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1. Introduction
Fair value accounting (FVA) is a constellation of techniques that periodically revise financial values, particularly those of financial assets such as shares, options, swaps and other tradeable items. This constellation broadly divides into a rigorous “mark-to-market” version of FVA, that uses verifiable market data of-the-moment as a reference point for these updates, for example quoted stock market prices; and an alternative “softer” collection of techniques called colloquially “mark-to-model” FVA, which allow management to estimate and revise the prices of assets using financial mathematics calculations and assumptions about the asset’s future conditions and prospects (see Table I for a further elaboration on these).
The controversy surrounding FVA and the Global Financial Crisis (GFC) of 2008-2009 is well known, at least in outline. According to the banking industry, and some academic supporters, mark-to-market FVA helped spark the crisis by forcing unrealistic asset write-downs that went into a spiral (e.g. Allen and Carletti, 2008; American Banking Association, 2008; Plantin et al., 2008). Financial assets had to be measured at the prices of the moment, during a temporary crisis, rather than allow for a longer-term recovery. Standard setters and other supporters of FVA replied that the banking industry caused the crisis by poor lending practices and that FVA was its scapegoat (Herz, 2008; Laux and Leuz, 2009; McSweeney, 2009; Roberts and Jones, 2009; Tweedie, 2008). Supporters of FVA lost this argument. Following political pressure, in 2009 the mark-to-market version of FVA was curtailed, and the management-estimate based mark-to-model FVA was more easily enabled (Laux and Leuz, 2010). This more malleable version of FVA, though it was intended to be an emergency fix during the GFC, subsists to the present day, eight years after the crisis “ended.” FVA is now 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).
Less well known, and much less reported, is that FVA was also embroiled in an earlier, similar controversy, surrounding the crash of Enron and other corporations, around the year 2001. According to Benston (2006), misuse of FVA was largely to blame for the crash of Enron but that, at the time, it was...