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Home > Blogs > Anthony Harrington > FASB chairman hits out at critics

FASB chairman hits out at critics

Finance Blogger: Anthony Harrington Anthony Harrington

Speaking at the AICPA National Conference on December 8, Robert Herz, chairman of the Financial Accounting Standards Board, decided to focus on what he called “a number of very important public policy matters relating to financial reporting and accounting standard setting.” His key focus was to drive home the point to as wide an audience beyond the AICPA membership as possible, that setting accounting standards is one thing, determining appropriate levels of bank capital reserves and regulatory capital is another thing entirely—and that the two should not be confused.

In essence, of course, his speech was yet another attempt to lay to rest the bogey status accorded to fair value accounting (or mark-to-market accounting) during the financial crash. In particular Herz used his speech to take up the cudgels against “certain parties” (i.e. some banks and financial institutions) who lobbied massively for the regulator to be able to step in and either take over or override the accounting standards process when, as the banks saw it, occasion demands such action. To quote him:

“As the financial crisis deepened and widened, there were intense efforts by certain financial institutions and their trade groups and lobbyists not only for us to address perceived issues in applying fair value and impairment standards in inactive and distressed markets, but also for the SEC and Congress to eliminate or defer the requirements to recognize losses on impaired financial assets. The use of fair value was decried by some as causing undesirable ‘procyclical’ effects on the financial system, accompanied by efforts by these parties to enable banking regulators or a systemic risk regulator to override and modify accounting standards and financial reporting to investors and the markets to achieve bank regulatory and financial stability objectives.”

Herz is very clear that this would be a terrible road for the US to adopt. Accounting standards are there to promote transparency. It is not part of their design objective to try to dampen down business, market, and economic cycles. In fact, the whole point of good accounting standards is precisely to allow the stresses and strains that follow the late stages of a market “bubble” and its subsequent collapse, to be followed by investors. You really do want to see the real impact on the accounts—only since the accounts are a belated snapshot in time, investors have to do additional leg work of their own to “fill in the blanks” and project forward from the time frame shown in the accounts, to the present and immediate future. This is generally the zone of greatest interest to short term investors. Buy and hold investors are much more interested in a company’s long-term potential and their questions through a downturn have to do with trying to form a view on what, if any, damage has been done to that growth potential, considered over the medium term.

The point for institutions and regulators to grasp, Herz suggests, is that accounting standards are all about transparency. By way of contrast, to quote Herz, “lack of transparency and honest reporting can be a powerful destabilizing force on the capital markets and the economy. A lack of transparency can hide the extent of risks facing financial institutions from both investors and regulators.” In other words, if the crash teaches us anything it is not to listen to special pleading from financial institutions worried about too much transparency…

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Tags: accounting standards , banking , capital adequacy , fair-value accounting , financial crisis , regulation , transparency
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