Included in the administration's proposal for a sweeping revamp to the U.S. financial regulatory regime are recommendations that standard-setters agree on a single set of global accounting standards and iron out any differences over fair value accounting.
Last month, President Obama and Treasury Secretary Tim Geithner outlined a massive overhaul for financial oversight that included granting the Federal Reserve expanded powers to supervise financial firms deemed "too big to fail," creating a Consumer Financial Protection Agency to protect consumers from unfair, deceptive and abusive financial practices, and dismantling the Office of Thrift Supervision.
"It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess," said Obama. "A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis - the Great Depression - was overwhelmed by the speed, scope and sophistication of a 21st century global economy."
However, at press time, lawmakers expressed concern about the possible conflicts between the Fed's traditional role of setting monetary policy, and being given the responsibility of being the top regulatory authority under the proposed alignment.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., likened giving the Federal Reserve more authority to a "parent giving his son a bigger, faster car right after he crashed the family station wagon."
Meanwhile, a white paper released by the administration addressed several accounting-specific areas, building on recommendations issued at a recent summit of the Group of 20 world leaders. It recommended that the Financial Accounting Standards Board and the International Accounting Standards Board "clarify and make consistent the application of fair value accounting standards, including the impairment of financial instruments, by the end of 2009."
The administration came out in favor of convergence, recommending that the accounting standard-setters "make substantial progress by the end of 2009 toward development of a single set of high-quality global accounting standards." The administration acknowledged that FASB and the IASB have "engaged in extensive efforts" to converge International Financial Reporting Standards with U.S. GAAP, but stopped short of endorsing the proposed roadmap for adopting IFRS now under consideration by the Securities and Exchange Commission.
The white paper also recommended that the accounting standard-setters improve accounting standards by the end of the year for loan loss provisioning "that would make it more forward-looking, as long as the transparency of financial statements is not compromised."
The paper noted that in an April 2009 report addressing pro-cyclicality in the financial system, the Financial Stability Board, an international group of financial regulators, determined that earlier recognition of loan losses by financial firms could have reduced the pro-cyclical effect of write-downs in the current financial crisis.
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