FASB Succumbed to Political Pressure: High Powered Investment Committee

An advisory panel of investors has accused the US accounting standard setter of losing its independence after it succumbed to political pressure over mark-to-market accounting changes in a fiery letter.

The group said the Financial Accounting Standards Board should have fought off pressure from politicians and lobbyists who sought special treatment for banks with toxic assets on their books.

The panel, the Investors Technical Advisory Committee was set up by FASB to act as a barometer for investors on accounting rules.

The group said the governance structure of the Financial Accounting Standards Board has been "insufficient" in fighting off pressure from special interests and politicians seeking more flexibility for banks with toxic assets on their books, and asked that the FASB board be restored to seven members from its current five.

The panel, called the Investors Technical Advisory Committee (ITAC), was set up by FASB to give investors' perspectives on accounting rules.

Its members include 13 investment professionals from suchorganizations as the Council of Institutional Investors and the CFA Centre for Financial Market Integrity; a former regulator; and analysts from Moody's, Standard & Poor's, Goldman Sachs & Co, J.P. Morgan Securities and CALPERS, the California Public Employees' Retirement System.

The said it had "grave concerns about what we believe to be a substantial erosion in the independence of the accounting standard setting process."

The group questioned whether "weaknesses" in FASB's structure and governance would undermine the quality of accounting rules issued by the board in the future.

The Committee said in the letter that it believes that poor transparency in accounting is partly responsible for the lack of investor confidence during the financial crisis and that FASB's inability "to assert its independence in the face of onslaught" was "exacerbating" the current problems.

"Many investors responded negatively to the reduced quality of information, as reflected in their investment decisions, but that response cannot compensate for the loss of information and, perhaps more importantly, the loss of trust and confidence in financial reporting and accounting standard setting," the group wrote.

To help FASB better fend off political attacks, the advisory panel urged the Financial Accounting Foundation to reverse changes made to its governance structure last year. It asked that the five-member board be restored to seven members, with the two additional members coming from investor groups.

The group also said because of "very public threats and intimidation" by Congress against FASB's chairman, another of the recent changes -- giving the chairman sole authority over what accounting projects end up on the board's agenda -- should be reversed.

In February 2008, the foundation downsized FASB and increased the chairman's power, saying the changes would help U.S. and international accounting standards converge. But plans to have U.S. companies switch to International Financial Reporting Standards as soon as 2014 are now being reevaluated by the U.S. Securities and Exchange Commission.

The investor advisory panel said in its letter that while FASB's governance issues were troubling, the situation "appears to be if anything even more dire outside the U.S." as the London-based International Accounting Standards Board has also faced threats from regulators and politicians abroad.

From Accountancy Age and Reuters