Saturday, May 23, 2009

Pressure On FASB, IASB Could Result In Tragedy, FCAG Members Warn

At least three members of the Financial Crisis Advisory Group (FCAG), formed jointly by FASB and the IASB last year to advise the two boards on accounting matters related to the credit crisis, have warned that continued political and other external pressure on FASB - and the IASB in particular - could result in tragedy. The warning came from FCAG co-chair Harvey Goldschmid, and FCAG members Nelson Carvalho and Michel Prada, with Goldschmid adding the pressure could threaten 'the very existence of international accounting standards.' The remarks were made at FCAG's meeting held on Friday, May 22 in London.

The public portion of FCAG's meeting lasted one hour; the remainder of the seven-hour meeting consisted of a closed session for drafting FCAG's final report, due out in July. Goldschmid noted it is likely the group will meet one more time, on July 10 in NYC, to finalize its report. He added the group will hold a followup meeting on December 15 in London to consider developments since the issuance of its report.

FCAG Members Fear Pressure on FASB, IASB Could Result in 'Tragedy'
FCAG Co-chair Harvey Goldschmid, a former SEC commissioner, called on IASB Chairman Sir David Tweedie and FASB Chairman Bob Herz to update FCAG on developments since FCAG's last meeting (held in April).

Tweedie said, "What has happened, there has been a lot of pressure, that both of us [FASB and the IASB] get, about an unlevel playing field.” He explained the IASB has chosen to focus on its long-term project to improve financial instruments, a joint project with the FASB, vs. taking on, e.g. a new short term project on other-than-temporary impairment, which some asked it to do after FASB's April guidance on OTTI, a concept that is not currently part of IASB's literature. Tweedie said the IASB believes focusing on the broader, long-term and potentially converged solution regarding financial instruments would be of more benefit. (See additional discussion regarding differing views between the FASB and IASB on the current direction of the financial instruments project, further below.)

Hans Hoogervoorst, FCAG co-chair, and Chairman, AFM (the Netherlands Authority for the Financial Markets), responded to Tweedie's comments as to the pressure the boards are under, saying, "I am feeling increasingly uncomfortable with that situation, the boards have already implemented quite a few actual changes, [more] to come; still, continuous pressure is being exerted on the boards.. exerted by bankers, ministers of finance who are all bankers, and have very little interest in transparency, or don't have a natural interest in transparency, so the pressure for short term changes is completely lopsided - all in the direction of more favorable standards leading to more favorable balance sheet presentation...increasing the risk investors get a lopsided view."

Goldschmid noted, "I couldn't agree more with Hans' comment, when we use the word pressure ... the pressure on the two standard-setters has created more than a crisis, and for the IASB in particular, a threat to the very existence of international accounting standards." He added, "The financial crisis came about for reasons other than accounting; Clearly there were private sector failures.. foolish risk decisions.. regulatory failures, in the U.S. context , bank regulators, the SEC, FINRA all share part of the blame for what went wrong; not basic failures of the accounting, and scapegoating [accounting] is really a tragedy for all concerned." He continued, “From a U.S. standpoint, if we lose the IASB system, we are going back to reconciliation; it is only IASB IFRS that are accepted [for foreign filers in the U.S.], not a carve-out.. not national standards; the costs for everyone long-term will be immense [if something were to happen to the IASB]; I am very worried about the time we are in, very glad David [Tweedie] and Bob [Herz] are in charge of the two boards.” Critical of those who are "challenging accounting standards [and] challenging the two boards in ways that are unconstructive," he urged, "it is important the business community and government begin to speak out.. we could lose this entire system, and the costs for going backward are very [large]."

Nelson Carvalho, chair of the IASB’s Standing Advisory Committee, said, "If we were ever under risk of getting back to the old system we had, back to the 200-plus national sets of GAAP, that would be a tragedy, a tragedy toward the aim of restoring investor confidence, losing the wonderful work of the IASB ...the world would suffer dramatically, including the new emerging [markets] which are already discussing getting rid of the dollar as the common currency for bilateral trade.” He closed, “The boards are in desperate need of advice; the G-20 finance ministers might make better use of our advice: Please keep politicians away from accounting standards.”

