The American Institute of CPAs has dispatched a letter to the leaders of the Senate Banking Committee asking them not to allow a systemic risk regulator to alter accounting standards in the financial regulatory reform legislation they are drafting.

Barry Melancon

The letter came in response to an earlier letter late last month to the Banking Committee leaders by a group of banking, real estate, construction, mortgage and insurance industry trade associations, including the American Bankers Association and the Financial Services Roundtable. The trade groups pressed for a provision that had been weakened in the House version of the financial regulatory reform legislation, which passed in December (see House Passes Financial Regulatory Reform Bill).

The provision would have allowed a Financial Stability Council to suspend or modify accounting standards that threaten the stability of the U.S. financial system. The AICPA and other accounting groups had lobbied to have the provision watered down in the House legislation in order to preserve the SEC’s oversight of the Financial Accounting Standards Board and the independence of the standard-setting process. The final bill now only allows the council to submit comments to accounting standard setters.

With the Senate now working on the bill, the industry groups sent a letter on Jan. 25 to Senate Banking Committee Chairman Christopher Dodd, D-Conn., and ranking member Richard Shelby, R-Ala., urging them to consider accounting policy as part of financial reform and “to address potential systemic risks associated with accounting policy.”

“During the recent problems in the financial markets, many have noted that accounting rules can and did have a negative effect on credit markets and the financial system,” they wrote. “Although the Securities and Exchange Commission (SEC) has responsibility for accounting oversight, it has not been charged with oversight of systemic risk issues. Any new group whose role is to address systemic risks in the financial system also must carefully consider potential systemic risks created by accounting standards.”

The groups said the objective could be achieved without having an impact on the role and independence of FASB in setting accounting policy or the oversight of accounting issues vested in the SEC.

The AICPA, however, sees the matter differently. In its own letter to Dodd and Shelby on Thursday, the Institute objected to the notion that systemic risks could be associated with accounting policy and defended the need for an independent accounting standard-setting process.

“In light of the recent letter to the Committee from various financial service organizations, we want to express our concern with any construct that would allow bank regulatory authorities or a systemic risk oversight authority to intervene or have undue influence over the setting of accounting standards for purposes of public financial reporting,” wrote AICPA president and CEO Barry Melancon. “We believe it may be quite appropriate, however, for bank regulatory authorities to assess if accounting standards used for public financial reporting purposes should be automatically applied for prudential regulatory purposes. Such authority resides today with prudential supervisors of financial institutions. Systemic risk authorities, if established, conceivably could provide appropriate input and direction to such prudential regulators regarding the use of accounting standards for prudential supervisory purposes.”

Melancon noted that much of the controversy arose from disagreements over fair value accounting standards. “Illustrating the confusion we see in the current public debate, fair value accounting, in and of itself, has been targeted by some as contributing to the global financial crisis by impacting bank capital requirements, which in turn affect the ability of a bank to lend money in support of economic activity,” he wrote. “Some even take the argument further and suggest that accounting standards can cause potential systemic risks in the financial system. What is missing in such a debate and such arguments is the distinction between accounting standards used for public reporting purposes and the application of such standards for prudential supervisory purposes. Accounting standards for public reporting purposes should be seen solely as part of a wider disclosure regime that focuses on past financial performance.”

He noted that banking regulators had already been able to take action last December to ease the effects of standards requiring companies to bring off-balance sheet securitization vehicles onto their balance sheets. But he objected to changing accounting standards to suit the needs of particular industries and warned of the dangers of political interference in standards setting.

“From an international perspective, political intervention in the accounting standard-setting process could undermine U.S. leadership as the world moves toward adoption of a single set of high-quality, globally accepted accounting standards — strong standards which are needed to facilitate capital formation in an increasingly global economy,” said Melancon. “In our view, any step back from the bedrock principle of independent standard setting should be avoided.”