CFA Institute Backs Decoupling of Accounting Standards

The CFA Institute expressed its support for Financial Accounting Standards Board Chairman Robert Herz’s statements on the need to “decouple” accounting standard-setting from bank regulation.

In a speech Tuesday at the AICPA’s National Conference on Current SEC and PCAOB Developments, Herz described a way to accommodate the needs of both independent accounting standards-setters and banking regulators to help avoid the procyclical effects of continual write-downs of assets in illiquid markets. For regulatory capital purposes, the banking assets could be measured on the basis of historical cost rather than fair value (see Herz: Not All Assets Need to Be Fair Value). Herz talked about meeting both the needs of investors and banking regulators.

“Much of the discussion about the role of accounting standards in the economic crisis seems to confuse our role of helping to provide investors and the capital markets with relevant and transparent information on the performance and financial condition of financial institutions (along with other companies) with the regulatory need to ensure the safety and soundness of financial institutions and stability of the financial system,” he said. “While these tasks often overlap, they are not the same, and the setting of accounting standards (i.e., GAAP) and the setting of regulatory capital and reserves should be decoupled so that one does not drive the other.”

The CFA Institute said it supported Herz’s views. “Chairman Herz’s views crystallize a stance that CFA Institute has long held on behalf of its global membership of investors,” said Sandra Peters, head of financial reporting for the CFA Institute Centre for Financial Market Integrity. “This ‘decoupling’ would ensure that investors get the information they need. Such an approach allows for regulators to tailor where necessary or prudent, without interfering with accounting standard-setting and preserving the investors’ need for financial reporting information.”

Under Herz’s proposal, FASB would be able to work independently toward market transparency while regulators could use their authority to take whatever actions might be needed to keep the financial system stable and healthy. As a part of this proposal, he noted that U.S. GAAP financial statements should be only one source of data to inform prudential regulators’ judgments. Regulators could then make practical adjustments in their calculations of regulatory capital as necessary in periods of economic growth or downturn to safeguard the financial system.