CTLR View: Accounting Politicization and Fearmongering - A Dangerous Trend
In Blog at the Controllers Roundtable, Joey Borson writes about the increasing interest of politicians in accounting--quoted verbatim below.
In a Congressional hearing today, Representatives spoke out strongly against 'mark-to-market' accounting, and called for the FASB to suspend or significantly change FAS 157 and the associated standards. When combined with simplistic calls in the popular business press for mark-to-market's suspension (or worse), this represents a disturbing trend which combines populist ignorance about accounting with heavy-handed attempts to involve Congress directly in setting accounting policy.
Ignorance: FAS 157 is not Mark-to-MarketIn most cases within the popular press (and Congress), fair value accounting and mark-to-market are synonymous—and the assumption is that companies must always mark the value of their assets to whatever market prices they can find—even if those markets are completely illiquid, or if the only transactions are fire-sales.
However, the FASB has repeatedly said (and emphasized again today), that FAS 157 and existing fair value provisions within US GAAP do no such thing. Instead, the three tiered hierarchy set out by FAS 157 creates criteria for what to do when there are not liquid, perfectly comparable equivalents—and in those cases, companies are expected to use their own judgment about the best method of valuing those assets—including using internal assessments of cash flow and other financial valuation techniques. Companies are explicitly told not to use fire-sale prices. Indeed, fair value standards already require a 'mark-to-model' approach (combined with clear disclosures about what models and assumptions are used) when a 'mark-to-market' approach is no longer appropriate.
Though the FASB can be (and has been) criticized for not providing enough guidance around determining when there is a "fire sale", and what "illiquid" really means, they have, to their credit, been clear about emphasizing the need for judgment—not just mechanical application—in these valuation exercises. This distinction has been lost by parts of the popular business press (and some legislators).
Politicization: Do We Really Want Accounting To Be Congressionally Defined?The last two weeks have seen the dangerous trend of politicians wanting to involve themselves actively in accounting standards—a sea change from what has been the generally accepted policy of having a very independent standard setting process; the hallmark of US GAAP for many years. At the hearing today, many Representatives implied (or in some cases, overtly stated) that if FASB did not "correct" fair value, they would take matters into their own hands, and set accounting policy through legislation.
This comes on top of a legislative proposal that would strip the SEC of their exclusive power to oversee US GAAP, and turn it over to a new committee which would "approve and oversee accounting principles," and would be chaired by the Head of the Federal Reserve, and include the Chairs of the SEC, PCAOB, and FDIC as well as the Treasury Secretary. This board would be required to consult with the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Federal Housing Finance Agency, the Administrator of the National Credit Union Administration, the President of the National Association of Insurance Commissioners, and the Chairman of the Commodities Future Trading Commission, but would only be encouraged, not required, to consult with the FASB or IASB on setting accounting standards.
In both cases, it is unlikely that accounting will be stripped away from the standard-setting bodies—but even the threat is disturbing. US GAAP depends on the fact that it is a public process, set forth with clear due process periods, and an effect to work with all stakeholders in a clear and transparent manner (hence the long period of exposure drafts, comment letters, and discussion documents which forms the modern accounting standard setting process).
But if GAAP can be set by legislative whim (or legislative "encouragement"), then imagine the accounting standard-setting process resembling the earmark process—with no transparency, provisions set in place for favored industries and constituencies, and a complete lack of due process or cohesive planning. Investors won't stand for that—and accounting, and public companies, in the US will be worse for it.
What's Next? Fair value standards clearly needs (marginal) improvements, and the process-oriented fixes that the FASB and the SEC have recommended are probably the right step in that direction—and when they are not, users should (as they always have done) suggest changes through a formal, public process. But changes should not be put in place by legislative fiat—at least not if we expect the US to maintain a tradition of high quality accounting standards that attracts investors to its capital markets.