The profession in the United States might think its day of reckoning came and
went in 2002. But those who thought that the
Oxley Act was the final word in regulation may be in for a rude surprise.
Both Barack Obama and John McCain have pledged to put what remains of Wall
Street’s financial institutions under a close watch. And not since Franklin
Delano Roosevelt entered the White House in 1933 have the American people
appeared so keen to see it happen.
The only sure outcome of the current credit crisis is that the 30 year trend
in America towards deregulation is over.
An increased appetite in Washington for regulating the financial markets
could have a number of effects on accountants.
Experts speculate that an Obama presidency might have the effect of stalling
the US’s shift towards international financial reporting standards, as the new
president confronts the unwelcome prospect of allowing foreign control of how US
companies draw up their balance sheets. The opposition of Obama’s Democratic
Party to limiting litigation against accountants who cook the books will
probably grow even more aggressive in response to shareholder anger.
Any proposals to limit liability would be expected to meet renewed
scepticism. ‘I would caution the accounting profession to recognise that when
people start looking for scapegoats, anybody could be found,’ says Harvey Pitt,
former chairman of the Securities and Exchange Commission and now CEO of the
consulting firm Kaloram Partners. ‘No sector of our financial markets will
So far, of course, it is the Wall Street bankers who are the main target of
public anger. And as credit contracts, the populist rhetoric of both McCain and
Obama have expanded.
In speeches, McCain, the Arizona Republican senator who likes to claim he is
outside the establishment, has struck out against bankers’ greed. Obama, the Ivy
League educated and bookish Democratic senator from Illinois, has cast himself
as standing up against ‘welfare for Wall Street’.
As bankers sustain criticism, some US financial commentators have tried hard
to redirect some blame towards fair value principles. ‘The people who are being
painted as the villains are saying that none of this would have happened unless
you had forced us to value what’s in our portfolio as if we had to sell it
tomorrow,’ says Fleischman, who is now a senior counsel in Linklaters’ New York
office. ‘They want to pin the whole tail on the donkey of the accounting
Increasingly, fair value accounting has come under fire, with critics saying
that it needlessly weakened balance sheets. Proponents say that a departure from
fair value principles would further prevent lending between banks and make it
impossible for investors to gauge the health of a financial institution.
US legislation passed in October that authorised the $700bn bailout plan
contains a provision that explicitly grants the SEC authority to suspend fair
value. Given that the SEC already had the authority, the new provision is ‘just
covering with a handkerchief something already covered with a bedspread’,
according to John Coffee, a law professor at Columbia University, Obama’s alma
mater. The debate over fair value has spilled out into newspapers and magazines,
and even into the presidential race.
McCain, in speaking to a group of Hispanic business owners in southern
California back in March, suggested that fair value was fuelling the credit
‘It is time to convene a meeting of the nation’s accounting professionals to
discuss the current mark-to-market accounting systems,’ he declared. ‘We are
witnessing an unprecedented situation as banks and investors try to determine
the appropriate value of the assets they are holding and there is widespread
concern that this approach is exacerbating the credit crunch.’
At the beginning of October the SEC and
Financial Accounting Standards
Board gave some flexibility to companies to deviate from fair value
accounting and use their own models, as opposed to current market information,
when trying to value distressed assets for which no willing buyers exist.
A senior economic adviser to McCain, Douglas Holtz-Eakin lauded the
regulatory decision. Sadly, McCain’s remarks about fair-value appear to be the
first and only serious discussion by either candidate of accounting principles
in the presidential race.
The only economic issue over which the candidates routinely wade deep into
details are their plans to cut taxes.Neither Obama nor McCain has experience in
the business world.
McCain was elected to the Congress in 1982, a year after retiring from the
Navy. His wife is the heiress of an Arizona beer distribution company. In the
Senate, McCain’s main interest has been foreign affairs. He admitted last year
that ‘the issue of economics is not something I’ve understood as well as I
Before election to the Senate, Obama taught for more than a decade at the
University of Chicago Law School, which is known for specialising in the study
of the intersection of law and economics. But the classes Obama taught focused
on constitutional law, voting rights and racial issues.
‘We don’t know what would happen with either of these folks,” says Neal
McGarity, spokesman for the FASB, referring to what a McCain or Obama presidency
would mean for the profession.
‘The big question,’ said Wayne Landsman, an accounting professor at the
University of North Carolina Business School, ‘is whether the US is, after the
election, going to be committing to IFRS.’
In August the SEC proposed a roadmap that would require all US public
companies to file financial statements using IFRS in 2014, with the convergence
between IFRS and the US GAAP relieving multinational companies from having to
keep two sets of books.
‘I had thought the train had left the station, but I wouldn’t bet on it now,’
says Landsman on the likelihood of convergence.
While Obama has not addressed the issue, accounting experts speculate that
the Democrats pro-regulatory stance could make an Obama administration wary of
ceding control away from US regulators. ‘It would be a lot harder to sell to the
American people that the people who set accounting standards, even though the
SEC has input in the process, is a group who meets every once in a while over in
England,’ says Fleischman. ‘It just doesn’t sound right to Americans.’
Others also speculate that Obama’s pro-labour posture against free trade
could be viewed as a signal that he could be reluctant to converge the US GAAP
and IFRS. ‘Obama appears to be much more an American firster, with a more
insular view of the world that resonates fairly well with labour,’ says James
Cox, a law professor at Duke University. ‘It’s unlikely that the Obama
administration would embrace the mantra of the Chamber of Commerce.’
However, at least one former SEC commissioner, Roel Campos, has been reported
to be advising the Obama campaign. Campos, now a Washington lawyer, was
In the unlikely event…
And a McCain administration should the current opinion polls be reversed
and he wins might be inclined to oppose convergence if IFRS is identified as
being more strongly committed to fair value.
‘Let’s look at the political reality. As a talking point this anti-fair value
thing has come up,’ says Landsman said. ‘It’s perceived that the IASB is more
wedded to fair value accounting than FASB. If that perception carries the day
politically, you can imagine the backlash.’
Another key issue is litigation. And commentators are predicting that in the
next administration, proposals to put ceilings on penalties that litigants can
win in US courts for suing accountants and auditors are unlikely to gain ground.
Juries in America are fond of big verdicts. In one recent case, a jury in New
Jersey state court ordered KPMG to pay nearly $32m over the firms’ failure to
find fraud in the books of a company that made collectible statuettes. Last
year, a Miami court ordered BDO Seidman to pay a Portuguese bank more than £300m
in another suit.Democrats, who have a chance of sweeping Congress in the coming
elections, are highly unlikely to erect laws preventing such kinds of damages
being hoisted in corporate defendants in the current climate.Before the current
financial meltdown, the accounting industry won a major victory this January
when the US Supreme Court made it much more difficult for shareholders to
include accountants and other secondary players, such as lawyers, as defendants
in most shareholder litigation.
But a Democratic Congress could seek to change the securities fraud law to
explicitly make accountants liable even in instances where there were no
publicly issued statements.
‘This will be a climate in which Main Street doesn’t like Wall Street,’ said
Prof Coffee of Columbia University. ‘Even very de-regulatory people do not like
investment banks today. The idea of suing them and suing their friends is not as
unpopular as it was two years ago.’
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