... of the CCAB, Belgian Branch and had to “sing for my supper” with a short talk on the Politicisation of the Accounting Standard-Setting Process. Regular readers of my blog will know that this is a matter of great concern to me. I used the opportunity to comment on a number of apparent contradictions in the current situation including:
· The fact that political pressure on FASB to amend accounting standards seems to have been overlooked whilst any suggestion that the EU might want to influence the IASB is seen as overt political pressure – even if it is only asking the IASB to take on board the politically prompted changes made by FASB.
· The large sums of money apparently being spent on lobbying activities in the USA compared to the almost nonexistent lobby activity in the EU.
· The attention we seem to be giving to those who criticise mark-to-market whilst ignoring the strong support for mark-to-market from the CEO of perhaps the most successful bank in the current crisis, Lloyd Blankfein of Goldman Sachs.
· A concern that regulation of the audit profession has made it far more difficult for auditors to assume a wider role in drawing attention to the level of risk inherent in a client’s business model.
I was pleasantly surprised at the level of support I received for my views – as well as the strong support for more people in the profession to speak up and more publicly participate in these discussions.
I also had an enjoyable dinner!
Global Accounting Mark to Market Standards & Regulators 
5 Comments
June 16th, 2009
In a
recent report in the Los Angeles Times, Paul Volcker - a former Federal Reserve chairman who leads a panel advising Obama on economic recovery – was quoted as saying:
"Political bodies in Europe and the United States or any other country are simply not the appropriate venue for reaching well-considered judgments that can be enforced internationally,"
Volcker said there is a "strong case" for reviewing so-called "fair value" rules that determine the value of assets of banks, insurers and other institutions. He said efforts to enforce "mark-to-market" rules on assets fueled confusion and uncertainty. But he said that while more international consistency is required in accounting standards, politicians should avoid excessive involvement.
Let’s hope they listen.
Mark to Market 1 Comments
June 15th, 2009
This week we have seen further evidence of the difference of opinion between the EU and US over fair value rules, something I have previously commented on
here. Meanwhile, the IASB assures the EU, that plans to reform accounting rules are still
going ahead. The convergence of EU and US regulation and practices can only help to improve the economic position we find ourselves currently in, and we must work hard together to achieve this, complex as it may be.
On that note, the FASB has
voted to approve the Accounting Standards Codification, which will provide a set of principles which US firms will follow to encourage a more transparent way of working. The principles are due to come in to force on 1st July.
On Thursday we saw the appointment of four directors to the newly created Financial Stability Committee, a group with no easy task in the present climate. Jeremy Warner at The Independent is clearly dubious about some of the appointments, however I hope they are able to play an effective part in steadying our industry over the months ahead.
Global Accounting 0 Comments
June 12th, 2009
The EU Finance Ministers met on Tuesday and it was widely rumoured that they were considering a “carve in” to change IFRS to reflect recent changes made to US GAAP by the FASB – in particular to suspend “mark-to-market” on certain types of financial assets and to permit the valuation of such assets on a “mark-to-model” basis. This, it is suggested, would create a “level playing field” – it being regarded as “unfair” that US banks can value assets on a more generous basis (mark-to-model being permitted in order to produce higher valuations) than those banks that use IFRS.
Ironically, if the EU had introduced a “carve in”, or if the IASB had succumbed to political pressure and changed the accounting standard without due process, it would have been cited by the US as evidence of the lack of robustness of IFRS. Yet the pressure to change IFRS comes from changes made to US GAAP by FASB under political pressure.
In this context there was a very interesting article in the Wall Street Journal (WSJ) on 3 June entitled “Congress Helped Banks Defang Key Rule”. According to this article, “Thirty-one financial firms and trade groups...spent $27.6 million in the first quarter lobbying Washington...” primarily to get rules on mark-to-market changed. The article explains in some detail how this lobbying worked but leaves the reader in no doubt that FASB changed the rules because of political pressure and, as the article states “... many investor groups opposed the changes... many saw the new rules as a watering down of standards...”
I appreciate that mark-to-market is not universally liked but it is the best that we have and it benefits from transparency thereby enabling users of accounts to make adjustments to accounts to reflect their own views on valuations.
According to today’s Financial Times Lloyd Blankfein, Chief Executive of Goldman Sachs, has made another speech supporting the use of fair value/mark-to-market. The article opens: “More use of marking assets to market prices would have provided an “early warning” of the financial crisis, according to Lloyd Blankfein...”
Having a single set of global accounting standards is vital – but they must be high quality standards. It is arguably better to have an “uneven playing field” than a “level playing field” based on poor standards.
Mark to Market 1 Comments
June 11th, 2009
The UK's House of Lords Select Committee on Economic Affairs stated in a report this week that: "Mark-to-market accounting generates verifiable information about banks. Without it investors would be less well-informed, and confidence would suffer in downturns. Regulators should not abandon mark-to-market accounting, but supervisors must identify ways to ensure that it does not amplify the economic cycle."
Also this week the American Bankers Association, along with four other financial services organisations, sent a letter to the members of the USA's House Financial Services Committee expressing continued concern over mark-to-market accounting and impairment rules in which they stated: "Mark to market does not provide the most relevant measurement basis for many types of transactions... FASB's emphasis on mark-to-market not only results in misleading information in a distressed market, but it can also result in misleading information in a typical market."
Personally I prefer the independent view of the House of Lords.
Mark to Market 0 Comments
June 4th, 2009
In one of my recent posts, I mentioned that whilst on a trip to South Africa I spoke about why the
FASB relaxed the rules on mark-to-market and the potential impact this would have for the finance industry. With this in mind I was interested to read that the IASB has agreed to speed up the decision to
reform fair value accounting rules. It is however vital that the changes they make are both appropriate and "robust" and not just a response to political pressure.
