Congress Waters Down FASB-Oversight Plan

An amendment to the in-progress Financial Stability Improvement Act would allow financial regulators to review accounting standards but give them no final authority.

Lawmakers have backed away from a proposal that would have weakened the Securities and Exchange Commission’s oversight of accounting standard-setters.

Reps. Ed Perlmutter (D-Colo.) and Frank Lucas (R-Okla.) introduced a bill earlier this year that would have created a new body to oversee the Financial Accounting Standards Board. It would have comprised the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp., as well as the SEC.

The bill never gained traction amid criticism from accounting firms and investor advocates who feared it would allow the proposed Financial Services Oversight Council an unacceptable degree of influence over accounting rules. In its place, Perlmutter and Lucas proposed an amendment to the Financial Stability Improvement Act that would formally require council regulators, including the SEC, to review and comment on current and proposed accounting rules. That represented a significant dilution of the congressmen’s original intent, since FASB, under its current standard-setting process, regularly collects input on its proposals from the various affected parties.

On Friday the amendment passed by voice vote in the House Financial Services Committee, which has yet to vote on the entire financial-stability bill. That legislation is still in the early stages as the Senate continues to work on its own version of how to reform the U.S. financial-regulatory system. The one-sentence, four-line amendment calls for regulatory bodies to advise the SEC on its oversight but does not give them final authority over the commission.

The SEC currently has sole authority over FASB, which it has designated as the main U.S. accounting standard-setting organization. The SEC also approves FASB’s budget and frequently provides input on the board’s activities. Trade groups that opposed the new regulatory council included the Council of Institutional Investors, the Center for Audit Quality, the U.S. Chamber of Commerce, and Financial Executives International, as well as former SEC chairmen and one current SEC commissioner.

Trade associations that had been in favor of weakening the SEC’s authority in this regard voiced support for the amendment. The American Bankers Assn., which has been very critical of fair-value accounting rules in the past year, said the change would retain FASB’s authority for developing rules, as well as the SEC’s oversight over those standard-setting activities. “The Perlmutter-Lucas amendment will empower the Council to work with the SEC to mitigate concerns over accounting standards that pose systemic risk and threaten the stability of the United States financial system,” said ABA president and CEO Edward Yingling in a statement.

Congress is still finding other ways to add scrutiny to FASB’s rules. Also recently added to the Financial Stability Improvement Act was an amendment that would require the standard-setter to study the effects of new rules known as FAS 166 and FAS 167, which go into effect in January and change the way banks and other financial institutions will account for securitizations and special-purpose entities. Banks are wary of the rules, which will change how they define their control over financial assets and liabilities and force them to consolidate some of their off-balance-sheet transactions back onto their financial statements.

 

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