules are intensifying the current economic crisis by forcing banks to write-down billions of dollars in mortgage-backed securities that will, they argue, eventually regain their market value.

Smeal’s J. Edward Ketz, however, says:

It’s morally reprehensible that Congress is even holding hearings on modifying accounting standards to take into consideration the state of the financial markets and the macroeconomy. In other words, they are considering green-lighting accounting lies if they achieve better economic circumstances.

The purpose of financial accounting is to ensure that managers communicate the results of their companies in an accurate and complete manner so investors can make rational economic, investment, and credit decisions. By focusing on truth-telling, we can allow investors to direct capital to the proper place. This system might involve occasional dislocations, but the system can right itself and find a new equilibrium if enforcement mechanisms exist to motivate truth telling.

We must resist the notion to turn financial reporting into a propaganda system to help political regimes to create the illusion of prosperity.

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One Response to “Congressional Accounting Hearings”

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