Regulation

Bernanke, Paulson Champion Global Accounting

In House financial-services committee hearing, they counter "outsourcing" IFRS challenge with argument that a single accounting standard is a good ...
Alan RappeportJuly 10, 2008

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke both defended the Securities and Exchange Commission’s plans for converging American accounting standards with international bookkeeping rules.

Their comments on Thursday came in response to criticism over the rapid progression of the project that is being pushed aggressively by SEC Chairman Christopher Cox. Michael Capuano, a congressman from Massachusetts and a member of the House Financial Services Committee, questioned the Treasury and Fed chiefs on the wisdom of outsourcing, in a manner of speaking, the rules that affect how companies report their most crucial information — including earnings — at a time when the U.S. is in the midst of a regulatory overhaul. Paulson and Bernanke were testifying at hearing about how to overhaul the regulation system.

Quoting from recent news reports that were critical of the conversion to international standards, Capuano said, “If they do this right now I will have some major concerns.” He particularly worried about the changeover in standards being managed too quickly, and during a time while the markets have been fragile.

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“I’m familiar with it and I’m supportive of it,” Paulson said of the plan, explaining that it is meant to make it easier for foreign firms to do business in the U.S. “There are different accounting regimes with different standards and different requirements. That doesn’t make them worse than ours. We’ve had plenty of issues with our accounting regime.”

Paulson disagreed with the notion that convergence should be equated with outsourcing American standards. He reminded Capuano that the SEC was focusing on accounting regimes for which the standards were similar in principle to those in the U.S.

For his part, Bernanke emphasized that despite a recent burst of news about International Financial Reporting Standards, the conversion project has been in the works for a while. The Financial Accounting Standards Board and the International Accounting Standards Board have been moving deliberately to allow foreign firms to operate in the U.S. without having to file two sets of books, he noted.

“I don’t think it causes any major problems with our accounting system or regulatory system,” Bernanke said.

Paulson and Bernanke did express concerns about other parts of America’s regulatory structure at the hearing. The Fed chairman noted that, in the long term, legislation may be needed to provide a “robust framework” for supervising investment banks and other securities dealers. Meanwhile, Paulson reiterated his hopes for consolidating regulators and creating a system that can “withstand the failure of a complex financial firm.” Critics complained that the government bailout of Bear Stearns, which had been considered by some “too big to fail,” might lead to moral hazard and more reckless behavior.

Barney Frank, chairman of the House committee, argued that the era of deregulation was over, and that “regulation done right” was in fact pro-market. He praised Paulson and Bernanke for their handling of the credit crisis and the Bear Stearns collapse. And while Frank did not comment specifically on the conversion to IFRS specifically, he said that, in general, the goal of regulators should be to devise tools to prevent future crises.

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