Why Accounting Matters

Nov 29th 2009
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In our previous post, we reported that two amendments relating to the Financial Accounting Standards Board were approved by the House Financial Services Committee (HFSC) during markup of its systemic risk bill. The bill, more formally called the Financial Stability Improvement Act (FSIA), is part of a broader set of bills being introduced as part of financial regulatory reform, aimed at preventing another credit crisis. The ultimate fate of the FASB-related amendments approved by the HFSC is not yet known, since the full House still has to consider the entire financial regulatory reform package, as does the Senate.

A Civil War Over Accounting?
The battle over the Perlmutter/Lucas amendment in particular -which, as approved by the HFSC last week was significantly softened ('watered down' per CFO.com's Sarah Johnson; 'gutted' per the Denver Post's Michael Riley) from its initial version proposed in March - rose to the level of Civil War in Corporate America (Ryan Grim, Huffington Post). Some may have wondered how this level of agitation could occur in a profession that still harbors, in the eyes of some, a "milquetoast" image (Michael Riley, Denver Post).
 

Why Accounting Matters
The level of emotion invested in various sides over the particulars of accounting standards has to do with the fact that accounting standards are designed - according to FASB's mission statement, and Conceptual Framework, as well as a recent Sept. 22 Statement of the IASCF Monitoring Board statement of which the SEC is a part, and according to a Nov. 5 letter from SEC Chairman Mary L. Schapiro to Rep. Barney Frank, chair of the HFSC - to produce information which is decision-useful. What kind of decisions result from reference to or use of accounting information? Investing and financing decisions. Therefore, emotions can run high over the content of accounting standards, and the process by which they are developed.

The extent to which the economic consequences of accounting standards should be considered has been a subject of debate throughout the history of standard-setting, predating the FASB. Past and present SEC Chairmen, Commissioners, and Chief Accountants have spoken of the relationship between the SEC and the FASB, and issues dealing with the independence of the standard-setter. Further details on this subject can be found here.

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