Of course, these critics don't know what they are talking about because Statement No. 157 merely discusses how to measure fair value whenever fair value is required. The Financial Accounting Standards Board requires fair value measurement in Statements No. 15, 63, 65, 67, 87, 107, 115, 116, 133, and 141, among other pronouncements. FASB issued these statements from 1977 through 2001. Before that, the Committee on Accounting Procedure and the Accounting Principles Board issued rules that required the application of fair value measurements. Fair value measurements have been around for decades, so these critics are incorrect when inveighing against Statement No. 157.

As these debates go, being wrong is insufficient for stopping the rhetoric. One should notice that not many peeps were heard during the 1990s when fair value accounting produced huge gains on the income statements. No surprise there, either, for hypocrisy knows no limits when you are trying to escape culpability.

Let's suppose, however, that the critics were right. I am not conceding anything, mind you, merely exploring the possibility. What are the consequences of such a proposition?

The immediate consequence of rejecting fair value accounting is to ponder what would replace it. Seemingly, we would have to return to historical cost accounting because there aren't too many other possibilities. What's wrong with that alternative is that historical cost accounting provides virtually no information about financial instruments until they are settled up, which includes after some of these instruments explode into brilliant colors. I don't think that would help investors much, so we would be at a quandary if we reject fair value accounting.

The larger problem, however, is that the criticism of fair value accounting extends to the management of financial instruments as well as the financial reporting issues. How can you manage a financial instrument if you do not have an idea of what impact it will have on the financial statements during its life and at its maturity? Any executive who buys or sells a financial instrument without comprehending its current value today and estimating its future value is being irresponsible to the firm's investors. Those managers who decry and vilify fair value accounting are confessing that they have committed malfeasance.

It has long been a tenet of management accounting that you cannot manage what you do not measure. If you cannot measure the value of financial instruments or any other vehicle, then you cannot manage them.

A third consequence is that criticizing fair value accounting discloses the hypocrisy of American managers. I found it fascinating, for example, when so many executives opposed fair value measurement of stock options because of the difficulty (some claimed impossibility) of measuring these fair values. Why fascinating? Because those same executives had no difficulty in fair valuing the stock options to obtain a tax deduction.

This business of fair value accounting is a queer business. While fair value accounting does have problems, both conceptual and practical, the arguments that are being put forward have greater deficiencies. One cannot consider fair value accounting in a vacuum, but must consider it as one of several alternatives for use in the financial reports. Likewise, one must confess that the inability to measure fair value accounting is an admission that firms should discontinue their use of derivatives and structured finance because of the inability to manage them. Finally, one wonders why managers did not complain about fair value accounting when it produced gains on the income statements, and they do not complain about it now when it creates favorable tax consequences.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

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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. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) to be published by BNA.