Congress Turns Up Heat on FASB

as Fair Value Debate Rages

By Peter J. Kern, CPA

Malin, Bergquist & Company, LLP

March 2009 - While the nation’s economy continues to flounder, elected leaders in Washington are scrambling to place blame and provide a quick-fix reactionary solution. 

On one side of the debate is the banking industry which is clamoring for a suspension or modification of the mark-to-market (or “fair value”) accounting rules.  On the opposite side are investor advocates and those in the accounting profession who claim that fair value accounting provides transparency and did not cause the financial crisis.  One commentator suggested that blaming mark-to-market accounting rules for the market meltdown would be akin to blaming the National Weather Service for Hurricane Katrina.

The bankers have some advocates inside Congress, and in recent weeks legislators have turned up the heat on the Financial Accounting Standards Board (FASB).  On March 12, 2009, top U.S. lawmakers threatened that Congress would be forced to take action if the mark-to-market accounting standard was not quickly modified.  In a hearing called by Paul Kanjorski, the chairman of the U.S. House Capital Markets Subcommittee, to examine the issue, he stated “If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself.”

New SEC Chairman Mary Schapiro told Congress that she was pushing FASB to issue guidance on the topic. And the top Republican on the full Financial Services Committee, Spencer Bachus, said that “if the FASB and the SEC refuse to use their authority to provide useful and timely guidance, this Congress may have no choice but to act in their place.”  Congressman Barney Frank told FASB and SEC officials at the hearing: “We’re going to have to have some movement.”  Even magazine publisher and onetime presidential candidate Steve Forbes weighed in and said that “mark-to-market accounting is the principal reason why our financial system is in a meltdown.”

Meanwhile, new Treasury Secretary Timothy Geithner and others are warning that efforts to modify the accounting rules could have unintended consequences and chip away what little confidence is remaining in the markets. "We are in a period where investors do not have a lot of confidence in their capacity to judge the risks," he said. "We have to be very careful not to do things that would erode confidence in people's ability to assess the risks."

Another slippery slope in the debate is the independence of the FASB to create accounting rules without the influence of political whims. It was just a few short months ago when the U.S. rulemakers criticized and questioned the ability of the International Accounting Standards Board (IASB) to remain free of political influence after that body had hastily adopted modifications to their International Financial Reporting Standards (IFRS) proposal in the face of political pressure.

Whether legislators agree with it or not, the fact is that the FASB has been issuing guidance attempting to interpret, and many would say soften, the accounting rules in the public company arena.  On March 17, 2009, the board issued two proposals that would allow companies more judgment in determining if write-downs of impaired assets are required, and whether a market is not active and a transaction is not distressed. The proposals are open for comment only until April 1, 2009, with the implication being that companies can apply the guidance when preparing their first-quarter filings.

FASB Chairman Robert Herz indicated that he hopes the guidance will empower companies to use more judgment in determining the fair value of an asset, and that companies should be contemplating an orderly market, instead of using a fire-sale price when determining fair value.  "We'll see whether this helps or not," he said. "In the end, part of the problem here is we have a kind of messed-up situation underlying this."

The guidance would alter the current presumption that the price from a recent transaction must be used if a company cannot prove that a market is distressed. The issue is that recently -- more often than not – these prices have been depressed. The proposed guidance would let companies value an asset by using more information than just the price at which a similar asset was sold, particularly if it was a distressed sale.

Somewhat troubling in the issuance of this guidance is the admission by FASB board members that they have been forced to consider public policy. The board maintains that the guidance is simply clarifying the leeway that already exists in fair value accounting standards. However, one board member said that "what we're voting on right now is hopefully elevating those fair values to a reasonable point so investors are more interested in investing in the banking system."

The response from investor groups has been swift and pointed.  The Consumer Federation of America, CFA Institute and FASB’s Investors Technical Advisory Committee all weighed in with their opposition to the proposed changes.  They maintain that “It provides an extraordinary amount of leeway to potentially report information that is not accurate, not reliable and not reflective of economic reality,” according to Patrick Finnegan, director of the financial reporting policy group at the CFA Institute.

And so the debate over mark-to-market accounting continues.  The only certainty at this point would seem to be that stakeholders will continue to attempt to protect their interests, Congress will continue to place its fingerprints on the outcome, and more guidance and rules emphasizing the need for judgment will be issued.

Peter J. Kern, CPA leads the Public Company/SEC Group of the certified public accounting firm of Malin, Bergquist & Company, LLP (www.malinbergquist.com), of Pittsburgh, Greensburg and Erie. Contact him at 412.364.9395 or at pkern@malinbergquist.com.

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