Michel Prada, former chairman, Autorité des Marchés Financiers (AMF), observed, "A few months ago, I said I thought our role would be to participate in cooling down temperatures and cooling down direction-pressure, and now .... [we are] on the verge of a tragedy in accounting." He added, "I don't see a situation where bankers are opposed to accounting standard-setters...I believe we should try to calm down this, and [warn] politicians we shouldn't go that direction, if we go that approach, we will end up with the situation we were in 15 years ago."

Don Nicolaisen, former SEC chief accountant, and co-chair with Arthur Levitt last year of the U.S. Treasury Advisory Committee on the Audit Profession, commented, "Accounting standards as written are always going to be refined, we don't get it perfect; but what we do have is an extremely cynical investing public, less trustful of regulators, government, and business – plenty of blame to go around.” He added, “To have them not trust accounting standards, I don't think would help the situation, it would put us in the dilemma of fueling that cynicism, unwillingness to accept responsibility by any group.” He analogized, “If we are facing global climate change as a problem, and [someone says] the solution is to go to scientists and say recalibrate your thermometers and we don't have to do anything ... no one believes that." Similarly, with external pressures to change accounting, he said, "If we have reached the ridiculous, the answer is no, better to let the system deal with failure of our accounting standard-setters, if you think of it that way; we are not willing to compromise, not willing to (produce) results that are unrealistic economically." He added, however, along the lines of his opening sentence that some refinements may be warranted, "[To] deal with complexity, deal with issues that arise because we know more today than a year ago, it would be sensible, responsible do that."

Jerry Edwards, an observer from the Bank for International Settlements, and former Chief Accountant at the Federal Reserve Board, said, "It is important to keep in mind the very good foundation that exists in a number of different areas, whether Basel, or the Financial Stability Forum, that have truly worked to support high quality accounting and independent standard-setting." He added, "I think the record shows those bringing pressure on financial standard-setters aren't those around the table, that pressure is coming from others. " Edwards then stated, "Accounting standard-setting is at its best when it brings its expertise and independence, [and] also shows it is responsible and reasonable in considering input... [and] hopefully, all these pressures will dissipate over time."

James Leisenring, a member of the IASB, and former member of FASB, advised the advisory group, "It is important for you to say, not only didn't [accounting] cause [the credit crisis], but [accounting] is not the solution. As Don [Nicolaisen] said, anything that increases cynicism or lack of confidence will prolong the crisis; recovery would be speeded if people had confidence in the information they see.”

FASB, IASB Views Currently Differ On Financial Instruments Project
Another subject discussed at the FCAG meeting was the status of the boards' joint efforts to improve accounting for financial instruments.

The IASB's current thinking, Tweedie explained, is to collapse what currently are four models of measurement or classifications into two: those measured at fair value, and those measured at amortized cost. In making the determination between the two categories of fair value and amortized cost, there are two possible ways the board could go, according to Tweedie. "You can say, anything that's traded is at fair value and anything else at (amortized) cost," [sometimes described as an intent-based model], "or, you can say, if you know the characteristics and cash flows of the instrument, and they are determinable, then [record at] amortized cost." He added, "We will probably allow a fair value option."

FASB Chairman Robert Herz sounded a note of caution. “I want to be as positive, constructive, and politic as I can be. We desire to get to a common, good answer with the IASB, we will make that effort to do so, but some of the direction they are currently headed in is very, very preliminarily not to the liking or acceptance of our board. In particular, one of our principles [is], you can't significantly widen the cost bucket, we don't think that's a step forward in financial reporting; there may be ways to deal with it through disclosure, that would mean more burden on U.S. preparers; if there was widening of the cost bucket, we might want to have a quarterly fair value balance sheet.” He added, "“We have talked with many investors, and the appetite in the U.S. for the sake of convergence vs. improvement is not there.” He added there is no bigger proponent of convergence than he, but questioned how impairment would be handled if more assets were potentially going to be carried at cost, or in his words, 'moved to the cost bucket’.

Tweedie said, "To clarify, I didn't want to give the impression there is no impairment test for cost [basis assets], we already have an impairment test... the credit loss model based on incurred loss."

Herz added that FASB and the IASB “need to work intensively together to see if can get to a common place, that means for other people, not just people putting pressure on the IASB, but other people who want to use global standards as their product, to be engaged in this.”

