Meet the FASB Override Button

Sunday, November 08, 2009 , , , , 0 Comments

I reluctantly admit that flawed as FASB might be (I think 157-e comes to mind here), we've got it slightly better than Europe. But that might be about to change.

HuffPo called it "Civil War In Corporate America":

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.

The move could effectively let banks set their own accounting standards in rough economic times.

Astonishingly, at a time when the public is crying out for greater regulation to limit excessive risk-taking by financial institutions, the banks are trying to get Congress to agree that the next time there's a big downturn, they should have the ability to alter their accounting standards -- essentially, fudge the numbers -- so that the public and investors won't be able to tell how insolvent they really are. By ignoring their declining asset values, they can avoid the standard requirement of raising more capital.

The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called "oversight" board, that would include the officials charged with managing systemic risks to the financial markets.

The Center for Audit Quality (among others) doesn't like the sound of this and isn't afraid to say so:

We believe that interim and annual audited financial statements provide investors and companies with information that is vital to making investment and business decisions. The accounting standards underlying such financial statements derive their legitimacy from the confidence that they are established, interpreted and, when necessary, modified based on independent, objective considerations that focus on the needs and demands of investors – the primary users of financial statements. We believe that in order for investors, businesses and other users to maintain this confidence, 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.

Agreed. But can we agree the SEC is independent?

Floyd Norris gave us an answer to that by looking to our previous SEC Chairman, the one who announced the transition to International Financial Reporting Standards in the US and then sort of shrunk off post-Madoff. What's Christopher Cox up to now?

Mr. Cox had a politician’s nose for public relations, which did not serve him well as the manager of an overtaxed regulatory agency. When reporters reacted with outrage to receiving subpoenas, he withdrew them in a way that held the staff up to ridicule. Similarly, when the Bernard L. Madoff scandal broke, he issued a statement that seemed to him to be an agency apology, and that seemed inside the agency to be a case of a chairman abandoning the people who worked for him.

He also had the politician’s willingness to stretch data, as when he claimed that the enforcement staff “under Chairman Cox has increased to 34 percent of the S.E.C. work force from 32 percent in 2005 and 29 percent in the 1990s. This investment in investor protection already is paying significant dividends.”

The reality was that there was no “investment in investor protection.” The commission’s enforcement staff had declined in size under his chairmanship. It had just declined at a slower rate than the rest of the staff. When I asked if the enforcement staff would look askance at a company that made a similarly disingenuous claim in an S.E.C. filing, his staff seemed surprised.

Like Tim Geithner, Cox tended to throw WTF curveballs (Larry Kudlow):

The decision by SEC Chairman Chris Cox to ban short selling is a terrible idea. It is an encroachment on free-market principles.

Why Cox is doing this is hard to fathom. He is supposed to be a free-market disciple of Milton Friedman and Art Laffer. It would have been much simpler and much more constructive if Cox restored the so called up-tick rule, where short sellers only can play after a share price has ticked higher. Some academic study apparently informed Cox that the up-tick rule was unnecessary. But virtually everyone who operates in the stock market disagrees.


This is one more in a long line of accounting WTFs, and if anyone endorses building a FASB override button "in a crisis", I direct them to 13(3) and need say no more.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.