With the election now academic, a concerted drive to ratchet up regulation of the financial markets by the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and other bodies will be near the top of the legislative priority list when the new Congress opens shop in January.Even before the 110th Congress closed, House and Senate Democrats had already scheduled hearings into the need for tighter oversight of financial institutions and tougher accounting standards for the industry, which is projected to be more constricted under the incoming Obama administration.
During the final days of the session, the House Financial Services Committee called a hearing into what a spokesman for Chairman Barney Frank, D-Mass., described as the "market turmoil" caused by an "outdated and weak regulatory system."
Meanwhile, in the Senate, a series of separate hearings were scheduled by the Banking Committee to explore what Chairman Christopher Dodd, D-Conn., termed "the abject failure of regulators to adequately police the markets."
During those hearings, former SEC chair Arthur Levitt underscored Dodd's concerns by blaming the current financial market turmoil on "at least two decades of societal and political adherence to a deregulatory approach to the explosive growth and expansion of America's major financial institutions."
Although some have criticized fair value accounting for contributing to the current market turmoil, Levitt told the Senate that just the opposite is true. "One of the biggest steps we can take to bring to light a fuller picture of companies' financial health would be to expand fair value accounting to cover all of the financial instruments - the securities positions and loan commitments - of all financial institutions," he said, adding, "If financial institutions were accurately marking the books, they would have seen the problems they are experiencing months in advance and could have made the necessary adjustments - and we could have avoided the current crisis."
THE SEC'S VIEW
Earlier this fall, the Senate Banking Committee's Subcommittee on Securities, Insurance and Investment focused squarely on the need for fine-tuning accounting standards in the financial services industry.
SEC deputy chief accountant James Kroeker testified that his agency has been working closely with FASB to solve problems associated with banking industry standards, including issues involving fair value and off-balance-sheet transactions.
Noting that transparency in reporting reduces uncertainty
in the markets, Kroeker said, "No better example of this exists than our recent experience with off-balance-sheet accounting and disclosure in the financial services sector."
In addition to instituting several new disclosure requirements for off-balance-sheet transactions that were mandated by Sarbanes-Oxley, late last year the SEC urged a number of large institutions to find extra ways to improve transparency.
In a separate appeal to large financial institutions last March, the SEC called on banks to increase disclosure transparency for fair value accounting, Kroeker said. In October, he said, the commission followed up by issuing additional guidance on fair value accounting by the financial services sector.
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