Should we be nervous about second quarter profits? It's fair to say that analysts have a lot to look at now from an accounting perspective. The perception seems to be growing that all the accounting upside--nothing illegal--may eventually backfire. To take an example, if banks are allowed to book profits when the value of their debt declines, what happens if the value of their debt increases?

While the market was willing to accept at face value the benefits of some accounting moves--including the accretable yield--it may be less accepting this time around. Analysts will also be more willing to back out of the pure accounting effect and focus on operational results. Bloomberg puts it bluntly: "The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are."   

For more:
- here's the Bloomberg article

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