The US Presidential campaign is almost over. As the Grateful Dead would say,
‘What a long, strange trip it’s been’.
In the 60 days before the election, the US Congress passed the $700bn
(£429bn) Emergency Economic Stabilization Act of 2008 (EESA), major global
financial institutions went bankrupt or were taken over by governments, and
central banks forced liquidity into global financial markets.
We may even see a second economic stimulus package in the US this year. And
at the end of October, the SEC plans public hearings to explore suspension of
FAS 157 and mark-to-market accounting.
Strangest of all? Accounting standards are now discussed on talk shows. The
political, economic, and business worlds have collided. It all makes me giddy.
Our arcane science of accounting is in the limelight.
I’ve been writing about accountants and their obscure alchemy on my blog for
the last two years. I’ve watched as the US Congress, regulators, business
leaders, academics, lawyers, standards setters, and the Big Four audit firms
wrangle over issues such as mark-to-market accounting, regulation of private
equity and hedge funds, limits on executive compensation, and better corporate
Unfortunately, this debate is taking place because of the inability of
accountants to defend their accounting. Absent other scapegoats, accounting
standards may take the blame for the worst crisis to threaten capitalism since
Depending on whom you ask, regulators were either over-regulating,
under-regulating, or not sufficiently enforcing regulations. The confusion comes
because the accounting standard that’s being blamed for exacerbating the
financial crisis is FAS 157. In theory, FAS 157 is simple. Not so in its
application to the financial services industry and to the ‘innovative’ financial
instruments used to fund the global housing boom.
Securitising sub-prime mortgages and then selling and reselling them passed
the higher than average default risk along as long as the housing boom music was
playing. When that music stopped, quite abruptly for some, many of our largest
global institutions were left holding booby prizes, securities with difficult to
Obama and McCain both voted for the US bailout package. Both supported US
Treasury secretary Paulson. If the polls are an indicator, Obama will win on 4
November, and then be burdened by the impact on the economy and politics of
decisions of the Bush administration and congress during the last 60 days.
Though he has not commented directly on the FAS 157 issue, if elected, Obama
will likely support accounting standards that reflect the true value of assets.
And he may have three experienced former SEC chairmen to help him implement his
economic plan: David Ruder, William Donaldson, and Arthur Levitt have endorsed
Big Four audit firm leaders met with SEC chairman Cox on 3 October to express
disapproval of the suspension of FAS 157 rules. Suspending the rules, PwC’s
chairman Dennis Nally said, could ‘plant the seeds for the next crisis’. FASB
has said that criticising fair value accounting is ‘shooting the messenger.’
The Big Four are right when it comes to maintaining the integrity of FAS 157
and fair value. But their immediate concerns are based more on fear of liability
than professional principle. They fear being forced to sign financial statement
opinions with no option to veto management’s estimates or valuations of material
balances. But their behind-the-scenes lobbying to delay or drop the idea of
suspending FAS 157 may head off a reactive, short-sighted, politically motivated
disregard for the rules until the election is decided.
A new president and his team must work with Congress, Treasury, and the SEC
to develop a reasonable approach to getting back to ‘true and fair’. Hopefully,
a new administration will help major financial institutions to restore
integrity, as well as transparency, to the global banking system. A strange
trip, but it’s
time to roll with the changes.
Francine McKenna leads McKenna Partners LLC, a
specialised consultancy, advising other professional services firms, especially
those with interests in Latin America. She blogs at:
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