Tuesday, November 3, 2009

FASB Oversight Subject of Congressional Interest

As we previously reported, Rep. Ed Perlmutter (D-CO) introduced a bill earlier this year (HR 1349), which would create a Federal Accounting Oversight Board (FAOB). More recently, Rep. Gary Miller (R-CA) proposed an amendment to create a Financial Reporting Forum (FRF). The two legislative initiatives vary in terms of how much oversight power the recommended bodies would have over the FASB. Various constituents have spoken out or filed comment letters recently on the proposed legislation that would impact FASB oversight specifically, and on the general subject of accounting standard-setter independence, as detailed below.

Perlmutter's Proposed FAOB Would Take Over Oversight of FASB From SEC
HR 1349, Section 4 would amend the Securities Act of 1933 to remove the SEC's role as the ultimate authority and overseer of accounting standards for public companies (a role which SEC has traditionally delegated to FASB, with oversight by the SEC, as reinforced in the Sarbanes-Oxley Act) and replace the SEC's authority in this area by assigning it to a new body called the Federal Accounting Oversight Board (FAOB). The FAOB as proposed by Perlmutter would focus on, among other things, systemic risk implications of accounting standards, and its five members would include the Chairmen of the Federal Reserve Board, FDIC, SEC and PCAOB, and the Secretary of the Treasury.

We understand that Perlmutter intends to offer an amendment on the Financial Stability Improvement Act (the bill relating to systemic risk regulation) to incorporate language from HR 1349.

Miller's Proposed FRF Has Similarities To CIFiR Proposal
Last week, Rep. Gary Miller (R-CA) offered an amendment to the Investor Protection Act (HR 3817), which some view as a competing amendment to Perlmutter's bill. Miller's amendment, adopted by voice vote by the House Financial Services Committee on October 27, (shown on this list of amendments on the Discussion Draft of the IPA as Amendment No. 13) would create a Financial Reporting Forum (FRF).

Miller's proposed FRF would differ dramatically from Perlmutter's proposed FAOB, primarily because the FRF (as shown in the current version of Miller's amendment) would NOT have oversight authority over the FASB.

In fact, the only duties assigned to the FRF in Miller's amendment would be to:

  1. meet to discuss immediate and long-term issues critical to financial reporting, and
  2. issue an annual report to Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters.

The first duty assigned to the FRF noted above, i.e., to serve as a discussion forum, is analogous to duties of a similarly named FRF contained in Recommendation 2.3 in the final report of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR final report), in which CIFiR recommended that the SEC in turn issue a recommendation to:

Create an FRF [Financial Reporting Forum] that includes key constituents from the preparer, auditor, and investor and other user communities, to meet with representatives from the SEC, the FASB, and the PCAOB to discuss pressures in the financial reporting system overall, both immediate and long-term, and how individual constituents are meeting these challenges. This may require the FASB to re-evaluate the roles and composition of its advisory groups or agenda committees.

However, the second duty assigned to the FRF by Rep. Miller - i.e., for the FRF to report to Congress annually, including any recommendations for legislation relating to financial reporting matters - reaches beyond the duties of the FRF as recommended by CIFiR.

Additionally, the composition of the FRF in Miller's amendment is generally more expansive than that recommended by CIFiR. Most significantly, Miller adds the chairmen of the banking agencies (and the NCUA) to the FRF - in addition to the Chairmen of SEC, FASB and PCAOB - whereas CIFiR only called for representatives of the SEC, FASB and PCAOB (but not the chairmen of those agencies), and did not call for the banking agencies to be included.

Also, the Miller amendment, like the CIFiR recommendation, calls for representatives of auditors and investors (with the Miller amendment expressly calling for those representatives to be appointed by the SEC), although instead of calling for a 'preparer' representative as CIFiR does, the Miller amendment calls for a representative of a financial company, and a nonfinancial company (both to be appointed by the SEC). [NOTE: This could potentially be a significant difference, in that the financial and nonfinancial company reps may or may not necessarily be experts at financial reporting, if they are not from, e.g. the CFO or accounting function at the company.]

