I see from CFO.com that Charles Mulford, a professor of accounting at Georgia Tech thinks that FASB 161 will help avoid the obfuscation that characterized Enron’s public financial statements. I hope he’s right but I doubt it.
The perennial problem with derivatives is fixing a valuation upon which an auditor can rely. To quote from CFO:
To be sure, the standard changes nothing about the accounting for derivatives. But it does make the often-cloudy reporting of them much more transparent to the users of financial statements, Mulford thinks. "With these tables, derivatives can’t be hidden from view in a way they were on, say, Enron’s balance sheet and income statement," he told CFO.com. "Investors will be better able to assess the contribution of derivatives to earnings and financial risk, and in the process, they’ll be better able to judge earnings sustainability."
I’m not sure how this works. Trying to understand the way in which instruments are supported by counterparty transactions has been a devil of a job for all sorts of reasons.
Each underpinning transaction requires analysis and assessment yet each carries specific risks that are not immediately obvious. How an average investor is supposed to make sense of this is beyond me when in reality, derivatives are little more than a bet placed in a sophisticated casino.Â
Tags: derivatives, audit
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