Tom Jones is a British chartered accountant who has worked as a preparer for 40 years, including 20 years in executive roles at Citibank and Citicorp in New York Jones has served as vice chairman of the International Accounting Standards Board (IASB) since its inception in 2001. He was also previously a member of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board (FASB), and of that organization's Emerging Issues Task Force.
He was interviewed by Alan Murray, online executive editor of the Wall Street Journal.
Using Fair Value in Tough Times
Alan Murray: I want to start by talking about what's going on in the economy. We're obviously in the middle of a pretty serious economic downturn. It was precipitated by a credit crisis, and a significant role in mat crisis appears to be, once again, bad accounting. How much do our current problems have to do with accounting problems?
Tom Jones: Well, the usual complaint is that mark-to-market, or fair value, exacerbates credit problems. Obviously, we don't accept that, in the sense that fair values are the disinfectant. I don't think reporting things as they really are is anything other than beneficial to the markets.
But if you think of bad accounting as broader than that, what we do know is that the financial industry, over the last year or two, has created all kinds of highly complex instruments that turn out to be extremely difficult to value in this market. They're extremely difficult to value in any kind of market, because they're so complex that most people appear not to really understand them.
If you haven't been sold on the basis that the liability is going to disappear from the balance sheet - and you have these instruments being assessed by rating agencies that may not understand all the ramifications and are being bought by investors who, perhaps, weren't as discriminating as they should be - I don't think that's really an accounting problem. That's behavior.
Murray: No, but a part of this was the ability of banks and financial institutions to take some of these investments and move them off their balance sheets into special investment vehicles [STV].
Jones: Well, the jury's out on that. A lot of people are raising questions about whether the removal of these things from the balance sheet was legitimate, and you can argue that maybe it wasn't. For example, if someone is given a liquidity guarantee and then takes the entire item off the balance sheet, a liquidity guarantee comes into play only in the worst possible circumstances, and then you're fully liable.
But I don't necessarily think the rules have been broken. We're talking about U.S. GAAP, but IFRS has some of the same issues. I think we're going to have to take a look at the rules and see whether they were appropriate. But it's premature to say that removing STVs from the balance sheet was wrong.
Murray: From a journalist's perspective, it feels an awful lot tike a financial version of Enron. I feel like we're reliving that experience over again in terms of these off-balance-sheet vehicles. We saw what havoc it caused in the Enron situation. Isn't there a problem in allowing it to happen again?
Jones: First of all, I think we should not react hastily. Hasty reactions usually cause overkill and may even do more damage. Second, I'm not sure the comparisons are completely fair. Enron it's pretty obvious in hindsight - was out-and-out fraud.
I think in this case, this is experimentation, and it's experimentation that is well understood by regulators, auditors, and other people involved, though just not understood well enough. I listen to speeches by central bankers saying what a wonderful thing it is that we can disperse these risks across the entire continuum. It probably is, if you think only about the bank's position. But it certainly isn't very smart when you realize you've now lost sight of where the risk is. …