Fernando Restoy of the Committee of European Securities Regulators (CESR), an observer at the FCAG meeting, commented, "In terms of convergence, I have the impression there is [a] sort of underlying technical disagreement [on the financial instruments project] is hard to understand why we cannot get technical agreement on a well defined technical issue... at this stage of the ballgame, we should come out with a common technical solution... we cannot be in continuous discussion, we need to do something as soon as possible."

Herz responded, “Rest assured, we will move heaven and earth to try to come to a common solution [on financial instruments], but will not be on technically based narrow differences, the issue is much more fundamental to us, the issue is, what's good for investors, that's more than a technical issue; our big concern is significantly broadening a cost bucket is not perceived as a move forward, it may be a move forward to simplify things, we could only cure that with [more] disclosure.”

Tweedie replied, “I wouldn't want the impression to be given we [IASB] don't consider investors." He added, "we don't think great chunks of things will go out of fair value to the cost bucket; we are happy to consider FASB's objections, [we are] looking to try to have one model by July."

For more details on the May 22 FCAG meeting (including an impromptu call by Hoogervoorst that the group consider recommending European bank regulators conduct stress tests so there would be a level playing field for investors in European bank stocks vs. U.S. bank stocks - after hearing FASB chairman Bob Herz speak of the approach taken by U.S. bank regulators in considering upcoming changes to accounting rules, including the upcoming amendments to FAS 140 and FIN 46R, - as part of their stress tests, and the fact that the results of the stress tests were disclosed publicly; and an impromptu call by another FCAG member to consider recommending that the boards require a reconciliation and/or further disclosures to show how bank regulators adjust GAAP-based capital to arrive at regulatory capital, see this FEI Summary.)

Goldschmid closed the public portion of FCAG's May 22 meeting, noting, “There is an enormous advantage of having one set of global standards,” including to remove any perceived ‘arbitrage play’ among different sets of accounting standards. Given the amount of time taken up by FCAG members in their opening remarks and the fact that there was an extended impromptu discussion about the pressure on the standard-setters, which took up virtually the entire hour allocated to the public portion of the meeting, Goldschmid noted that with respect to the formal agenda for the meeting, "we will give short shrift to [our scheduled discussion of] independence, accountability, transparency in our open meeting, but will come back to that in our closed meeting." (See my related comment under 'my two cents,' below.)

My two cents
(I direct you to the disclaimer in the right margin of this blog, that these views are solely my own.)

I was disappointed that only one hour of FCAG's seven hour May 22 meeting was open to the public (and webcast), with the remaining time spent by FCAG in closed session. I say this because I believe sunshine serves an important purpose in informing the public about the basis of conclusions reached by a group - any group - and may even indirectly impact the dynamics and decision-making process of the group.

Here is what FCAG was originally slated to discuss in public session, according to its agenda: "How (and by whom) should oversight be exercised over accounting standard-setters on a national (or international) basis in order to ensure appropriate independence, accountability, and transparency in the standard-setting process?" However, as noted above, FCAG ran out of time during the one hour allotted to its public session, and therefore discussed the item above during its closed session.

When FCAG was first formed, I noted in this blog on 10.28.08: " I found it significant that the [FCAG] will meet in the sunshine, as stated in the [FASB-IASB] Oct. 20 press release: 'the advisory group will meet in public session with webcasting facilities available to all interested parties.' By holding meetings open to the public, this group will differ from existing advisory groups formed previously by IASB and FASB to advise them on fair value accounting issues, which have met in private, releasing brief summary points identifying issues discussed (in the case of FASB), and releasing a draft discussion document (soon to be finalized), as well as brief summaries of meetings (in the case of IASB). Specifically, the existing groups are FASB’s Valuation Resource Group (VRG) and IASB’s Expert Advisory Panel (EAP). Whether the form or substance of any recommendations coming from the [FCAG] will differ from previous output from the VRG or EAP due to the public nature of meetings is an unknown, but the fact that the meetings will be open to the public, to some, may enhance confidence in the process." [Note: in the original post last year, I refered to FCAG generically as a Global Advisory Group or GAG, references to GAG in this quote have been changed to FCAG. Additionally, in 2009, FASB's VRG changed its practice and began meeting in open session.]

