Systemic risk legislation amendment threatens FASB’s independence

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Barry Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), and Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), participated in a joint briefing on Monday November 16 to express their strong opposition to an amendment sponsored by Representative Ed Perlmutter (D-CO) to the Financial Stability Improvement Act, one of the systemic risk bills now before Congress. Markup on the bill began before the House Financial Services Committee on Tuesday, November 17.  Melancon and Fornelli stressed the importance of the independence of FASB from political influence and the Board’s unique role in providing transparent financial information to investors.

The Perlmutter amendment would give to a new body, a so-called "oversight" board, the power to recommend “corrective action to accounting standards to the (SEC) in a financial crisis,” according to language quoted in “In the event that any member of the Council believes that an accounting principle, standard, or procedure threatens the stability of the United States financial system or companies, as a whole, then the Council shall investigate and by a majority vote, determine whether any corrective action, emergency or otherwise, is necessary. . . . The Securities and Exchange Commission shall ensure that the prudential standards recommended by the Council are implemented within 60 days of the Council's recommendation or within such other time period specified by the Council,” the draft language says, and in the event the SEC does not act, “the Council is authorized to direct that any recommendations issued pursuant to paragraph (a) be implemented.” 

Both Fornelli and Melancon pointed out that the SEC already has the authority to intervene and require that banks increase their reserves, their capital requirements. And. in the case of a crisis, that the SEC can suspend an accounting rule. “This is a case of a solution looking for a problem,” Melancon said. “It is a circumvention of important due process, a very transparent process.” 

“FASB’s role is to meet the needs of investors for accurate, transparent information,” Fornelli said. “Banking regulators have a very different role. Systemic risk is different from investor protection.” She went on to say that this amendment would have a broad impact on 15,000 public companies in all industries and not just the banks. “The potential consequences to investor confidence are very serious.”

“This is a very bad, a very unprecedented law,” Fornelli said. “Why are we going down this path?” Responding to a question about the potential impact on convergence of politicizing our standard setting, she said that at times FASB’s independence was central to the discussion of standards in contrast with other national accounting standard setting boards. When governments get involved, multi-national companies can shop around for the most beneficial standards. “The best way to win the race to the bottom is to inject politics into the standard setting process.”

Melancon and Fornelli have sent letters to the House Financial Services Committee on behalf of their organizations expressing their objections to the Perlmutter amendment. The Council of Institutional Investors, and an arm of the U.S. Chamber of Commerce co-signed the CAQ letter. They write that the FASB is overseen by the SEC because it’s supposed to be independent of the political process.  For investors to remain confident in financial reports, the letter says, “the process by which accounting standards are developed must be free—both in fact and appearance—of outside influences that inappropriately benefit any particular participant or group of participants in the financial reporting system to the detriment of investors, businesses, and capital markets.”

Melancon’s letter emphasized FASB’s unique investor protection role and the independence requirement. “The purpose of public company financial reporting is to provide investors with clear, objective, and transparent financial information. . . . Any attempt to divert financial reporting from its primary investor-focused objectives to other policy objectives with regard to financial institutions damages investor protections. . . . However, those agencies being contemplated to oversee systemic risk do not have the same focus on the importance of the U.S. financial reporting system related to the setting of accounting standards for public companies.  This will impair the quality of information received by investors because factors other than the primary needs of investors will be taken into account when the proposed board oversees accounting standards."

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