Wednesday, September 24, 2008

The Economy: What Do We Say When Asked?

Over the last few weeks, the subprime issue has escalated into a wide-reaching credit crisis that will change the economic landscape. Both the MSCPA and AICPA have received some inquiries from the media.

The AICPA and MSCPA suggest that when asked we focus on the following message points:
  • The subprime crisis was caused by complex market economics: a housing bubble, unscrupulous lending, borrowers with bad credit, and excessive leverage and risk-taking by major Wall Street banks that led to a cascading domino effect when subprime defaults created losses. The situation we now see unfolding largely points to a systemic problem on Wall Street. As in the past, we caution against a rush to judgment or the comfort of easy answers.
  • The CPA profession has worked with regulators and issuers to improve the quality of financial reporting in the U.S. broadly under Sarbanes-Oxley.
  • Fair value accounting is an appropriate model for measuring asset values. There is a debate over its application and the SEC and FASB are weighing whether additional guidelines are necessary. The American Bankers Association has proposed changes and the accounting profession is participating appropriately and constructively in that dialogue. We will continue to work to protect investors and provide the markets with timely, important and transparent information on these difficult financial instruments. We will also welcome any additional guidance from regulators on assessing inactive markets.
  • In October 2007, the Center for Audit Quality issued a series of white papers to “articulate certain existing accounting practices and requirements of GAAP literature related to the specific issues addressed, with the intention of helping auditors understand the application of existing GAAP in the context of illiquid market conditions.”

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