Your issue of May 2008 may well stand among the best journalism in our profession, with not only the codification of GAAP (“Framing the Future,” page 40) but a thorough discussion of the late crisis in the subprime mortgage market and the role of accounting there (“The Role of Fair Value Accounting in the Subprime Mortgage Meltdown,” page 34).

Michael R. Young is right on point that the conservative standards of reporting have brought the valuation issue to immediate attention. That is what reconciles both Paul B.W. Miller’s (conservative) fair value accounting of the balance sheet to Eugene H. Flegm’s historical (and inclusive) income statement. The difference, “unrecognized losses” after income from operations, maintains the integrity of both the income statement and the balance sheet. Some competence on the part of the user is necessary to understand this; it simply cannot be “dumbed down” any further.

But, the real issue is brought out quite clearly by Kenneth F. Fick (“Securitized Profits,” page 54) in his final paragraph: FASB will likely “address the removal” of “special-purpose entities.” Enron immediately comes to mind. “Special-purpose entities” are forms to move substance off the balance sheet. SPEs are subsidiaries or related parties which must be included and reported on the balance sheet in the classical manner. When do we learn?

Thank you again for a superb issue, and I look forward to more of the same.

Samuel H. Coppock, CPA
Chandler, Ariz.

The Journal of Accountancy ’s May 2008 discussions of fair value “accounting” (“The Role of Fair Value Accounting in the Subprime Mortgage Meltdown,” page 34), more correctly described as fair market valuation, are interesting. Each opinion on this subject presents a compelling argument.

Fair Value vs. The Audit
Debates on fair market valuation—for years— seem to dissolve habitually into monographs, with each opinion eloquently supporting itself by referring to incredibly detailed, and narrow, facts and circumstances. Yet, debates rarely, if ever, touch upon an overriding concept: the audit.

No matter one’s position on fair market valuation, one assuredly agrees that an audit adds value to financial reporting, that an annual report absent an opinion letter is of dubious value.

The more we add subjective valuations to financial statements, the more we increase audit risk. The larger the risk is, the more questionable the value is.

Simply put, when we increase subjectivity, we decrease value. The application of fair market valuation increases audit risk, thereby decreasing the value of the audited financial statements.

Fair Value and the Erosion of Accounting Ethics
Over the decades, I have seen management— from sales staff to corporate officers— promote questionable policies in revenue and expense recognition to ensure favorable financial results. I have witnessed senior management apply undue pressure on accounting staff to follow these aggressive policies.

I am proud to say that, consistently, I have seen accounting management uphold professional ethics and resist aggressive and unsupportable financial policies.

Professional ethics are supported by detailed standards, regulations and objective criteria. When we replace objectivity in accounting with subjectivity—the subjectivity of market pressures and fair valuations—we erode accounting’s ability to maintain professional ethics.

The CPA
Over time, the designation “Certified Public Accountant” has acquired significant credibility. We have built this credibility by ensuring that our profession is a no-nonsense, objective, exacting discipline, one that is consistently reliable to the extreme. The public, rightfully, demands this of us. Consequently, our responsibilities to the public are unique—not those of economists, investment bankers, mortgage brokers or financial analysts.

Fair market valuation is an excellent financial tool—an excellent economic, analytical tool, for economists and analysts. Fair market valuation is not an accounting tool.

Donald J. Carroll Jr., CPA
Langhorne, Pa.