Thursday, May 29, 2008

SEC Nominees Set for June 3 Sen. Banking Hearing;SEC To Hold Fair Value RT;IASB Forms Val. WkgGroup; Uproar over IIF Recs on FV

The Senate Banking Committee has scheduled confirmation hearings on June 3 for a number of President Bush’s nominees for federal agency positions, including the nominees for the three open slots for Commissioner at the SEC. The three nominees for SEC commissioner (to fill the vacancies created by the departure of Roel Campos and Annette Nazareth, and the impending departure of Paul Atkins), are: Luis Aguilar, Elisse B. Walterand Troy Paredes. If all goes well at the Senate Banking hearing, nominees would then be subject to a confirmation vote by the full Senate.

Batavick to Remain on FASB board until Replacement Announced
In other pending appointment news, (although not subject to Senate confirmation) the FASB announced last week that current board member George Batavick “will extend his present term on the [FASB] as the Board conducts its search for a candidate to fill the open seat.” With three FASB board members scheduled to depart June 30 (Michael Crooch, Donald Young and Batavick) - and under the FAF's new constitution calling for a reduction in the size of the FASB board from the current seven to a new total of five board members - FASB needs to hire one new board member to complete its board as of June 30. Batavick, former comptroller of Texaco, previously had announced he intends to retire from the FASB at the end of his first term, which expires June 30.

SEC To Hold Fair Value RT in July; Cox Promotes Steps to Enhance IASB as SEC Moves Toward IFRS
In an article entitled, “Cox to Press Global Rules,” Kara Scannell and David Gauthier-Villars reported in the Wall Street Journal yesterday that, “The SEC will hold a roundtable discussion on fair-value accounting in July.” Their source is SEC Chairman Christopher Cox, and they contrinue: “Mr. Cox, who was elected chairman of the IOSCO committee in charge of research on Tuesday, said the U.S. watchdog wouldn't recommend abandoning the concept altogether. ‘

Nothing that stark,’ he said.” IOSCO is the International Organization of Securities Commissions, of which the SEC is a member.

Scannell and Gauthier-Villars also reported, based on an interview with Cox preceding his participation in the 2008 IOSCO Annual Conference taking place this week in Paris, that Cox “is expected to call for creation of a body to oversee the setting of international accounting standards, a step that could hasten the ability of domestic companies to choose international standards over traditional U.S. accounting.” They add: “Such a move could smooth the way for the SEC to allow U.S. companies to comply with International Financial Reporting Standards.”

On the subject of the status of the SEC’s IFRS roadmap for potentially allowing U.S. companies to report in IFRS, Jack Ciesielski reported earlier this week in his AAOweblog on some related developments, including the SEC’s signing of protocols to expand the sharing of information with other regulators on the application of IFRS. Ciesielski also noted our upcoming June 5 conference – “The World is Moving to IFRS – Are You?” at which he will be a speaker, is currently sold out.

If you would like to be placed on a waiting list (and be informed of future programs on IFRS) you can sign up at The conference is hosted by Financial Executives International (FEI) and is exclusively sponsored by BNA Tax and Accounting.
The move reported in the WSJ to enhance the IASB’s governance follows on previous announcements beginning last fall by a group of international securities regulators, including the SEC, which we previously reported here. Meanwhile, the IASCF (which oversees the IASB) is moving ahead with its Constitutional Review, as reported most recently by the IASB here.

Reaction to the SEC Chairman’s comments yesterday at IOSCO and to the widening expansion of IFRS was reported by James Langton in his article, “Adoption of IFRS Would Give World a Common Language for Financial Reports,” published yesterday in Investment Executive, a Canadian publication.

”In his keynote address to a meeting of global securities regulators today,” reported Langton, “Cox… suggested that international financial reporting standards could become a sort of lingua franca for the financial world…. However, in the debate that followed his remarks, it became clear that the world is far from unanimous on the form this new language should take, and the range of dialects it should permit.” Additionally, Langton reported that at least one panelist on an IOSCO panel yesterday challenged the perception that all investors are a monolith, specifically regarding IFRS.

“John Glen, group financial director at Air Liquide, an industrial gas firm based in Paris, cautioned against sacrificing relevance in financial reporting for the sake of comparability at all costs, suggesting that most investors don't necessarily need global comparability, particularly when the price is less meaningful financial information. He stressed that the original intention for IFRS was a common set of principles that could be interpreted with some latitude, not a narrowly-defined set of principles that are virtually rules.” Additionally, “Glen pointed out that while investors are often referred to as if they were a single body, not all investors share the same interests. He stressed that professional investors are often the focus of these sorts of discussions, and retail investors may not have the same priorities.”

