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
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
Fair Value and the Erosion of Accounting
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
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.
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.
market valuation is an excellent financial tool—an
excellent economic, analytical tool, for economists
and analysts. Fair market valuation is not an
Donald J. Carroll Jr., CPA