A Blind Spot of Banking Regulation: Level 3 Valuation and Basel Risk Capital

Mohrmann, Ulf; Riepe, Jan

doi:10.2139/ssrn.2247536

Cited by 2 publications

(4 citation statements)

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“…Assets must be recorded at the prices of the moment rather than wait for an "expected" recovery Mark-to-model FVA is criticized for allowing management to manipulate values by using questionable and malleable assumptions of future conditions FVA may be more relevant than HCA but it is not necessarily more reliable The "value relevance" to investors of FVA numbers has not been established by academic studies (See Allen and Carletti, 2008;Holthausen and Watts, 2001;Plantin et al, 2008;Watts, 2006) Table I. Rival measurement systems 26 AAAJ 31,1 being criticized because it allows corporate managers to manipulate more freely, and to hide losses on failed assets (Glaser et al, 2013;Jarolim and Öppinger, 2012;Milbradt, 2012;Paananen et al, 2012).…”

Section: Fair Value Accounting (Fva)mentioning

confidence: 99%

Enron, fair value accounting, and financial crises: a concise history

Haswell

Evans

2018

AAAJ

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Purpose While the debate about fair value accounting (FVA) and the global financial crisis (GFC) of 2008-2009 has been explored in the academic and professional literature, there has been little debate about the consequences of FVA being implicated in the crash of Enron around 2001, and the effect of this on later FVA developments and the GFC. The purpose of this paper is to examine how well regulators, political actors, and other commentators may have understood the use, misuse, effects and consequences of FVA at the time of Enron, and to examine how this collective understanding (or lack thereof) has influenced later accounting policy, especially that going into and arising from the GFC. Design/methodology/approach Using content analysis, the commentary about FVA is traced through documents, primarily the US Congressional Hearings’ examination of the collapse of Enron that took place between December 2001 and December 2002. An assessment of the knowledge of and attitudes toward FVA is made from these and is then traced through later developments including policy responses before, during and after the GFC. Findings Links are found between the collapse of Enron and adjustments to FVA in the mid-2000s, which in turn became implicated in the GFC. These linkages are explored in the context of a fair value world view held by global standards setters in the mid-2000s. During the timeline from the 1990s to the mid-2000s, those advocating and adopting FVA as part of this world view, may have had collectively an insufficient understanding of the consequences or effects of FVA technology. Originality/value The study provides evidence of a direct link between Enron, the response of global standard setters, and the GFC controversy.

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Section: Fair Value Accounting (Fva)mentioning

confidence: 99%

Enron, fair value accounting, and financial crises: a concise history

Haswell

Evans

2018

AAAJ

View full text Add to dashboard Cite

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“…The FASB responded to increasing pressure from politics and bank lobbyists by issuing FASB Staff Positions SFAS 157-3 and 157-4, which clarify the use of Level 3 valuations (see Botosan et al (2011) for an overview of the debate). Glaser et al (2013) show that both Big-4 audit firms and audit firms that are not a member of an international audit network restrict the use of Level 3 valuations. While the Big-4 have high reputational risk, smaller audit firms lack technical knowledge to audit internal valuation models (Martin et al (2006)).…”

Section: Fair Value Hierarchymentioning

confidence: 96%

“…This research relates to literature on the use of fair value accounting in general (Benston (2008); Landsman (2007); Laux and Leuz (2009), (2010); Penman (2007); Ryan (2008); Shaffer (2010)), the value relevance of fair values (Goh et al (2009); Kolev (2008); Song et al (2010)), and regulatory consequences of the use of fair value assets (Glaser et al (2013)).…”

Section: Introductionmentioning

confidence: 99%

“…We use the model of Bhat et al (2011) to estimate the liquidity of the mortgagebacked securities market. Specifically, we use the residual of the following regression as our liquidity measure: CMBS_RET m =β 0 +β 1 CS_RET m +β 2 R_RET m +β 3 TB_RET m +ε m return of the BBB collateralized mortgage-backed security index from the Barclay Bank; CS_RET m = monthly-return of the Case-Shiller 20 city composite home price index; R_RET m = monthly-return of the U.S. Datastream residential REITS index; TB_RET m = monthly change in the yield of constant-maturity, 30-year U.S. treasury bonds.As additional control variables, we use the industry expertise of the auditor, a dummy variable indicating a new auditor, and the book value of mortgage-backed securities(Botosan et al (2011);Glaser et al (2013)).…”

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confidence: 99%

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Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures

2013

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Although the role of auditing is to increase the reliability of financial statements, surprisingly little is known about addressees' perceptions of the auditor-client relationship. Using a sample of more than 1,000 U.S. bank-years from 2008 to 2011, we analyze the economic consequences of the joint announcement of audit fees and the level breakdown of fair value assets. We confirm prior findings that audit fees are higher for banks with larger proportions of Level 3 fair values. Moreover, we find that the market perception regarding fair value assets depends on the extent of managerial discretion in the estimation process. Most importantly, we find evidence consistent with the notion that addressees' interpret abnormal audit fees as an indication of additional risk. Thus, unexpected audit fees are not interpreted as a signal for a more reliable audit, but further increase the market discount on Level 3 fair values. Bank managers have to consider these negative consequences in their reporting strategy.

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A Blind Spot of Banking Regulation: Level 3 Valuation and Basel Risk Capital

Cited by 2 publications

References 1 publication

Enron, fair value accounting, and financial crises: a concise history

Enron, fair value accounting, and financial crises: a concise history

Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures

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