Fair value accounting is the wrong scapegoat for this crisis

The ongoing financial crisis has spurred much finger-pointing at fair value accounting for financial instruments, as set out in both leading sets of accounting standards used by listed companies around the world, namely US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS). Prominent financial leaders such as Martin Sullivan, CEO of AIG, and Henri de Castries, CEO of AXA, have singled out fair value and the related wide use of mark-to-market accounting as a major factor in the crisis1. Echoing these views, European Commissioner Charlie McCreevy expressed his concern on 1 April this year about the ‘impact of mark to market valuation when markets generally become illiquid and irrational’2.