Sizing up the role of transparency in the financial crisis

Hannah Bergman | Freedom of Information | Feature | September 29, 2008

In the midst of the nation's current financial crisis -- including Monday's historic 777-point Dow drop and Congress's efforts to bail out the financial services industry -- transparency has been a key part of the debate: how much should be disclosed, when and by whom.

Last week, Wall Street blamed its woes in part on accounting rules that require regular release of balance sheet information. To wit: one article on the issue bore the headline, “Wall St. Points to Disclosure As Issue.”

Some experts say the problem is not that banks and other financial services companies are required to give out more data than before, or that they’re not following the rules, but others disagree.

John Snowling, a spokesperson for the American Bankers Association, said the fair value accounting method the banks use does not give an accurate picture of the industry's current financial state -- essentially that disclosure of that data could be misleading.

But others point to the underlying issues of how the balance sheet data was computed and what that means, and say that disclosure of that data is crucial.

“Accounting helped to make this crisis less of a crisis, if that’s possible,” said Charles Mulford, an accounting expert and professor at Georgia Tech University, who favors disclosure of those methods. It gave the public a better read sooner rather than later on the problems banks are facing, he said.

In particular, the method of fair value accounting -- cited as a factor in the collapse of some industry giants -- is taking the heat. But the blame may be misplaced, according to experts such as Edward Ketz, an accounting professor at Pennsylvania State University.

Ketz explained the banks and others are wrong in blaming the crisis on disclosure of new information. What happened, he said, is that there has been an effort in the past year to clean up inconsistencies in accounting rules.

“It’s old information -- the fair value part is mostly an old accounting standard,” Ketz said. The financial institutions are disclosing slightly more, he said, but even that is information they previously compiled.

Mulford pointed out that even with the fair market accounting method, transparency is still somewhat lacking “in the sense that you can’t look at a balance sheet when assets have been securitized and know what is the obligation of the company."

Both Ketz and Mulford discussed a new accounting rule slated to go into effect in 2010 as part of a potential solution. That rule, the two said, would do away with “special purpose entities” and make it more clear from a company’s balance sheet what its obligations were.