At one time I would have smacked myself for saying “Amen, Arthur Levitt!” In a Washington Post OpEd, “Weakening A Market Watchdog: An Accounting Rule Change’s Real Costs,” Levitt observes that FASB’s action on fair value measurement in inactive markets and other-than-temporary-impairment is a first erosion of the independence of the accounting standard setting process.
With the passage of Proposed FASB Staff Positions FSP FAS 157-e, “Determining Whether a Market is Not Active and a Transaction is Not Distressed,” and FSP FAS 115-a, FAS 124-a and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments,” the question many are asking is “has the FASB bowed to political pressure on fair value measurement, compromising investor transparency?”
Many have called for further guidance on mark-to-market accounting in illiquid markets (see discussion of “investor views”), and FASB members had asserted that these staff positions clarify much of the intent of the original standards. However, as Levitt observes, while the theory of the latest FASB staff positions may be arguable (not by him,) that doesn’t resolve his fundamental concerns about (1) responding to Congressional pressure to act quickly, and (2) a rush to action without the typical due process of an independent standards setting process.
In a press conference following the FASB decision, Board members responded to criticism that they had succumbed to political pressure, insisting that due process had been achieved, judging from the number of comment letters received during the two-week comment period. A Board member also defended the FASB’s continued role as an independent standard setter, noting however, that it was not immune to observing the current turmoil in the markets.
The CPA profession has long defended the necessity for independence in the standard setting process. In December 2008, outgoing SEC Chair Christopher Cox appealed to the new administration to understand that:“
Accounting standards should not be viewed as a fiscal policy tool to stimulate or moderate economic growth, but rather as a means of producing neutral and objective measurements of the financial performance of public companies.”
Responding to those who advocate setting aside independence in abnormal periods for quick fixes, Cox stated:
“The truth is that the value of independent standard setting is greatest when the going gets tough. The more serious the stresses on the market, the more important it is to maintain investor confidence.”
FASB Chair Robert Herz made the same argument in 2003, citing the lasting truth of a 1978 Journal of Accountancy quote from Professor David Solomons:
“if it ever became accepted that accounting might be used to achieve other than purely measurement ends, faith in it would be destroyed just as faith in speedometers would be destroyed once it were realized that they were subject to falsification for the purpose of influencing driving habits.”
This plea is being lost, as the U.S. House of Representatives considers a non-independent governmental accounting oversight board under HR 1349 — the Federal Accounting Oversight Board Act. This “regulatory reform” would truly be an expansion of government authority over what has historically been an independent process.
Will the SEC bow to political pressure as FASB may have done? Observers state that application of the new rules will be dependent on whether they are supported by auditors and those who regulate the auditors. As a new administration calls for increased scrutiny of large institutions, particularly the financial sector, and also for relaxing of accounting rules, who will be blamed when balance sheets are overly optimistic? The auditors, perhaps?
Rarely will there be an accounting standard that is perfect for all users, but adequate due process provides the opportunity for all voices to be part of the debate. Opening the standard setting process to political interference does not protect the public interest, but instead provides protection for those best able to exert political influence.