Accounting Groups Object to Brown Amendment

A group of seven accounting and business organizations are protesting a proposed amendment to the financial regulatory reform legislation from Sen. Sherrod Brown, D-Ohio, that would legislate some accounting standards for financial reporting.

The amendment mainly aims to limit the balance-sheet leverage ratios at financial institutions, but also includes a provision requiring that within a year of enactment of the financial reform legislation, the Securities and Exchange Commission, or “a standard-setter designated by and under the oversight of the commission, shall establish a standard requiring that each issuer that is required to submit reports to the commission under this section record all assets and liabilities of the issuer on the balance sheet of the issuer.”

The standard would require that: “(A) The recorded amount of assets and liabilities reflect a reasonable assessment by the issuer of the most likely outcomes with respect to the amount of assets and liabilities, given information available at the time of the report; (B) each issuer record any financing of assets for which the issuer has more than minimal economic risks or rewards; and (C) if an issuer cannot determine the amount of a particular liability, the issuer may exclude that liability from the balance sheet of the issuer only if the issuer discloses an explanation of (i) the nature of the liability and purpose for incurring the liability; (ii) the most likely loss and the maximum loss the issuer may incur from the liability; (iii) whether any other person has recourse against the issuer with respect to the liability and, if so, the conditions under which such recourse may occur; and (iv) whether the issuer has any continuing involvement with an asset financed by the liability or any beneficial interest in the liability.” The SEC would also have to issue rules to ensure compliance.

The leaders of seven accounting and business organizations, including the Center for Audit Quality, the American Institute of CPAs, the CFA Institute, Financial Executives International, the Investment Company Institute, the Council of Institutional Investors, and the U.S. Chamber of Commerce, have signed a letter objecting to the Brown amendment.

“As representatives of key stakeholders in the U.S. capital markets, we are writing to discourage the Senate from taking actions that would impact the independence of accounting standard-setting,” they wrote to the Democratic and Republican leaders of the Senate and the Senate Banking Committee. “As the Senate considers reforms to the U.S. financial system as part of the Restoring American Financial Stability Act of 2010 (S. 3217), we are concerned with any amendment that would legislate accounting standards, including Brown amendment SA 3853 regarding ‘Financial Reporting.’

“We believe that interim and annual audited financial statements provide investors and companies with information that is vital to making investment and business decisions. The accounting standards underlying such financial statements derive their legitimacy from the confidence that they are established, interpreted and, when necessary, modified based on independent, objective considerations that focus on the needs and demands of investors — the primary users of financial statements. We believe that in order for investors, businesses and other users to maintain this confidence, the process by which accounting standards are developed must be free — both in fact and appearance — of outside influences that inappropriately benefit any particular participant or group of participants in the financial reporting system to the detriment of investors, businesses and capital markets.”

The organizations claim that the amendment could subject accounting standards to “political influences.”

“Public due process procedures, appropriate oversight, technical expertise, and independence are important to ensure the legitimacy of the standards-setting process, and to protect the goals of transparency, relevance and usefulness in financial reporting that are critical to the success of the U.S. capital markets,” they wrote.

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