Proposed revisions by the Financial Accounting Standards Board to the fair value accounting standard would ”gut” the current intent of the rule and allow banks and other financial firms “wide leeway” in how they value their assets just when the market is scrambling to find a bottom, Espen Robak, president of Pluris Valuation Advisors, told Markets Media Wednesday.

Robak said the proposed FSP FAS 1 e (FSP) would help financial institutions, but hurt companies that have been diligent about complying with “fair value” accounting standards.

“Companies that have already gone through the process of determining ‘honest’ fair value numbers for their assets will now have to go through yet-another process, this time to figure out what the FASB meant by their new fair value standard, then shepherd this new valuation through the audit process,” said Robak.

That process could be time-consuming and costly and spook an already skittish market by convincing investors that banks are still not being honest about what their balance sheets hold.

“Then, on top of that, they will pay the penalty, as will we all, when the reliability and consistency of U.S. financial statements is weakened, leading to reduced investor confidence and higher cost of capital for all of us,” said Robak.

Robak said changing well-understood terms like “fair value” and “fair market value” to alternative terms being “thrown around like ‘hold to maturity’ value” can become so “vague as to being able to describe almost any value you want.”

He added that although changing the financial valuation lexicon may work for some firms in the short-term, it ultimately will “make the government’s job actually more difficult going forward” because “if they can’t trust the numbers on bank balance sheets, how can they be sure they will pick the right ones for the [Office of the Comptroller of the Currency] to seize?”

Robak cautioned the although a quick fix provided by changing fair value rules may be tempting, the answer may eventually lay in reducing capital adequacy ratios for troubled firms. “Is the answer to this problem to fudge accounting rules, not just for banks but for the entire
economy, so that banks’ balance sheets look better than current values would suggest they are? Clearly, no,” said Robak. “If regulators wanted to see fewer banks fail, they could ‘lower the bar’ by reducing required capital adequacy ratios. This would be a simple common-sense solution that would not ruin investor confidence in financial statements for the entire economy.”

Pluris Valuation Advisors a New York-based valuation firm specializing in the valuation of restricted securities of public companies, auction-rate securities, stock options, bankruptcy claims and other assets that lack liquidity.