New York Times: ‘Integrity’ and Standard Setting

Floyd Norris is an astute writer at the New York Times—you know something is up when the New York Times comments on accounting issues.

Commenting on the most recent changes to mark-to market accounting rules by the FASB, Norris states in his blog:

“the change came after a subcommittee of the House Financial Services Committee made clear that FASB could be destroyed if it did not knuckle under to the banking lobby.

“Arthur Levitt and Bill Donaldson, two former chairmen of the Securities and Exchange Commission, bemoaned the politicization of the board, but the current chairman of the commission, Mary Schapiro, does not appear to have resisted the political pressure. That is understandable, but not necessarily admirable.”

Barney Frank, the chairman of the U.S. Congress Financial Services Committee stated after the changes were fast-tracked through the FASB rule-changing process that : “The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices.”

Norris questions “Just how was the “integrity of the standard-setting process” preserved by using political pressure to force the board to do something it did not want to do? And how does Mr. Frank know that markets are now producing “inaccurate asset valuations,” but that the banks that created and bought these assets know what they are really worth?

“If the disclosures the FASB will now require really provide useful information, this could be a pyrrhic victory for the banks, much as the win on stock option accounting might have been.”

“Then, as now, those putting pressure on the banks wanted to keep reported profits from being changed by something they deemed unreasonable. But the FASB, in backing down, forced disclosure of what the impact would have been if options were expensed. The information that accumulated helped make it possible for the board to eventually impose the rule it had wanted to pass in the first place.”

“Could it be that these disclosures will work in the same way, by making it clear to those who read the footnotes just how much profits are being pumped up by the banks assuming that they know the real values of assets, even though nobody will pay that price for them right now?”

“In the long run, such disclosures might make it possible for us to track just how right (or wrong) the banks were in their confidence that they knew better than the market.”

“Or maybe my innate optimism is showing, and the new disclosures will not provide much useful information at all.”