Mark-to-market Accounting: “True North” in Financial Reporting

By Walter P. Schuetze,
edited by Peter W. Wolnizer

Published by Routledge; 2003;
ISBN 0-415-29955-1; 348 pages (hardcover); £75

Reviewed by Robert H. Colson

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JUNE 2006 - Depending on the audience, “fair value accounting” is either the most controversial aspect of modern accounting or the most highly desired result of FASB’s current standards-setting project, which is soon to be converged with international standards. Even with the buzz surrounding fair value accounting, however, it’s remarkable how many people have not understood the extent of the change that took place in 1982 when FASB adopted a conceptual framework that shifted the financial accounting paradigm from revenue recognition and expense matching measured at historical cost to asset and liability recognition measured at fair value. College students continue to tell me that they learn revenue recognition and expense matching measured at historical cost in their accounting courses.

This collection of articles, speeches, and letters sheds considerable light on the modern development of fair value concepts. Walter P. Schuetze—a founding member of FASB, a chief accountant at the SEC (the first to come from accounting practice), a chief accountant at the SEC Division of Enforcement, and an engagement and national office partner at KPMG—presents his case for fair value accounting in a compelling and interesting narrative. Peter W. Wolnizer, dean of the business school at the University of Sydney, Australia, summarizes and provides context for the 47 pieces collected in this volume.

In 1982, few would have anticipated the pervasiveness with which fair value would permeate accounting thought by the start of the 21st century. Most accounting thought-leaders at that time understood the conceptual framework as laying the groundwork for stating financial instruments and marketable assets (real estate), at their current market value, a step seen by many as a responsible reaction to the savings-and-loan crisis. Few would have considered it possible, or even desirable, for goodwill and other nonseparable intangibles to have fair values. Indeed, fair value by appraisal or by model would not have been popular among even the staunchest fair-value proponents.

Schuetze began developing his ideas about fair value in the late 1950s, while working on oil and gas company mergers for the accounting firm of Eaton & Huddle in San Antonio, Texas. Allocating historical cost numbers didn’t make sense when what really interested capital suppliers (investors and creditors) was the current market value of oil and gas reserves. The value of the reserves drove the acquisition price, and, because it was a known amount, Schuetze reasoned that it would be preferable for investors and creditors to simply do the accounting on that basis.

There are interesting parallels between Schuetze’s ideas and those of the Australian accounting theorist Ray Chambers. The connection between Schuetze and Chambers is also reflected by Schuetze’s choice of editor: Wolnizer was Chambers’ PhD student at the University of Sydney. Ray Chambers spent several weeks at Ohio State University in the mid-1970s as part of his tour as the American Accounting Association’s distinguished lecturer in accounting. Chambers presented and argued his concepts of current cash equivalents (CCE) and continuously contemporary accounting (CoCoA) before audiences generally committed to historical cost as the sole foundation for accounting. Chambers’ view of the world was sharper than most, his charm and persuasive abilities were unparalleled, and the correctness of his views was not seriously challenged. Although Chambers was a preeminent accounting theorist, his views on current value accounting, like Schuetze’s, arose from practical experience: the responsibility to allocate capital to businesses involved in Australia’s war production during World War II.

Both Chambers and Schuetze developed approaches to financial reporting that adopt current market value as the measurement base, but both also held a much narrower view of what counts as an asset or liability in accounting than does FASB, which currently defines them in terms of “probable future benefits or sacrifices.” Schuetze defines assets as items that a company can exchange in a market as of the balance sheet date. Liabilities are defined as legal obligations as of the balance sheet date. Both are measured at their current market selling or settlement amounts as of the balance sheet date. Chambers’ and Schuetze’s systems are accounting systems rather than valuation systems, so the emphasis tends toward ex post scorekeeping about management activity rather than toward ex ante valuations of the entity’s net equity.

Wolnizer organizes Schuetze’s writing into three parts: accounting for assets and liabilities; the implications of accounting practices for auditing; and accounting standards setting and regulation. Several themes recur throughout:

  • Accounting’s purpose is to inform investors’ and creditors’ decision making. Regulators and standards-setters should ensure that general purpose financial statements reflect this “capital markets perspective.”
  • Both investors and creditors are best served by simple, relevant, and transparent accounting about assets and liabilities, where assets are defined in terms of their exchangeability and measured at current market selling prices, and liabilities are defined in terms of legally enforceable claims measured at current settlement prices. Schuetze characterizes this approach as “accounting that my sister would understand.”
  • Auditors should bolster their professional skepticism by carefully guarding their social interactions with clients.
  • Auditing’s proper role should be to gather competent evidence about the valuations of assets and liabilities from the marketplace, independently of management.
  • The SEC should require mark-to-market accounting and the disclosure of the providers of the market-price data in financial statements.

Schuetze adds a brief autobiography. His roots come from a Depression-era farm in Texas, where his family owned property but cash was scarce. He received his accounting degree from the University of Texas at Austin after a tour of duty in the Air Force during the Korean Conflict. Eaton & Huddle merged with Peat Marwick, and Schuetze moved to New York to be part of his new firm’s department of professional practice. He left to go to FASB, and KPMG rehired him when he left. He was the SEC’s chief accountant from January 1992 until his retirement in March 1995, but he returned in November 1997 to become chief accountant of the Enforcement Division, where he stayed until February 2000.

Wolnizer provides an overview of Schuetze’s writings at the beginning of the book, as well as brief introductions to the principal themes of each of the three major sections. Schuetze’s essays on accounting for stock options and on internal control audits offer provocative dissenting viewpoints on the commonly accepted approaches to these topics. Schuetze presented his arguments against internal control audits (not because they are too costly, but because they won’t achieve the desired results) in the 1993 CPA Journal symposium titled “In the Public Interest.” And, of course, employee stock options do not become liabilities in Schuetze’s accounting system until the employee exercises them.

Mark-to-market Accounting is very readable. Schuetze’s writing style reflects his convictions: It’s simple, relevant, and transparent. He makes excellent use of his own experience and of examples drawn from that experience. There is never much doubt about what he means or what he values.

His critical eye is cast in his own direction, too. Schuetze was the primary author of SFAS 5 while a member of the board in the 1970s. The SEC Historical Society conducted an interview with Schuetze as part of its oral history project (see, and in it Schuetze mercilessly tears apart SFAS 5 as an example of a standard based on principle but impossible to implement.

Robert H. Colson, PhD, CPA, is a partner of Grant Thornton LLP. From June 2000 to August 2005 he was Editor-in-Chief of The CPA Journal.





















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