Congress Pressures FASB to Revise Mark-to-Market

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Financial Accounting Standards Board Chairman Robert Herz was pressed to make changes in mark-to-market accounting standards in as soon as three weeks during a contentious congressional hearing.

Herz (pictured) agreed to consult with the other four members of the board later that evening and work with them to issue guidance within the next three weeks to forestall Congress from drawing up legislation to dictate accounting standards. Earlier in the day, he had said that the guidance would be available by the end of the second quarter.

Sitting beside James Kroeker, acting chief accountant at the Securities and Exchange Commission, and Kevin Bailey, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency, Herz pledged to cooperate with their agencies on issuing guidance for mark-to-market and fair value accounting to give financial institutions more flexibility as soon as possible.

Legislators underlined the urgency of the task.  “The accounting regulators and standard-setters need to offer us an achievable concrete idea of what they are doing,” said Paul Kanjorski, chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. “We can’t wait 15 years or 15 weeks.”

“You are the FASB, you cannot be the SlowsB,” quipped House Financial Services Committee Chairman Barney Frank, D-Mass.

Herz, however, pointed out that many financial institutions already have the ability to use a cash flow model instead of mark-to-market when accounting for their illiquid assets. But he admitted that smaller banks might face challenges in drawing up such models. “Many of these institutions do not have the in-house expertise to do cash flow models and do not want to pay for an outside expert,” he said.

The concept of fair value accounting received withering criticism from many of the legislators and witnesses in attendance.

“Process is important, but I think FASB and the SEC have had enough time,” said Rep. Tom Price, R-Ga. “We cannot wait any longer.”

“There is nothing ‘fair’ about the misleading and destructive accounting regime promoted by the Securities and Exchange Commission and the Financial Accounting Standards Board under the rubric ‘fair value accounting,’” said former Federal Deposit Insurance Corp. Chairman William Isaac.

However, fair value and mark-to-market had some defenders, including Cindy Fornelli, executive director of the Center for Audit Quality. “Investor confidence in the reliability and transparency of financial reporting is critical to our financial system’s long-term well-being,” she said. “We must pursue only those proposals that do not put that confidence at risk.” However, she suggested that improvements could be made, including applying fair value accounting to different types of assets under various market conditions and providing clearer disclosures about the assumptions and methods applied.

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