Rather than answering the specific questions that FASB asked in its exposure draft, Mr. Flegm addressed the objectives of fair value measurements. In essence, he commented that if the board wants to help those committed to accounting frauds, by all means continue along this path of fair value measurements.

Flegm sets the stage by acknowledging that FASB was not the primary cause of the financial disasters at Enron, WorldCom, Adelphia, HealthSouth, Global Crossing, or the myriad other artists of accounting wizardry. Rather, the primary cause of those disasters is the general decline in the ethical values in the past 30 years.

While Flegm merely asserts this reason, I think it quite defensible. For proof, I offer the following:

Consider the defensive driving of yesteryear with the aggressive driving of today; contrast the previous concern by teachers for students' chewing gum in high school with their concern today about students' having guns in class; think about today's prevalent acceptance of cheating on one's income taxes; reflect on the money given under the table to today's collegiate athletes; and contemplate the widespread cheating in schools (according to recent surveys, about two out of three students confess that they have cheated during their college years).

Within this moral vacuum, business ethics have declined and so have accounting ethics. The accounting scandals unambiguously demonstrate a prima facie case for this proposition. Given what has happened in our society, why is anyone surprised at the decline in business ethics?

Having said this, Flegm posits the existence of several enabling factors. First is Congress, which did not supply the Securities and Exchange Commission with the resources to battle accounting miscreants and which allowed the Glass-Steagall Act to come to an end. The latter omission by Congress increased the power of investment banks and created countless conflicts of interests, which led a number of them to enable Enron to hide accounting losses with its special purposes entities. To Flegm's list, I would add the so-called 1995 and 1998 securities litigation reform that removed various disincentives for managers to lie and cheat in financial reports and the various idiotic attempts by Congress to prevent accounting reforms by FASB.

After considering these broader forces, Flegm turns his attention to accounting. He states that two enablers within the realm of accounting are "the steady move to fair value accounting by the FASB and the decline in professionalism." (The best discussion about the latter subject is a speech by Art Wyatt. I discussed this topic in my column, Wyatt's Call to Return to Professionalism.)

With respect to the concern over fair values, Flegm claims that the problems "began with the conceptual framework. The Trueblood committee dealt with not only an economist's world but a utopian one as well. They never took into account that a certain percentage of people are dishonest…" Accounting theory should deal with people as they are and quit pretending that everybody is moral and upright.

The fundamental flaw of fair values, according to Flegm, is that they are unauditable, particularly the fair values of intangible assets. Accounting and auditing promulgations "place more and more pressure on the accountants and auditors to judge values without any solid basis for such an evaluation." The external auditor, in particular, is put in the untenable position of assessing management's estimates of fair values without any idea of what amount is approximately correct. One person's estimate is as invalid as another's.

FASB likely will ignore Flegm's comment. Indeed, the board has become more or less immune to criticism as it lives in some toy universe in Connecticut. But, in the real world, investors must worry about the scruples of corporate managers and directors. After all, investors do not know which managers are ethical and who are crooks. Fair value measurements exacerbate the problem because they make it virtually impossible to discern the honest from the dishonest executives until it is too late.

Accounting frauds are here to stay thanks to the decline of ethics in our society, thanks to the Congress for hampering the enforcement process and for passing legislation beneficial to accounting swindlers, and thanks to FASB for fair value measurements.

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J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals.