Ah, the first week of July: hot summer days, the sound of loud explosions, the sight of things bursting in mid-air before the debris plunges back to earth. Yes, the stock market is putting on quite a show. (Fireworks? Yes, those are exciting, too.)

Wall Street's credit crunch is one year old and the financiers' pain is now yours. The United States is in a full-fledged bear market and is dragging most of the world's equity markets into steep losses. Canada is an exception, but even here the gains have been slim in 2008. If there's a hole in your nest egg today – and, unless you're the wise one who owns exclusively oil and potash, there probably is – who are you going to blame?

Your financial adviser? Maybe. The idiot mortgage bankers who started this? Sure. But don't forget about the accountants. They didn't create the credit mess, but they've probably made it harder for the U.S. economy to climb out of it.

One hates to pick on the accounting profession, a group of (mostly) earnest, well-meaning men and women. So often, though, their good intentions go awry. What follows is a story of unintended consequences that began the last time the accountants were under serious attack – after Enron crumpled like a beer can in 2001.

Enron changed the accounting game because of its size but also because of its sheer complexity. This wasn't sprinkling a bit of gold in a drilling sample. Enron management pulled out all the tricks, twisted and shaped the rules every which way, to move the reported numbers precisely to where analysts said they should be. In the fallout, “earnings management” became the dirtiest phrase on Wall Street.

This had major implications, beyond just the Houston fraud artists who bent the bookkeeping rules in the name of “beating the Street.” General Electric, IBM, Fannie Mae and scores of others were accused of mathematical manipulation. And there are few businesses in which management has more opportunity to massage earnings than in banking. A bank is, after all, a black box of loans and other assets with offsetting liabilities. Only the senior managers know what's inside, and sometimes even they are caught by surprise (see CIBC).

Suppose you owned a small regional bank in the U.S. with $10-billion in loans. The economy's on fire. You look at the books and see only small problems – just $25-million in projected loan losses. Wouldn't you be tempted to take a much larger loss provision – say, $50-million – to pad your reserves for tougher times? Sure you would. You're a prudent person. You know that the business cycle is not dead and that real estate values can go down as well as up. You'll take a larger-than-necessary hit now to save some hurt later on.

Many banks did just that. But A.E. (After Enron), the practice became verboten. You've got $25-million in stinky loans? You book $25-million in losses. We're oversimplifying here, but the point is that the SEC gave bank bean counters less room to “smooth” results.

For a time, this was a bonanza. A lot of banks “released” reserves – that is, they took back some of what they'd set aside and put it back into income. Profits went up, and share prices followed. But now that the economy has turned, the cushion banks once had is looking thin. Recent data from the U.S. Federal Deposit Insurance Corp. show that American banks have 89 cents in reserves for every dollar of “non-current” loans (more than 90 days overdue) – the lowest level in 15 years.

Enron, and the other accounting scandals of the decade, also helped prompt a shift to so-called “fair value” accounting. Behind fair value is a sound idea: That the balance sheet should reflect reality. If a bank buys a pool of mortgages for $100 and the price falls to $90, it generally takes the hit now, not when it sells those securities for a loss later. (Toronto-Dominion Bank has already taken a writedown on loans it will make to fund the BCE buyout – even though it hasn't advanced the money yet.)

“Banks … don't necessarily disagree at a high level with that principle,” says a senior executive at one of the Big Five who spoke on condition of anonymity. The problem, he says, is that for many types of credit securities, the market isn't very liquid. When confidence goes away, as it did last summer, the buyers disappear. If there are no buyers for an asset, fair value believers would say that it's worth zero. But it's not worth zero, because some (even most) of the underlying loans are still good.

The executive's prediction is that the financial bloodbath has been overdone – and some of the tens of billions of dollars in assets written down by UBS, Citigroup, CIBC et al. will later be “written up.” But in the meantime, those banks are starved for capital and they have to pass around the begging bowl (multiple times), and even after they've recapitalized, they're still afraid to lend liberally.

So money stays tight, and the U.S. housing market continues to drop. The real economy suffers and so does your portfolio. See? It's not your fault after all. Pin it on the bean counters and those who decide how the beans should be counted.