The Fair Value Challenge: The Real Challenge for the PCAOB, Auditors, and Financial Analysts

Implications: The real challenge for the PCAOB, auditors, and financial analysts is not the lack of expertise.  The real challenge is twofold: 1.    The user of financial statements must be educated and revise their expectations. 2.    The US legal system must adapt.

Analysis: The dialogue between Professor Miller and Sarah Johnson is intriguing.  However there needs to be additional points.

First, I agree with Professor Miller about the lack of expertise.  Such a point is not justification for avoiding fair-value or value based information.

Second, I also contend that accountants deal with fair value everyday.  Accountants constantly benchmark current value with approaches such as lower-of-cost-or-market and impairment.

Third, because of the litigious US society, accountants are conservative and rely on historical cost measures.  The quickest way to get sued is to overstate value.  Thus when they look at value, US accountants will write-down historical cost when it overstates fair value.  What US accountants will not do is write-up an appreciating asset. 

Fourth, I am somewhat perplexed with the "us versus them" attitude many take in this debate.  The purpose of accounting is to provide useful information.  In reality, the financial disciplines are not discrete, but a continuum.  Accounting, finance, and economics are all tied together in the process of measuring and creating value. 

Fifth, the discussion about fair value accounting adding risk is unfounded.  In reality, user uncertainty is elevated when the information they use (e.g., historical cost) is insufficient and does not reflect economic reality.  The challenge is creating an educated user of financial information.

In summary, the only thing holding the US accounting profession back from embracing value-based measurement is the need for educating the user and legal reform that inhibits unjustified lawsuits.  That's my opinion.