BLOG VIEW: About The FASB Capitulation

Written by Phil Hall
on May 04, 2009 No Comments
Categories : Blog View

lier this month, the Financial Accounting Standards Board (FASB) announced it was changing FAS 157, its mark-to-market accounting rules. [/b]For the most part, FASB decisions rarely register a blip outside of the accounting world. However, this change created an interesting bit of seismic activity – not so much because of the details in the new language surrounding FAS 157, but because of how these changes came about. For starters, FASB's decision clearly did not come about independently. It is no secret that certain segments of the financial services industry and some members of Congress were putting pressure on the FASB board to soften up FAS 157. On March 12, members of the House Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Entities put their cards on the table: Either FASB would address the issue of fair-value accounting or Congress would intervene and take charge of the issue. Five days later, a draft of the proposed FAS 157 changes was put forth by FASB. That created a storm without precedent in FASB's history. The American Institute of Certified Public Accountants (AICPA), an organization that is not known for stirring controversy, took an unprecedented step in publicly questioning FASB's reaction to the outside forces that agitated for FAS 157 changes. In a statement released to the media, AICPA president and CEO Barry C. Melancon said, ‘Independent, private-sector standard setting of accounting is critical to a free-market economy, and everyone involved in the financial reporting system should be committed to that principle. We unequivocally support FASB's continuing independence.’ The Investors' Working Group was also perturbed about the pushed-around FASB, calling the turn of events ‘unacceptable.’ Dr. J. Edward Ketz, an accounting professor at Pennsylvania State University and editor of the four-volume ‘Accounting Ethics,’ was more blunt. He blogged that April 2 (the date of the FAS 157 ruling) was a ‘day of accounting infamy’ and demanded that Robert Herz, FASB's chairman, resign in the face of ‘cowardly acts’ that he claimed ‘would allow distortions, massagings, and manipulations of the U.S. financial reports.’ Ouch! At the moment, there is little reason to believe that the changes to FAS 157 will have significant impact on speeding a resolution to the ongoing crisis. Standards & Poor has already acknowledged its lack of impact by stating FASB's decision will not have any effect on how its ratings are determined. The subject was not front and center at the recent Mortgage Bankers Association National Secondary Market Conference – the suffocating state of warehouse lending dominated the majority of the talk at that gathering. In the ultimate scheme of things, the situation surrounding FAS 157 may actually do more harm than good. FASB's reputation has been weakened through its compliant reaction to outside pressure. Likewise, Congress – which has mostly been inefficient, if not clueless, throughout the course of the crisis – deserves the reputation of being a nasty bully that picks on an entity considerably weaker than itself. As for the financial institutions, it is uncertain what effect the new FAS 157 guidance will have after the current crisis is over and normalcy returns – one could argue that it would be the equivalent of continuing to take antibiotics long after the infection has disappeared. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]. [i] (Please address all comments regarding this opinion column to hallp@sme-online.co

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