IASB Forms Valuation Working Group; Uproar over IIF Rec's on Fair Value
Jennifer Hughes of the Financial Times recently reported in an article entitled, “IASB to Tackle Securities Valuations,” that the IASB is in the process of forming a working group on valuation.
“Invitations have been sent out to senior bankers and regulators to form a new group to tackle the problems of valuing securities in illiquid markets – an issue central to the credit crunch and banks’ complaints about the write-downs they have been forced to report… Invitees to the IASB’s working group include senior accounting executives from some of the biggest banks and insurers together with representatives from securities regulators, sector analysts, ratings agencies and the Big Four audit firms.”

According to Hughes, “The first of a series of meetings” of the IASB’s valuation working group “is due to be held in London on June 13 and will discuss the scope of the project.” She added the meetings “will take place behind closed doors,” which “has already upset some accounting observers.”

Hughes mentioned in the above article, and expands in another article today, “'Alice in Wonderland' in Need of a Clarity Tweak,” that the Institute of International Finance (IIF) recently published a paper “propos[ing] a relaxation of the [valuation] rules when markets seize up and asked for some more flexibility in the way various holdings are classified.” (See our previous coverage of IIF paper here.)

Hughes noted that Goldman Sachs, a member of the IIF, rejected the proposal and may leave the IIF over it. “Goldman Sachs spiced up the accounting world last week when it dealt a blow to some of its biggest rivals by terming their proposals "Alice in Wonderland" accounting,” she reported. “Suddenly, an ongoing struggle over seemingly arcane financial reporting involved a spat among the top names in the industry as Goldman threatened to walk out of the Institute of International Finance, a global industry body.”

The IIF issued a statement yesterday in response to the controversy about its paper. As we noted previously, the IIF recommendations call for “multiple and coordinated policy responses” and recommends reforms to various industry practices, not only accounting and valuation, including: risk management, credit underwriting, liquidity risk management and conduits, valuation, ratings, incentives and compensation.

However, to see the crux of the issue on IIF’s call for a potential relaxation or increased flexibility of mark-to-market or fair valuation rules in light of the liquidity crunch, see especially paragraphs 74-76 of the IIF report, in which the IIF notes:

“A critical subset of issues revolves around whether mark-to-market exacerbates the overall degree of risk aversion in the marketplace and thereby contributes in a procyclical manner to the continuation and possible worsening of market stress…. In circumstances where doubts about products and underlying credit quality undermine valuations inducing extensive margin calls, there is the danger of a precipitous and destructive downward spiral, which reinforces the procyclical impact… the Committee believes that broad thinking is needed on how to address such consequences, whether through means to switch to modified valuation techniques in thin markets, or ways to implement some form of “circuit breaker” in the process that could cut short damaging feedback effects while remaining consistent with the basics of fair-value accounting. And, while there is no desire to move away from the fundamentals of fair-value accounting, the Committee feels that it is nonetheless essential to consider promptly whether there are viable sound proposals that could limit the destabilizing downward spiral of forced liquidations, writedowns and higher risk and liquidity premia. The Committee is developing specific proposals for consideration in a timely fashion.”

Personally, I think the recommendation to consider whether ‘circuit breakers’ (or modified valuation procedures) are needed to stem downward spirals in fair valuation (driven in part, as noted by the IIF and others, by margin calls and selloffs of securities experiencing price deterioration which drives further writedowns) in markets that lack liquidity is worthy of consideration in light of the current market turmoil - similar to the development of ‘circuit breakers’ in response to the 1987 stock market ‘crash.’ (For different points of view, see also the Washington Post article from Oct. 30, 1997: “Stock Traders Criticize Market ‘Circuit Breakers.’)

If you are interested in the topic of fair value in illiquid markets, check out FASB’s upcoming webcast scheduled for June 2: “The Crisis in the Credit Markets: Causes, Reporting Issues, and Responses." And, see links to our previous coverage of the subprime crisis and accounting issues here.

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1 comment:

About Medicine Blog said...

He stressed that professional investors are often the focus of these sorts of discussions, and retail investors may not have the same priorities.