Even the mighty...

In case you've missed it, news is going around that the SEC is investigating Buffett's Berkshire Hathaway for irregularities in loss accounting. Here's a link to the news on Reuters.

What's particularly troubling about this news is not that financial firms are still trying to "engineer" their way to greater paper profits, but that a firm like BH, long respected for taking a conservative, cut-no-corners approach to finance would get caught so far on the other side of the line. I don't claim to have a particularly strong command of FASB regulations, but what is at issue is not the fine print. Part of the cultural decay leading to the present financial crisis is the focus on the letter, rather than the spirit, of the law.

For something like mark-to-market accounting for marketable securities, the spirit of the law is rather clear, even to the non-lawyers. Financial institutions have every incentive to manipulate their earnings (e.g. cookie jars, big baths, etc) and it is to the investor's benefit to minimize the leeway with which these firms can choose to interpret their results. For marketable securities, the mark-to-market rules increase transparency as to the underlying financial condition of a financial firm.

For BH, a firm that others look to as a gold standard for fiscally conservative financial management, to hide losses in their portfolio is shocking. For them to come out and defend their handling of this matter by saying, "Berkshire determined both companies had enough earnings potential that their share prices would eventually exceed the original cost of the stock. It also has the ability and intent to hold the shares until they recovered", is just plan sad. This logic is obviously flawed and if other financial firms were to follow BH's lead, it will do away with any of the protections to investors that mark-to-market regulations were supposed to provide.

If leaders want to lead, it's only fair that they're held to a higher bar. Buffett & Co. have claimed for years that honest, old-fashion astute investing is the surest way to build wealth. Along the way, they stood as vanguards to the image that the financial profession is a respectable one. For their sake, and the sake of the rest of the industry, they need to stand up, take their lumps, and steer the company back over to the conservative side of the line.