Clarification of accounting rule sparks debate

The Securities and Exchange Commission on Tuesday clarified its position on controversial bookkeeping rules, thrusting arcane accounting practices into the center of the credit crisis debate.

In a statement released late Tuesday, the SEC gave an interpretation of mark-to-market accounting. These rules, put in place in recent years, broadly require companies to write down the value of assets if a similar asset has sold at a lower price.

But the SEC now says banks and brokerages do not necessarily need to write down the value of troubled securities to the lowest prices if the prices are not the result of an orderly transaction between buyer and seller.

This clarification pleases critics of mark-to-market accounting, including some investors and legislators, who claim the rules make some healthy financial institutions look sickly because they hold assets similar to those being dumped at depressed prices by struggling firms.

But critics of the clarification say the SEC is giving financial institutions dangerous leeway in measuring the most basic information investors count on: the value of their assets and liabilities.

"This is a very deceptive statement," says Donn Vickrey, co-founder of market research firm Gradient Analytics. "It turns (the existing accounting rule) on its head and lets you do whatever you want to do again."

Jim Kroeker, deputy chief accountant at the SEC, defended the interpretation in a statement: "The guidance is intended to provide increased clarity related to the practices that may be used to determine an appropriate fair value in the light of current market conditions."

Just as accounting rules took the spotlight during the Enron scandal, mark-to-market accounting is becoming an issue in the current financial crisis.

Mark-to-market accounting is blamed as a sticking point for some Republicans who voted against the $700 billion financial bailout. The Financial Accounting Standards Board, which sets U.S. accounting rules and was consulted on the SEC's guidance, is expected to release more information on the rules this week.

Maureen O'Hara, finance professor at Cornell University, says the SEC's guidance is sound because it doesn't force companies' books to reflect prices set by distressed markets that aren't necessarily accurate.

"These illiquid assets are a serious problem. No one knows what they are worth," says Brian Wesbury at First Trust Advisors. "But they're worth more than the fire-sale prices."

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