Separately, FCAG's Charter states: "In order to provide the boards and others in the financial reporting system with the benefits of their advice, the advisory group will generally meet in public sessions, with webcasting facilities available to all interested parties. The advisory meetings also may involve private sessions, at the discretion of the co-chairs." Additionally, the Charter states: "Conduct of its Activities: Advisory group meetings are the primary mechanism that will be used to provide input to the IASB and FASB. The advisory group’s role is not to reach a consensus or to vote on the issues that it considers at its meetings. For that reason, it is important to convene the advisory members as a group so that the boards can hear the individual members’ views and members can hear and respond to each other’s views."

Although the charter states FCAG's role is not to reach a consensus, and stresses the importance of convening the members as a group so all views can be heard in such meetings, it appears FCAG's approach has evolved in that it plans to issue a final report in July, which presumably - in my estimation, based on listening to a number of FCAG meetings - will include statements expressing areas in which FCAG has reached 'consensus,' 'agreement,' or 'recommendations.'

If it is the case that 'consensus' views, areas of 'agreement' or 'recommendations' of the group are to be included in FCAG's final report, as I expect they will, it would be helpful to understand - preferably via a public meeting - what the word 'consensus' really means, i.e., does it represent the views of 51% of the group - or 99% of the group? Were members of the group asked to vote in an individual roll call vote, in a call of 'all yeas' and 'all nays,' or did one of the co-chairs state, 'I believe we have reached a consensus ...' and no one or only a few people objected to that statement? To the extent less than 100% of a group voted in favor of a consensus, were the remaining views diametrically opposed to the consensus, or was there only a slight difference in opinion? Is there only one alternative view, or are there many alternative views? Votes taken in public meetings serve to answer these questions.

One way of shedding some light on potential dissenting views among the FCAG members could be by listing any dissenting views in the final report. However, there can be dynamics at play in any group, wherein someone with a view that differs from the consensus still does not want to have their view characterized as a 'dissent,' and if that person's views were not previously given sunlight through discussion at a public meeting, the public (and the target(s) of any such recommendations) may not be informed as to the strength, or nuanced tone, of any such 'consensus.'

It will be interesting to see how FCAG allocates the public and closed portions of its final meeting on July 10, and if any formal votes are taken in the public session. Since FCAG was formed to advise FASB and the IASB, any 'consensus views,' 'recommendations' or 'areas of agreement' contained in FCAG's final report will likely be aimed at the boards; and in my estimation, based on discussion at the May 22 meeting and prior meetings - at which concern was expressed about political and other pressures placed on the boards - I would not be surprised to see some of the recommendations aimed at parties external to the FASB and IASB. All the more reason why sunshine on the decision process would be valuable, and perhaps strengthen the process itself.

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Anonymous said...

Everyone is accountable to someone. In my personal opinion, to say that there were no accounting failures during the most recent is somewhat ridiculous.

Anonymous said...

These (mainly) guys who make millions of dollars (paid to them by close interest groups) avoid meeting in sunshine to keep the old boy’s, Anglo-Saxon accounting network alive. Instead of taking advantage of new technology solutions and working with the global software industry they are blindsiding the poor regulators and the rest of the world. Perhaps someone should teach them on how to turn on a computer and/or putting RFID chips in their brains. Double entry bookkeeping was a wonderful invention but the patent on it has run out. Never heard of object tracking? including mortgages and financial instruments.
The whole approach reminds me of the messy US legal profession who killed Andersen rather than to compete with them.

Paul Wilkinson said...

U.S. GAAP and IFRS, when adhered to by accountable and responsible professionals, are wonderful systems of STRUCTURED financial disclosure, and it will be even better for investors when they only need to learn one system. Meanwhile, disclosure about asset backed securities was UNstructured, leaving the market without the information needed to burst the bubble built until it was too late. If you're going to use other people's money or create systemic risk (i.e., big leverage), you should be required to describe how the money is being used, with GAAP, IFRS, or another proven form of structured disclosure.

gene said...

Just completed our 2008 audit and saw first hand how auditors interpreted FAS 157. The FAS needs to be subject to political pressure, because they certainly aren't responsive to us old practical accountants...