FASB On Troubled Debt; Congress On Troubling Accounting

(video credit: abo1121's youtube post of Rob't Preston, The Music Man, at the 1971 Tony Awards)

This week saw the issuance by FASB of a new standard on troubled debt restructurings, and a Congressional hearing on accounting and auditing issues that some members of Congress found troubling. The FASB standard was issued on Tuesday in the form of Accounting Standards Update (ASU) No. 2011-02: Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring. As noted in FASB's press release and a related FASB in Focus:

For public companies, the new guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may indentify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. For nonpublic entities, it is effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Early adoption is permitted for public and nonpublic entities.

The Congressional hearing on accounting and auditing, which took place yesterday, was convened by the Senate Banking Committee's Subcommittee on Securities, Insurance and Investment. Entitled "The Role of the Accounting Profession in Preventing Another Financial Crisis," panelists at the hearing included FASB Chairman Leslie Seidman, SEC Chief Accountant Jim Kroeker, PCAOB Chairman Jim Doty, Anton Valukas (Examiner in the Lehman Bankruptcy proceeding), former SEC Chief Accountant Lynn E. Turner, Center for Audit Quality (CAQ) Executive Director Cyndi Fornelli, and U.S. Chamber of Commerce Center for Capital Market Competitiveness VP Tom Quaadman. Click on the link to the hearing to view the archived webcast, and links to testimony. Some of the news outlets that covered highlights from the hearing are linked below:

Auditors Not Solely To Blame For Crisis, Stronger Role Necessary, Experts Testify (Tina Chi, BNA Daily Report for Executives). EXCERPT:

In his opening remarks, subcommittee Chairman Sen. Jack Reed (D-R.I.) said that the goal of the hearing was not to place the blame of the financial crisis on one company or one auditor. The purpose was to discuss how to eliminate the “systemic weaknesses that may continue to impair investor confidence and provide inadequate information to the investing public, public company directors and general markets,” he said. In response to Reed's question about why faulty accounting and audit practices were “allowed to go on,” Doty said that in the buildup to the financial crisis, many auditors were not “self-reliant” and did not feel that they could approach audit committees and management to sound an alarm about problems associated with the “momentum investing” that was so popular at the time. This hesitancy on behalf of auditors is something that the “audit profession is well aware of now, and knows it needs to change,” Doty said....

...[I]n addition to the FASB's shortcomings, the SEC as well as audit committees also played a role in the financial crisis as well, [former SEC Chief Accountant Lynn E.] Turner said. “The SEC has probably not been adequately performing the oversight it needed to do. The lack of certain disclosures is troubling,” he said. Audit committees need to play a stronger role in enhancing and improving the transparency of the audit process as well, he said. According to Turner, the PCAOB should undertake [a comprehensive] study of the role of the auditors and accounting profession in the financial crisis and issue a public report on its findings. “I believe such a retrospective review, in-depth study, and report by not only the PCAOB, but also the SEC and FASB, should be undertaken and published,” he said...

Congress Probes Accountants' Role in Financial Crisis (Michael Cohn, AccountingToday). EXCERPT:

Financial Accounting Standards Board chair Leslie Seidman discussed the role of FASB in the standard-setting process and referred back to the controversy over mark-to-market accounting... Cindy Fornelli, the executive director of the Center for Audit Quality, agreed that auditors did not cause the financial crisis. “Following the past several years of global economic turmoil, there have been extensive examinations by panels and commissions to identify the root causes of the financial crisis and determine what could be done to reduce the risk of a future similar crisis,” she said. “While none of the panels or commissions found that auditing was a root cause of the financial crisis, auditors, like all participants in the capital markets, have a responsibility to examine their role in light of lessons learned from the crisis and consider what improvements can be made in audit standards and what more they can contribute to market integrity and investor protection.” Thomas Quaadman, vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce argued for less reliance on prescriptive rule-making by standard setters and greater transparency. “For decades, standard setters have been operating under inadequate rules and guidance, resulting in the impairment of financial reporting and as a contributing factor that escalated the financial crisis,” he said. “In order to prevent the next crisis we must address the fundamental flaws with the system.” Public Company Accounting Oversight Board chairman James Doty urged Congress to amend the Sarbanes-Oxley Act to allow for public disciplinary hearings of auditors...

And, here's some additional points of view: - Ben Hallman highlights the hearing in The Center for Public Integrity Blog, Paper Trail. - Prof. Dave Albrecht, a fairly outspoken and widely read blogger, provided his take on the hearing in his blog, The Summa. - Jim Hamilton covers the hearing in Jim Hamilton's World of Securities Regulation. UPDATE 4.13.11: Tom Sellingprovides his thoughts on the hearing in his blog post today in The Accounting Onion.

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