Every profession has its vulnerabilities, and its bad actors. Recent economic failures have got politicians talking in ways that are making a lot of accountants queasy. That’s why members who attended the annual meeting of the American Accounting Association had some weighty questions for their guest, House Financial Services Committee chairman, Barney Frank (D-Mass).
Why are accountants nervous?
In another meeting, last March, Frank told Robert Herz, the chairman of the Financial Accounting Standards Board, that he needed to make some serious changes to certain accounting standards, within a three-week time period. This strong-arm move left accountants wondering what his intentions were. That's why, when Frank appeared before the American Accounting Association, he sought to calm their fears.
Frank admits that he is concerned about the mark-to-market and fair value accounting issues and wants to see change. But, he says, he wasn't trying to legislate standards. He was, instead, trying to exert pressure to get the revisions he wants to see.
“At the same subcommittee hearing [in March]… I announced that as long as I was chairman of the committee, we would never consider any legislation to mandate changes in accounting,” he said. “I’ve taken that position consistently.” But he also reminded those in attendance that he will not always be the chairman, implying that his predecessors may take a different approach.
A fellow member of the committee, John Campbell, (R-California) agreed with Frank. While something needs to be done, Campbell asserted that accounting standards should not become yet another political football.
“We do not need to be politicizing accounting standards. That will be a disaster. Exactly as Barney mentioned, we have influences, and if accounting standards are going to be politicized, smaller community banks would have a different set of accounting rules than would large banks. All sorts of things can get involved when you politicize accounting, so the last thing in the world I want to see is us making accounting rules, because we will make them for the wrong reasons."
Campbell added his belief that accounting has become too rules-based. “You put everything in a rule so you don’t get sued. If I meet the rule, I don’t get sued. Other countries, because they have a different litigation setup, are more principles based.”
Here is a summary of the major changes Frank told accountants he would like to see:
- · A proposal that would alter the impact of mark-to-market accounting. Mark-to-market, said Frank, has forced U.S. banks to recognize billions in losses on mortgage-related investments.
- · A proposal to stop the automatic consequences that can happen when the value of bank investments are slashed due to mark-to-market accounting. Instead, Frank would like to see banks have time to rebuild their capital.
- · A proposal to allow banks to treat investments held for sale differently than investments held on the books for the long-term. This, he said, would avoid punishing companies for market fluctuations of investments that are not currently for sale.
Frank was asked by attendees if he thought the major auditing firms that appear to have overvalued assets of failed banks and financial companies should be investigated. He deflected the question by saying his committee wants to move forward. The main reason for the overvaluation of assets, he said, was the securitization of loans, and that determining the value of a home is not the job of an auditor.
While he had their attention, Frank also took the opportunity of the meeting with accountants to touch briefly on other issues relevant to the profession.
He predicted that Obama’s proposed Consumer Financial Protection Agency (CFPA) will not be empowered to head up regulation of tax preparers, as expected. "I do not contemplate that tax preparation will be supervised by the consumer entity", he told the group, though he did say that refund anticipation loans could be subject to truth-in-lending laws.
Finally, Frank speculated that some of the suggestions put forth by the Obama administration for the CFPA, such as the imposition of a widely touted “plain vanilla” mortgage, will not ultimately happen.