Friday, October 3, 2008

Rep. Spencer Bachus Calls For Hearings On MTM Accounting; Asks SEC To Study FAS 5 Changes

On Oct. 2, 2008, Rep. Spencer Bachus, ranking member on the House Financial Services Committee, sent a letter to Rep Barney Frank, chair of that committee, asking that hearings be convened on ‘mark-to-market’ (MTM, also called 'fair value') accounting. Separately, Bachus sent a letter to SEC Chairman Christopher Cox asking the SEC to study FASB’s proposed changes to contingency disclosures under FAS 5, as discussed further below.

Stating in his letter that “fair value or ‘mark-to-market’ accounting has become part of our national discussion to restore order to the capital markets,” Bachus observed that Frank “indicated that the [House Financial Services] Committee would hold hearings in the fall to begin its examination of proposals for reforming our current regulatory system.”

Bachus continues: “The Committee has not held any hearings in this Congress on accounting policy, nor conducted any significant oversight of our accounting and auditing standard setters. Accordingly, I am writing to request that as part of its consideration of regulatory reform the Committee hold hearings to thoroughly review fair value accounting standards, including the extent to which those standards may have contributed to the current economic downturn and exacerbated the credit crunch.”

“These hearings should specifically examine whether reforms to FAS 157 are warranted, and should include testimony from all interested parties, including the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board (PCAOB), the International Accounting Standards Board, academics, auditors, investors and issuers.” (See: Bachus letter to Frank re: hearings on accounting.) Although Bachus asked for the hearing to address fair value/mark-to-market, it is possible the scope of any such hearing could be broadened to encompass issues other than fair value.

FAF Asks Congress To Reject Legislative Proposals On Accounting Standards
In related news, Robert Denham, chair of the Financial Accounting Foundation which oversees FASB, sent a letter to Rep. Frank on Oct. 2, (See: FAF letter to Frank.) which says: "Effective accounting standards are achieved only when the standard-setting process is independent and free of undue political influence.” '

In an apparent reference to the provisions of the Emergency Economic Stabilization Act mark-to-market accounting, set forth in the bill passed by the Senate on Wednesday, (up for a vote by Congress today), Denham states: “We are very concerned about the current efforts of some to legislate the suspension of one of the FASB’s Standards, Statement 157 on fair value measurements.”

“We believe that any legislative effort to overturn a FASB standard will greatly undermine investor confidence,” says Denham, adding, “[O]nce Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard setting and the credibility of U.S. financial reporting will be dangerously compromised.”

“If Congress sends the message that special interests are able, through legislation, to overturn expert accounting judgment arrived at through an open and thorough due process, necessary and timely improvements in financial reporting will likely become impossible and the best interests of participants in the capital markets will not be served.” Therefore, “The FAF urges Congress to reject proposals that would threaten the independent process for establishing accounting standards for investors, auditors and preparers." He closes, “Any changes to accounting standards, including Statement 157, should be made through the FASB’s open due process, without political interference that could cause a loss of investor confidence in the financial reporting process.”

Info on FAS 157
If you would like further info on FAS 157, Fair Value Measurement, here are some links (note: this is not an exhaustive list, further info can be found at

FASB Announces Oct. 10 Meeting To Decide on Finalizing Proposed FSP FAS 157-d [NOTE: presumably FSP FAS 157-d will be issued some time today, watch FASB’s website for updates, we will also add a link to this post.]

Understanding the Issues: Some Facts About Fair Value, by FASB Chairman Robert Herz and then-FASB Director Linda MacDonald, May 2008

Comment letters sent to FASB prior to and following release of FAS 157, including:

· Fair Value Measurements-Original Exposure Draft released June, 2004
· Fair Value Measurements Working Draft posted Oct., 2005
· Unsolicited Letters on Fair Value Measurement - 2006
· Unsolicited Letters on Fair Value Measurement, May , 2008

FASB Project Page: Fair Value Option
FASB Project Page: FAS 157: Measurement of Liabilities

Bachus Asks SEC to Study Proposed Changes to FAS 5, Contingencies
Rep. Spencer Bachus sent a letter to SEC Chairman Christopher Cox on Oct. 2, calling for the SEC to study of the impact FASB’s proposed changes to FAS 5, Accounting for Contingencies. (See Bachus letter to Cox on FAS 5.) Note: we previously reported that FASB voted to defer the effective date of the proposed changes to FAS 5 until next year, following field testing and roundtables, in light of concerns with the earlier proposal voiced by the legal community, preparers and others. See FASB’s Project Page on the proposed amendments to FAS 5 and related comment letters.

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