How FASB Caused the Credit Crisis

One of the most difficult aspects of the current economic malaise to explain has to do with complicated accounting rules dealing with a concept known as fair value. The Financial Accounting Standards Board, or FASB, issued two standards which radically changed the way certain financial transactions were recorded. Traditionally–with few exceptions–assets and liabilities were recorded at their historical cost. FASB Statements 157 and 159 allowed companies to record assets at their fair, or market, value. As early adoption of these standards took place, companies could determine their value based on what the market would pay for them. The problem with this idea is that the market for these securities was created by at least one party to any of these transactions, thereby impairing the independence of the transaction. For a while this method worked just fine, until the markets for securitized mortages and other complicated collateralized debt obligations (CDOs) siezed up. As soon as the market for the assets dispappeared, the accounting rules for them changed dramatically. Assets that were once considered Level 1, or based on “quoted prices in active markets,” were now downgraded to Level 3, where only “unobservable inputs for the asset or liability” exist (FASB Statement No. 157). Companies were forced to rely upon complicated, and often proprietary valuation methods, based largely on “black box” computer models no human could ever hope to understand or explain. Large writedowns result when the asset’s valuation method changes and the certainty of that valuation comes into question. While the market may have allowed for and even encouraged inflated asset prices (yes, we’re talking bubble), accounting rules do not. This is another cause of the substantial writedowns most banks have announced over the last year.

To recap: Bear Stearns announces is has pumped cash into two failing hedge funds. As a result, the market for mortage-backed securities and other CDOs evaporates. Thus, accounting rules for those securities change and massive writedowns ensue. Hence, accounting standards caused the credit crisis.

A Bizarre Approach to Animal Control

“As bomb scares go, this one might be the most unusual for local police.” So opens the Hartford Courant’s Courant.com article about a bomb scare in Simsbury, Conn. It seems that someone in a residential neighborhood was having problems with bears and decided to take matters into his or her own hands. The individual’s solution: stuff a whole roasting chicken with a pipe bomb. Police responded, detonated the chicken, and are now looking for the culprit.

I’ll be sure to follow up with this story, just for the sheer hilarity of writing about pipe bomb chickens.

The ‘Green’ Economy

I’ve recently been hearing a lot more about the green economy. Not surprising, given the changing views on climate change. This new economy could bring about opportunities for Gen Y to couple its entrepreneurial sprit with the awareness and activism the generation has already demonstrated. Just imagine what could be done about climate change if Gen Y put the same energy into innovation that it put into such disparate interests as the presidential race (namely the Obama campaign) and customizing our iPods. And all while exercising our hard-sought-after freedom.

Gen Y Can Reverse the Offshoring Trend

That’s right. According to Ken Gronbach, who spoke at the Connecticut Expo for Business on June 5, 2008, Gen Y has the chance to reverse the trend towards outsourcing. Mr. Gronbach, a futurist and demographer, sees the entrepreneurial nature of Gen Y leading a trend towards small business fulfilling needs that are currently being sent overseas. He cites the fact that “…we have the expertise [and] we have our own homegrown labor force for the first time in 20 years…” as support for the changing trend.

WNPR/Connecticut Public Radio‘s Harriet Jones first reported on this story last week in her piece “CT Expo for Business Optimistic, for the Long Term.”

More information about Ken Gronbach can be found at his web site, www.kgcdirect.com.

Where I Left Off

Last year, I suspended posting by saying I had just been assigned to a new client, which would be keeping my busy. Nearly a year later, I’m trying my hand at this again. The project that took me away from this last year was of the highest level of service (accountant speak for most complicated) offered in my industry: the audit. Audits are rare for my firm, largely due to the cost and relatlively little need among our clients. This year, I will begin this journey again with a new project, of a very different nature. Look for more on this new project in the coming weeks.

It’s back

Last summer, I started a blog of the same name. Then, ADD kicked in. I’m hoping this attempt may have some staying power. Check out the archive to get a flavor of what’s to come.

My Time to Shine

We’ve started work on a new client this week, and so I’ve been busy, hence the dearth of posts. More on that in the coming weeks. In the meantime, check out the August 20 & 27 issue of BusinessWeek, which focuses on “The Future of Work.”

Wasted Time or Professional Development

As I discussed previously, there is a lot of down time in my job, attributable to both my clients and my novice in the industry. This down time requires me to find ways to occupy myself. I spend a significant amount of time reading business publications, but a great deal of time is also spent chatting with my coworkers. While clearly non-billable, I am weary of labeling this time non-productive. Conversation topics range widely, but we generally gripe about bosses, coworkers, and clients. I have learned a great deal about the people in my office from these regular “water-cooler moments.” The quirks and frustrations of the partners are well known to my coworkers, and passing on that knowledge is critical to workplace success. Much frustration in my early days could have been avoided with this knowledge. I’ve learned, for instance, that our elder partner has a penchant for scrambling Excel spreadsheets. Knowing that, I now retain printed copies of documents I send to him. On multiple occasions now, the partner has assigned me a project, I’ve completed it, and he’s then scrambled the spreadsheet; having a copy of my work has saved me from looking completely incompetent. These water-cooler moments have also provided insight into the strengths and weaknesses of different partners. This knowledge allows me to target my questions more effectively to the appropriate partner. In both instances, the down time is clearly productive, even if I can’t charge a client for it.

Clearly, this situation depends on the employees involved. There are individuals in my office who don’t use their down time effectively, preferring instead to waste time checking email and booking vacations. It takes a conscious effort to focus and utilize the free time that is inherent in many offices. Stay focused on the workplace in such instances and you’d be surprised what you might learn about the people around you.

Check out this post from the Movin’ On Up blog for another perspective on wasted time.

When Feedback Should be Required

A few months back, my employer went through the annual rite of performance evaluations. At this point, I had been employed here for five months, four as an intern and one as a staff associate. Needless to say, much of the evaluation was irrelevant. How have I fostered the client relationship? How could I? I’m not a party to client visits and my employer certainly doesn’t have me calling them up to check in. Who are you again?

Needless to say, I had few expectations for my evaluation. Lacking any substantive performance items to review, we discussed my career plans, such as studying for the CPA exam. Then they gave me a raise. (I’ll give you a minute to process that; it made my brain stick when it happened).

Don’t get me wrong, I have no problem with the extra money. But a little explanation would be nice. Even if for no other reason than, “We like you.” Was there something particular to my performance? If so, I’d like to know so I can continue that action. Did they recognize some hidden or underdeveloped potential? Then tell me so I can keep that skill and continue developing it.

This is one of the biggest problems with performance evaluations: they can be very one-sided. An evaluation should be a mutual undertaking for the benefit of employer and employee. When done, both sides should feel like something was accomplished, like some benefit was derived from the whole process. Instead of focusing solely on the employee’s areas for improvement, success should highlighted as well.