Status of Miller and Perlmutter Amendments

According to staff in FEI's Government Affairs office in Washington, D.C., the House Financial Services Committee, chaired by Rep. Barney Frank (D-MA), is engaged in mark-up of both the Financial Stability Improvement Act (FSIA) and the Investor Protection Act (IPA) this week.

We understand that it is possible that both Miller and Perlmutter's amendments may be adopted (in the IPA and FSIA, respectively), with any potential legal conflicts worked out later in the process (i.e., potentially when each regulatory reform bill is packaged together and brought to the full House for a vote sometime in November or December.)

FEI members with questions about the status of this or other legislation can contact Matt Miller, Senior Director, Goverment Affairs, mmiller@financialexecutives.org or Cady North, Manager, Government Affairs cnorth@financialexecutives.org, in our Washington DC office.

Chamber, CII, CAQ Write Congress
Yesterday, a joint letter was filed by the U.S. Chamber of Commerce Center for Capital Market Competitiveness, the Council of Institutional Investors, and the Center for Audit Quality (an affiliate of the AICPA), addressed to the Chairs and Ranking Members of the House Financial Services Committee and its Capital Markets subcommittee, which appears to allude primarily to the Perlmutter amendment, voices continued support for an independent standard-setting process, and objects to any change to FASB oversight. Specifically, the Chamber/CII/CAQ letter (I'll refer to this group later as the 3C's) states:

[W]e are writing to discourage the Committee from taking actions that would potentially impact the independence of accounting standard setting. As the Committee considers reforms to the U.S. financial system as part of the Financial Stability Improvement Act of 2009 (H.R. 3904), we are concerned with recent proposals that would realign the oversight of the Financial Accounting Standards Board (FASB) within the structure of systemic risk....

In adopting the Sarbanes-Oxley Act of 2002, Congress recognized the benefits of having accounting standards set by an independent body and established a process
for the establishment and oversight of financial reporting policy. In doing so, Congress designated the Securities and Exchange Commission (SEC) as the primary agency with oversight over accounting standard setting...

While dialogue and input between standard setters and all stakeholders might be improved, a realignment of oversight within the structure of systemic risk regulation could have adverse impacts on investor confidence, which is of critical importance to the successful operation of the U.S. capital markets.
My two cents

I remind you of the disclaimer posted in the right side of this blog (above the Blogroll). The 3C's letter (the Chamber/CII/CAQ letter) covers a number of points relating to the Perlmutter amendment, which it refers to somewhat obliquely, by referencing recent proposals relating to systemic risk, that would realign oversight of the FASB.

I am going to focus my comments on the Miller amendment calling for a Financial Reporting Forum. I believe Miller's amendment may have a greater likelihood of surviving through the House (and later, Senate, and conference committee) action on the bill, since

  • it does not threaten to expressly change FASB's oversight model, and
  • it is a clone (well, maybe not a clone, but a sibling, or let's say a cousin) of the SEC CIFiR Recommendation 2.3 which also called for a Financial Reporting Forum, albeit a more narrowly structured one, with a more narrow scope.

One could view the Miller amendment as being largely motherhood and apple pie, in assigning a Financial Reporting Forum the duty of discussing immediate and long-term issues of importance to financial reporting, which is virtually identical to CIFiR's recommendation.

The fact that Miller also calls for the FRF to report annually to Congress on any legislative proposals relating to financial reporting is not necessarily a bad thing.

  • On the one hand, some may fear this invitation for legislative proposals could become a Pandora's box, potentially imposing on FASB's independence.
  • On the other hand, any such legislative recommendations could also potentially have a positive effect by reinforcing or strengthening matters relating to FASB, the SEC or PCAOB.
  • However, if this duty to present legislative recommendations is viewed as a true roadblock to the Miller amendment, perhaps some will argue to remove this second duty from the FRF (e.g., FRF could still provide an annual report to Congress, without being required to include 'legislative recommendations' per se).

