A global advisory group released 37 pages of recommendations on Monday discussing how regulators, accounting standard–setters, and — to some extent — CFOs can help prevent the next financial crisis, and work to fix existing “weaknesses” in accounting standards
The report is the work of the Financial Crisis Advisory Group, an 18-member panel of experts assembled by the International Accounting Standards Board and the Financial Accounting Standards Board. In it, the group issued its final thoughts on financial reporting, the convergence of American and international accounting standards, and the independence and accountability of standard-setters. Donald Nicolaisen, an FCAG member and former chief accountant of the Securities and Exchange Commission, called the recommendations “sensible and sound,” noting the concepts won’t solve all the issues they address, but will “clearly identify strong support for an independent process of standard-setting.”
Independence was a hot-button issue during the past year, as standard-setters on both sides of the Atlantic were bullied by special interests and politicians to relax fair-value accounting rules. In interviews with CFO, both Nicolaisen and FCAG co-chairman Harvey Goldschmid focused on the importance of the independence issue.
“Accounting rules of the highest quality — written by independent standard-setters — will help to restore investor faith in the fairness and integrity of financial markets,” Goldschmid, a former SEC commissioner and currently a Columbia University law professor, told CFO. “This is now a national imperative and will prove a blessing for CFOs,” he added.
The FCAG recommendations range from asking companies to take more responsibility for “effective price verification” when valuing financial instruments, to developing robust disclosures around structured financial products, to developing a permanent funding mechanism for the IASB as a way to protect its independence from “undue influence.”
The reach of undue influence played out on the world stage last November, when German chancellor Angela Merkel, French president Nicolas Sarkozy, and other global policymakers jumped into the fray on fair-value accounting. As a result, the IASB ignored its normal rule-revision process and rushed out guidance that gave banks and other companies more flexibility to choose when to apply fair-value standards to financial instruments.
The expedited process came after banks lobbied heavily for the change — claiming that fair-value accounting led to excessive write-downs — and European policymakers threatened to pass laws that essentially would have given the banks the accounting treatment they sought. By March, members of Congress were vilifying fair-value accounting as the cause of the financial crisis, and FASB quickly pushed through its new guidance on valuing assets.
To address the independence issue, the FCAG suggests that before the next crisis, the IASB and FASB should define when it is appropriate to expedite the rulemaking due process, and how to inject into that rushed process the “maximum” amount of consultation that is practical. The group also wants to see policymakers “refrain” from writing, or rewriting, accounting rules.
“CFOs should recognize how important due process and independent, objective accounting standards–setting is to them,” said Nicolaisen. He noted that it is reasonable for all users of financial statements to ask whether the standard-setting process works, if decision making is biased, and whether standards fairly measure performance and valuation. “What would be wrong, however, would be to suspend due process and take direction from Congress or business interests who say, ‘use this accounting method because that’s what we want,’” asserted the former SEC official.