After intense pressure from lawmakers and some factions of the financial industry, accounting rulemakers are expected to make it easier for corporate management to value assets on their balance sheets with less regard for market prices. The Financial Accounting Standards Board, which sets U.S. accounting policy, could act as soon as Apr. 2, and many observers expect them to adopt changes cheered by the banking sector. The American Bankers Assn. has supported the provisions but says the proposals may not go far enough in some ways.

The move would make life easier for financial institutions, letting them ride the markets' gyrations with less risk that regulators will demand they raise funds or face closure. But at the same time, it could well cloud investors' insight into how well the banks are really doing. And some observers worry the new rules will also give banks less incentive to cleanse their balance sheets by getting rid of risky assets through the Treasury's new auction program, unveiled late last month.

The fair-value debate
The issue centers on a long-running but normally obscure debate over "fair-value" accounting -- previously the province of financial wonks but now the focus of furious lobbying and heated congressional hearings. At their heart, fair-value principles say asset and liability figures on a company's books should reflect their real-world value&mdash and that, typically, means marking them up or down to market prices whenever possible, on the theory that markets provide the best measure of value.

But banks say the financial crisis has made mincemeat out of those mark-to-market rules: Many securities are trading thinly, if at all -- particularly those backed by residential mortgages and other loans now seen as risky. The trades that do occur close at fire-sale prices that don't really reflect the assets' true value, they argue. Their solution: Let bank management come up with more accurate assessments. And in a fiery House hearing last month, lawmaker after lawmaker drove home the same point to federal regulators and the chairman of FASB. "Don't make us tell you what you have to do," Representative Michael E. Capuano [D-Mass.] warned FASB's chairman in a hearing last month.

Investors counter that, imperfect as market prices can be, they're more reliable -- and certainly more transparent -- than black-box estimates made by management. They say the FASB's proposed technical changes give bank management too much leeway, especially with the strong incentives they have to arrive at too-rosy estimates. The upshot, critics argue: Investors will lose even more confidence in banks' financials, exacerbating the very doubt that has helped drive the financial sector's rout in recent months. "It's downright Orwellian to protect the public. This 'oversight body' would blind them from the mistakes made by financial institutions by making accounting less transparent," Jack Ciesielski, editor of the Analyst's Accounting Observer, fumed on his blog.

Losing dodgy assets
This could be a brief tempest if the Obama Administration succeeds in auctioning off as much as $1 trillion of the dodgy assets weighing down bank books. Once banks are cleaned up and credit markets resume their normal function, market prices will be easier to come by, and presumably more favorable to banks.

But that may not happen if banks suddenly have an incentive to retain their assets in the hopes that markets recover before they have to sell. The new rules "may also result in entities not willing to sell financial assets because they may realize a loss, as it will be more beneficial to carry assets at the higher 'mark-to-model' value," warned the Center for Audit Quality, a nonprofit auditing think tank. In other words, if the rules let banks hold on to the assets without taking a hit to net income for market conditions, they might be less eager to sell now. Selling into a down market, after all, locks in losses -- no matter how FASB tweaks mark-to-market accounting.

"The concern is it's really got the potential to undermine what Treasury's trying to do, which is get the assets off the books," says Jay Hanson, national director of accounting for audit firm McGladrey & Pullen.