New Financial Accounting Standards Board Standard Should Be Reconsidered
In April 2009, the American people were in the depths of the worst financial crisis since the Great Depression. About 10 million Americans had lost or were about to lose their homes, the the unemployment rate was around 10%, and about $ 17 trillion of the wealth of American households had been lost. The people of Main Street were focused on maintaining the ability to feed their families and wondering if America’s best days were behind us. It was also at this time that the Financial Accounting Standards Board (FASB) largely abandoned its “mark-to-market” accounting principle. Apart from a few articles in economic journals and financial news organizations, the decision has gone relatively unnoticed.
Despite the lack of attention, the FASB’s decision was not a minor event, and it certainly was not an easy one. At the time, critics accused the FASB of giving in to political pressure – accusations that board members strongly opposed. In a Wall Street Journal article dated April 3, 2009, Lawrence Smith, then a board member, reiterated the importance of board independence while asserting that it cannot “ignore this. happening around us ”. I welcomed the FASB’s decision to end marketing then and continue to do so today. A month later, the S&P 500 bottomed at 666 and the US economy slowly began to rebuild.
To say that the mark-to-market was the sole culprit in the recession oversimplifies the crisis. The blame for a fall that brought the country to its knees and severely crippled the global economy cannot be blamed solely on an accounting standard. However, rescinding the standard was an honest acknowledgment that it severely exacerbated the devastation and was a prime example of the threat posed by insufficient study of the economic effects of an accounting standard that the entire financial system must follow.
Most of us have heard the famous quote from George Santayana: “Those who do not remember the past are doomed to repeat it.” Apparently those wise words never made it to Norwalk, Connecticut, where the FASB is only months away from implementing its current new expected credit loss standard (CECL), the biggest change. accountancy since 2009. While the FASB will vigorously support CECL for years, the members of the board of directors also admitted that no economic impact study has been carried out, nor that there will be, despite repeated warnings that the pro-cyclical nature of CECL will have effects similar to market valuation in a country. slow-down. In one July 23, 2019, editorial Former FDIC Chairman William Isaac and Antonin Scalia Law School Executive Director and Professor of Law Thomas Vartanian said: “A similar rush by the FASB in the face of unanswered concerns had dire financial consequences in 2008 when “Mark-to-market accounting” has been redefined by the FASB. Additionally, at a House Financial Services Committee hearing earlier this year Jamie Dimon, CEO of JP Morgan Chase, said, “CECL will force banks at precisely the wrong time.”
So why does the FASB continually neglect to conduct studies on the economic impacts of its standards? Simply put: they don’t have to. Under current law, the FASB and its supervisor, the Financial Accounting Foundation (FAF) are independent private sector organizations that do not fall under the laws that govern the making of regulatory rules and require adequate assessments before implementing implement the standards. The point is, prudence for the common good has not yet made its way onto the FASB’s agenda.
Accounting standards should not be a political issue, and the independence of the FASB has served as a laudable method of keeping standardization and the economic implications that flow from it out of the political fray. However, when independence leads to complacency and that complacency threatens American consumers, businesses and the great American economy, it is time for our citizens’ representatives to step in.
This week, I introduce a bill that will require the FASB to follow the Administrative Procedures Act and abide by the same regulatory guidelines in place for every federal financial regulator, including the Federal Reserve. The APA requires regulators to make the proposed rules available to the public, use the comments to form a final rule, and perform a cost-benefit analysis if a rule is considered “economically significant”. In addition, this legislation would require the FAF to consider the impact that its accounting principles will have on the US economy, market stability and the availability of credit – which the FASB admitted to me that it did not. not envisaged when the CECL was enacted. This bill will not take away the independence of the FASB, but it will force it to do the due diligence it has been reluctant to do.
Rules and regulations cannot prevent every economic downturn. However, it is irresponsible of Congress to stand by and allow short-sighted, hastily implemented standards to fuel the fire. Especially when the production process for this standard is eerily reminiscent of disastrous actions taken barely a decade earlier.
Blaine luetkemeyerWilliam (Blaine) Blaine Luetkemeyer Wall Street Spent .9B on Campaigning and Lobbying in 2020 Election: Study Bipartisan House Members Reach Deal to Extend Small Business Loan Scheme Financial Regulators Focus on climate risks FIND OUT MORE represents the 3rd district of Missouri. He is a senior member of the Financial Services Subcommittee on Consumer Protection and Financial Institutions.