Additionally, it may not necessarily be a bad thing to expand the composition of the FRF, as Miller envisions, from the model envisioned by CIFiR (which included only SEC, FASB, PCAOB, auditor , preparer, and investor reps), to expressly include representatives of the banking agencies.

Related to this, there may be some worthy systemic risk considerations that could be assigned to the FRF, such as described in Perlmutter's amendment, sans the change in oversight powers which Perlmutter includes.

Some may view a suggestion to invite the banking regulators to the table of the proposed Financial Reporting Forum as heresy, or as an ipso facto threat to FASB's independence. I don't see it that way, particularly in light of the lessons learned in today's (hopefully) post-economic crisis environment, in which suggestions have been made in various quarters to bring together multifaceted regulatory agencies to interact more robustly and relate all the various pieces of the puzzle under their realm.

Paul Volcker, Chair of the President's Economic Recovery Advisory Board and former Chairman of the Federal Reserve Board and the International Accounting Standards Committee Foundation (IASCF), sounded a similar theme, I believe, in remarks last week at the AICPA-IASCF convergence conference.

As noted in the excerpts below from the article, Volcker Heartened by Regulators Reaction to Crisis Warns Against Isolation (Steven Burkholder, BNA Daily Report for Executives. Reproduced with permission from Daily Report for Executives, 208 DER I-4 (Oct. 30, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com/):

Volcker... praised the International Accounting Standards Board and its U.S. counterpart Oct. 29 for reacting to the financial crisis sensibly, as he also warned against the dangers of isolation presented by notions of independence and the specialized world in which rulemakers work....

As chairman of IASCF trustees from 2000-05, Volcker said, he was barred from speaking on the substance of rulemaking topics before the international board. However, four years after his service ended, the statute of limitations had run its course, he said.

Speaking more freely, Volcker focused on the need for IASB and rulemakers to be independent. Along those lines, he listed other words that expressed desired qualities in rulemaking: “professionalism,” “expertise," and “uniformity,” which he said also reflected good values in central banking.

“But I think it's also true that the accounting standard setters—and whether you're talking about economists” or central bankers, he continued, “you know an organization that is shrouded in independence can also become a kind of professional cocoon. It can slip into isolation—even, may I say, arrogance.

“In that respect, it is subject to some of the dangers of central banking, and think of themselves as some high priest, or some occult science that ordinary mortals should not touch,” said Volcker. “But the fact is they have to deal—central bankers, or accountants or standard setters—with some really complicated realities that don't always fit very nicely into theoretical concepts.”

I particularly like Volcker's reference to the need for standard-setters (and this could apply to almost anyone) to avoid "think[ing] of themselves as some high priest, or some occult science that ordinary mortals should not touch."

Said another way, [and I did say this, in a column I wrote in the July/August issue of Financial Executive Magazine, entitled Standard-Setters and Sovereignty (free login account required to read article)]:

In this charged atmosphere, the role of sovereign bodies with respect to accounting standard setting continues to be debated. How much oversight or influence of standard-setters by sovereign bodies is too much? When do actions taken in the name of oversight compromise the independence of standard setters? Or, when do such actions “unduly” compromise the independence of standard setters? If FASB and IASB were 100 percent independent, would that make them sovereign, too? This heated debate is likely continue through the summer and beyond.
Balancing relevance and reliability, practical concerns and theoretical constructs, and the needs of a broad range of constituents, is a daunting task for any standard-setting body; FASB and the IASB work hard under the weight of these formidable challenges.

Their efforts were praised by Volcker in his remarks last week, as reported by BNA: "Volcker... was encouraged by progress made to date on both the writing of high-quality standards and their increasing acceptance worldwide."

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