RegulationAccounting StandardsObama’s crusade goes global

Obama's crusade goes global

The new President's plans for major reform of US financial regulation will have important knock-on effects for the entire accounting world

While few accountancy bodies are yet prepared to formally comment on
President Barack Obama’s sweeping plans for reforming US financial regulation,
there can be little doubt that if the proposals become law the repercussions
will be felt throughout the accounting world.

A clear focus on the need for global co-operation runs through the White
House package, underscoring the President’s assertion that ‘problems in any
country’s financial system can easily and quickly spread throughout the global
financial system’.

There is no room for doubt that the Obama administration will crusade to
bring in changes at a global level. Specifically, what might accountants expect
to follow the reforms?

It is worth looking at Obama’s language on the detail of the proposals. Part
of the plan is that ‘accounting standards will be reviewed to determine how
financial firms should be required to employ more forward-looking loan loss
provisioning practices that incorporate a broader range of available credit

This will be accompanied by a review of American fair value accounting rules
­ already the subject of debate in US accountancy circles ­ ‘with the goal of
identifying changes that could provide market participants with both fair value
information and greater transparency regarding the cash flows management expects
to receive from investments’.

As has been reported, large interconnected financial businesses whose failure
could threaten the US economy ‘will be subject to consolidated supervision by
the Federal Reserve’ combined with the creation of a ‘council of regulators with
broader co-ordinating responsibility across the financial system’.

Also, new reporting requirements for issuers of asset-backed securities will
be created and there will be an insistence that securitisers must ‘retain a
financial interest’ in the performance of the asset-backed securities they help
issue. All this will require more financial reports and more comprehensive ac
counts analysis.

In the global context, the White House calls on the Basel Committee on
Banking Supervision (BCBS) ‘to develop a simple, non-risk based capital measure
to limit the amount of leverage built up in the international financial system’.

It seeks to ensure ‘more capital to offset riskier assets, such as trading
book instruments, securitised products, and off-balance sheet items’ and wants
the BCBS to complete ‘an in-depth review of the Basel II framework to mitigate
its pro-cyclical impact on the global economy’ and to strengthen the definition
of ‘regulatory capital’ so as to improve the quality, quantity and consistency
of capital held by financial firms.

National authorities are requested ‘to promote the standardisation and
improved oversight of credit derivatives and other OTC derivative markets ­ in
line with G-20 commitments’.

The BCBS is enjoined to expedite its work to improve cross-border resolution
of global financial firms ‘and develop recommendations by the end of 2009 to
help ensure that countries have powers and tools necessary to quickly resolve a
failing financial firm’.

So far this is non-specific and the US accountancy profession is taking a
relatively unconcerned attitude. ‘The accounting profession here in the US is
already regulated by Sarbanes-Oxley and the Public Company Accounting Oversight
Board (PCAOB) and all that remains in place. We don’t see any new major issues
here for the accounting profession,’ said William Roberts, spokesman for the
American Institute of Certified Public Accountants.

The Sarbanes-Oxley Act, is of course facing a potential challenge in the
Supreme Court, whose decision on the issue could influence the passage of
Obama’s proposals through Congress.

Though seldom openly expressed, there is widespread recognition among US
financial professionals that there has been a failure of the regulatory system
and general agreement with President Obama’s follow-up statement this week that
there was ‘fault across the board’.

Given the general (albeit private) welcome for the White House proposals from
accountants and other financial professions, it may be expected that there will
be few hold-ups in the US Congress.

The House of Representatives Financial Services Committee this week began a
hectic six-week schedule of hearings with the aim of producing legislation to
pass on the House floor before the summer break next month.

The Senate will not take up the matter until the summer break is over. It
seems possible that the legislation will be approved and in law, in all its
significant elements, by the end of the year.

Meanwhile, accounting professionals in the US are keeping a close watch on
how the progress of Obama’s financial regulatory reforms could influence the
ongoing debate over fair value accounting standards. Under Financial Accounting
Standards (FAS) 157, the choice of prescribed valuation techniques ‘consistent
with the market approach, income approach and/or cost approach’ to estimate fair
value ‘depends on the nature of the asset or liability being valued, as well as
the availability of data’.

And put simply, the Obama reforms could introduce new and more comprehensive
auditing and accounting processes, and lead to further insights on the
appropriateness of fair value in various scenarios.

Accountants are now awaiting enlightenment from the Financial Accounting
Standards Board (FASB) on what Obama’s detailed intentions are in this area and
whether they might have been toughened up after last week’s announcements and
the reaction in US financial circles.

There is also some outstanding business at the Securities Exchange Commission
and the stance it will eventually take on international accounting standards.
This is unlikely to be resolved until a new chief accountant is appointed by the
new chief regulator, Mary Schapiro, who has been slow to make a choice over who
should take the reins.

One thing is for sure, there still much to play for in the US over accounting
and financial regulation.

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