Risk & Compliance

Keep Bank Regulators Away from FASB: SEC Commissioner

Commissioner Elisse Walter hopes to squelch a legislative proposal that would make FASB subject to oversight by banking regulators. Other critics s...
Sarah JohnsonNovember 17, 2009

SEC commissioner Elisse Walter is fighting a proposal that would weaken the regulator’s authority over accounting standards-setters. In a hearing Tuesday before a House committee, Walter called the concept of allowing bank regulators to have a significant say in accounting rules “a grave mistake.”

While Walter’s prepared speech included the usual caveat that her words were not representative of the entire commission, she noted that Securities and Exchange Commission chairman Mary Schapiro “endorses this testimony.”

Currently, the SEC has budget approval over the Financial Accounting Standards Board, which it has designated as the main U.S. accounting standards-setting organization. The commission also frequently provides input to the board’s standards-setting activities. In addition, the SEC has the ability to nominate and interview trustees of the Financial Accounting Foundation, FASB’s parent, which nominates and approves the five FASB members.

All this year, lawmakers have toyed with the idea of making FASB subject to a new oversight body as they work to pass sweeping financial regulatory reforms. Soon, Rep. Ed Perlmutter (D-Colo.) is expected to introduce an amendment to the Financial Stability Improvement Act — a key piece of legislation in the markup phase in the House Financial Services Committee — that would establish a new board of regulators, including bank regulators, to oversee accounting standards-setting. Critics are concerned that the body would give the bank regulators too much say on accounting rules.

The concept has been embraced by advocates of financial institutions — many of which have blamed fair-value accounting rules for exacerbating the financial crisis. Conversely, investors, business advocates, and accounting firms oppose such a move, as they fear it would harm FASB’s independence.

In an unusual pact, the Council of Institutional Investors, the Center for Audit Quality, and the U.S. Chamber of Commerce have come out against the proposal. The groups believe changing FASB’s oversight would skew the rules in favor of the whims of the banking industry, without regard for other industries and the overall needs of investors. “We think it’s very important that we keep our sights on what the accounting standards are meant to do and meant to serve,” CAQ executive director Cynthia Fornelli told CFO.com.

Walter expressed similar worry during her testimony Tuesday. “Establishing a new process that would permit regulators to weaken accounting standards, reduce disclosure, or allow the basis by which economic performance is measured to fluctuate with the economic environment could provide a new avenue for particular institutions to lobby for — and potentially receive — special treatment,” she said.