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Levitt, Beresford on Congress, FASB & Fair Value; Breeden Calls For Merger of SEC, CFTC & PCAOB

Mar 27th 2009
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It’s an exciting time when a former SEC Chairman and a former FASB chairman weigh in on issues involving Congress, FASB and fair value. Former FASB Chairman Denny Beresford, an FEI member and one of the founding inductees in FEI’s Hall of Fame (and a reader of this blog), brought to my attention the OpEd in today’s Washington Post by former SEC Chairman Arthur Levitt, Jr. on Congress, FASB and fair value.

Levitt's OpEd, entitled, Weakening A Market Watchdog: An Accounting Rule Change's Real Costs, talks about the pressure that was brought to bear on FASB to amend or provide further guidance on its rules on fair value measurement (aka mark-to-market accounting), particularly with respect to applying FAS 157, Fair Value Measurement, in inactive markets, and with respect to the accounting rules impacting other-than-temporary-impairment (OTTI). He notes that FASB Chairman Robert Herz was told at the March 12 Congressional hearing on mark-to-market accounting: "Don't make us tell you what to do, just do it," (Rep. Randy Neugebauer (R-Tex.)) and "If you don't act, we will," (Rep. Gary Ackerman (D-NY)).

"This is like being forced to give your boss several mulligans in a round of golf," says Levitt in the WashPost OpEd, adding, "And so last week, the FASB voted to propose allowing banks to obscure -- some might say bury -- the full extent of impairments on many of the bad loans and investments they made and securitized over the past few years."

NOTE: The proposals Levitt refers to are FASB's Proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and Proposed FSP FAS 115-a, FAS 124-a and EITF 99-20-b, Presentation of Other-Than-Temporary Impairments. The proposals were released by FASB on March 17 for a 15 day comment period, ending April 1. FASB confirmed in its Action Alert issued today that it will hold a board meeting on Thursday April 2 (in addition to its regularly scheduled board meeting on Wed. April 1) to "redeliberate" the proposals, "in light of the comments it has received."

I asked Beresford if he'd like to share his reaction to Levitt's column with me and our blog readers. Here is what he said: "On the 157e proposal, I believe that one or more of the Board members thought they were already calling for what is in the new proposal when they issued the initial 'guidance' last fall. But they worded the guidance at that time too generally and companies were disinclined to apply the judgment that the FASB and SEC thought they should for fear of being second guessed by the auditors and the SEC. And the auditors were afraid of being second guessed by the PCAOB."

"The proposals may not be perfect," he continued, "but I think they are a major improvement in determining how fair value should be estimated when active market prices aren't readily available. Those who argue for the most conservative prices that can be found in the relatively few 'fire sales' of some of these complex securities seem to feel that the standard should call for 'market value,' however that would be defined, rather than "fair value," which is what SFAS 157 calls for."

Read more analysis of Levitt's OpEd, and furhter comments from Beresford, here.

Levitt, Roper, Breeden, Others Testify To Senate
Levitt's views are highly regarded, and he opined on broader subjects in his testimony earlier today at the Senate Banking Commitee hearing on investor protection and market regulation.

Others testifying on his panel were former SEC Chairman Richard Breeden and former SEC Commissioner Paul Atkins. The first panel, as we noted in our blog post earlier today, included SEC Chairman Mary L. Schapiro. And the third panel included various representatives from the private sector, including Jim Chanos, founder of Kynikos Associates, (who, as noted in his wikipedia bio "rose to fame in the 1980s as a "short" - a short seller who had a knack of spotting stocks that he thought to be overvalued") - and famously was one of the first to identify weaknesses at Enron - author of an OpEd in the WSJ earlier this week entitled We Need Honest Accounting. Another panelist at the Senate hearing was Barbara Roper of the Consumer Federation of America (CFA, one of the 4 C's noted above).

Roper testified that the SEC should drop its push to move U.S. companies from U.S. GAAP to International Financial Reporting Standards, and instead focus again on encouraging convergence of the two sets of standards (i.e. FASB and IASB standards).

Sounding a similar alarm regarding threats to FASB's independence as Levitt did in his OpEd, Roper told the Senators: "In arguing against adoption of the IFRS roadmap, CFA has in the past cited IASB’s lack of adequate due process and susceptibility to industry and political
influence. Unfortunately, FASB’s recent proposal to bow to industry pressure and weaken fair value accounting standards – and to do so after a mere two-week comment period and with no meaningful time for consideration of comments before a vote is taken – suggests that FASB’s vaunted independence and due process are more theoretical than real. We recognize and appreciate that leaders of this Committee have long shown a respect for the independence of the accounting standard-setting process. Moreover, we appreciate the steps that this Committee took, as part of the Sarbanes-Oxley Act, to try to enhance FASB’s independence."

She thus recommended: "[I]n light of recent events, CFA believes more needs to be done to shore up those reforms. Specifically, we urge you to strengthen the standards laid out in SOX for recognition of a standard-setting body by requiring that a majority of both the board itself and its board of trustees be investor representatives with the requisite accounting expertise."

Additionally, Roper called upon the Senators to "Ignore calls to weaken materiality standards and lessen issuer and auditor accountability for financial misstatements," referring to recommendations that had been made by the SEC Advisory Committee on Improvements to Financial Reporting or CIFiR.

I am sure others will summarize testimony of the many other panelists at today's Senate hearing. Before I leave this subject I'd like to highlight one quote from former SEC Chairman Richard Breeden's testimony: "It isn’t enough for regulators to write rules and give speeches. More time needs to be spent conducting examinations, analyzing results, discovering problems and, where necessary putting effective limits in place to prevent excessively risky activities. Directors and regulators need backbone, and a willingness to shut down a party that gets out of control. Regulators can’t catch all the frauds any more than police can catch all the drug dealers. Nonetheless, when failures happen it shouldn’t be acceptable to just ask for more resources without making the necessary corrections first. Regulators need accountability for performance failures just as much as any of us." He added, "While we need to demand better effectiveness from regulators, we must not shift the burden of running regulated businesses in a sound and healthy manner from management and the boards of directors that are supposed to oversee their performance."

I have a feeling Breeden's recommendations - which number a dozen - are going to receive a great deal of attention, from his call to merge the SEC, CFTC and PCAOB (rec. #1) to his call for increased proxy access (rec. #2), and his call to "Reverse or suspend the SEC decision to abandon U.S. accounting standards and to adopt so-called "International Financial Reporting Standards" for publicly traded firms headquartered in the U.S." (rec #3).