Global Crisis Group Offers Integrity Backstop

U.S. and international accounting standard-setters form a monitoring body to help the industry cope with future political storms.
Sarah JohnsonDecember 31, 2008

The newly established Financial Crisis Advisory Group — a heavyweight board made up of current and former regulators and financial-services executives, and headed by a former commissioner for the Securities and Exchange Commission and a Netherlands regulator — has its work cut out for it in 2009. But it carries the hopes of many.

Formed by both the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, the 18-member group has been given the mission of staving off undue interferences in rulemaking. It will be taking on that task, of course, in an environment of financial maelstrom, resounding with calls for sweeping changes to fair-value accounting.

The advisory group has been given six months to address both how financial reporting helped uncover the current problems, and how it helped hide them as the crisis unfolded in the U.S. and abroad. The group will also explore the ties that mark-to-market accounting and off-balance-sheet accounting had to the collapses on Wall Street.

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It also offers a fresh resource for providing perspective among existing U.S. and global accounting standard-setters, which have become entrenched in their crisis response for the past several months — and have seen their reputations tarnished.

IASB chairman David Tweedie, for example, has acknowledged that his board bowed under pressure from the European Commission, and skipped over its normal due process to expedite a rule allowing financial institutions to reclassify some loans as a way of avoiding marking those assets to market. Tweedie has said that he considered resigning rather than cave to the political demands, but stayed on to oversee the rule changes to two of IASB’s standards rather than allow the EC to make good on its promise to override the board.

Overseen by the SEC, this country’s FASB has also had to deal with criticism of its fair-value standard, which bankers largely have blamed for the crisis following their large writedowns of securities backed by mortgages. Some lawmakers have also called on the SEC to suspend mark-to-market accounting and have mandated the commission study the issue. The report is due to Congress on Friday.

In the meantime, the standard-setters have defended their independence. “We are very concerned about recent efforts in the United States and abroad that contemplate political solutions to perceived flaws in certain accounting standards,” Robert Denham, president of the Financial Accounting Foundation, wrote in a letter to President Bush in the fall. FASB chairman Robert Herz has said he hopes the new monitoring group will address many of the issues that have come up and explore how financial reporting issues tie into public policy issues.

In describing the new Financial Crisis Advisory Group, joint chairman Hans Hoogervorst, of the Netherlands, pointed to its powerful global membership as a hopeful sign. “The diversity and seniority of the group will help to ensure that any enhancements to financial reporting are considered in the context of the broader financial system and measured against a benchmark of enhancing investor confidence,” Hoogervorst said. Harvey Goldschmid, the former SEC commissioner, co-chairs the group, which will hold its first meeting in January.

Among the other U.S. members: Vanguard founder John Bogle; former New York Federal Reserve Bank president Jerry Corrigan; and former U.S. Comptroller of the Currency Gene Ludwig. Former SEC chief accountant Don Nicolaisen, who has been a longtime supporter of the U.S. adopting international standards, is also part of the group.

Michel Prada will represent France as a former chairman of the country’s financial markets regulator. French president Nicholas Sarkozy has been one of the loudest critics of fair-value accounting and is attributed with giving the IASB tight and demanding deadlines on making changes to its rules by the end of the year. In the last few months of 2008, both FASB and IASB have responded with roundtables and modifications to some of their standards that deal with fair-value measurements.