Regular readers of this blog will know my views on this matter. It is an issue that
I have spoken about at great length and it is pleasing to see other
accountancy firms now expressing their views; conversation and debate will help to promote the importance of transparency.
Looking to the month ahead, the EU's response to Europe's current economic position is of importance not only in the region, but also globally. On 11 June there will be a meeting in London discussing the
EU's response to the issues we face, in which the role of accountants may be discussed following
last week's report from the UK Treasury Select Committee of the House of Commons. I'll be greatly interested to hear the outcome.
Here's to another interesting week.
Mark to Market 4 Comments
May 29th, 2009
Last week's report from the UK Treasury Select Committee of the House of Commons commented on both the role of auditors and of fair value accounting in the banking crisis.
Commenting in its summary on the role of auditors in the banking crisis the report states:
"We note that the audit process failed to highlight developing problems in the banking sector, leading us to question how useful audit currently is. ..... We recommend that the FSA consult on ways in which financial reporting can be improved to provide information on bank activities in a more accessible way."
Whilst the report recognises that there was no audit failure I think they are right with regard to the audit process not highlighting the "developing problems" although we don't know to what extent audit firms commented on these issues to boards and audit committees. In my view much of this is due to the regulatory and litigation environment in which we operate making it difficult for auditors to offer advice and comment outside that which they are required to do so. The answer is thus not more regulation but perhaps a look at how to help the auditor feel comfortable about going "beyond his/her brief" - and removing the fear of litigation if we do so. As the detailed report states:
"We are perturbed that the process results in 'tunnel vision', where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures."
As far as fair value accounting is concerned the report states:
"We regret the power of the European Commission to pick and choose which international accounting standards should be implemented in the EU and call on the Treasury to consider the impact of the Commission's powers on the objective of establishing a single global set of accounting standards."
Indeed! The issue of course goes well beyond the EU if we are to establish a single set of high quality global accounting standards.
Mark to Market Standards & Regulators 5 Comments
May 19th, 2009
It was a very broad ranging discussion including accounting issues - primarily mark-to-market - but also regulation, ethics and the need for the audit profession to find a way to express its opinion without fear of regulators and litigation. Dennis has kindly prepared what I regard as a fair summary of these aspects of our discussion and rather than repeat this myself
you can read it all on Dennis's blog.
We also discussed the merits of 'blogging' and what we both hope to achieve from our blogs ? and whether they work or not. I think they do otherwise I would stop doing this! As I said to Dennis the challenge is getting an appropriate balance and not spending all my time blogging and responding to others. I think Dennis will also be writing about this aspect of our discussion and I hope that it might encourage others to join the 'blogging community'. If we are to develop a more proactive voice for the audit profession blogs could certainly help.
Mark to Market 1 Comments
May 18th, 2009
.... it is difficult to know where to begin.
One of the main issues I discussed whilst in South Africa was why the FASB relaxed the rules on mark-to-market and what effect this would have. Interestingly, I did not find any support for the FASB approach in South Africa (nor in Hong Kong and China) only a concern that FASB did not seem to have considered the effect of their adopting a different position to the IASB on other countries ? particularly those which have (or are) adopting IFRS in the expectation that it would ultimately also be adopted in the US (either directly or because of the convergence of US GAAP and IFRS).
Everyone I discussed this with agreed that the US approach was intended to enable banks to boost their balance sheets by taking a "softer approach" to the valuation of certain financial instruments. Presumably, the hope was that as a result of apparently stronger balance sheets, confidence would be restored and lending and liquidity would increase. I expressed the view that in fact the opposite might occur. Because there will now be uncertainty over the basis on which these financial assets had been valued, and because they will have been valued at above their market value, I think that there will be less confidence in the balance sheets of those banks that choose to adopt the "new rules" and thus less likelihood that confidence will be restored in the banking system.
It is clear that I am not the only one who thinks this way. On my return to the UK I was sent this
article. In this article the chairman of the PCAOB has said they "had no plans to issue further guidance on new market-to-market accounting rules even though the business community has asked for it." As the person who sent me the article said: "From our reading of the article it seems that the decision to allow more flexibility has in fact created ambiguity. Businesses are unsure how and where to apply the rules and need guidance from the FASB. Rather than inspiring confidence in the markets and accountancy industry there appears to be a risk that the rule change will simply lead to more hesitation and indecision." I can only agree.
Mark to Market 0 Comments
May 18th, 2009
... to regular readers (I know there are at least a few of you - not least because I met one in Hong Kong on Tuesday evening) for the absence of anything new over the past few days. This is not due to a lack of things to comment on - or a dearth of views from me - but a reflection of my travel schedule. I was in South Africa last week and am now in China, having spent a few days in Hong Kong, and it is clear that concerns over fair value/mark-to-market are as prevalent in these countries as in the USA, Europe and elsehwere. I was interviewed on both radio and TV in South Africa with particular concerns expressed about what I would describe as "political interference" in the setting of accounting standards.
The "divergence" between US GAAP and IFRS is of particular concern as these countries feel they have limited ability to influence this debate yet are compelled to make a choice as to which standards to follow - tricky for those that see both the USA and Europe (primarily the UK) as their "natural" sources of capital.
I have talked in the past about the need for those of us in western, capitalist, liberal democracies to be sensitive to other "cultural norms" and not to assume that "our" business model and approach can be applied everywhere. Our approach to accounting standards - which doesn't seem to involve meaningful discussion with those outside the key capiatl markets in the USA/Europe - suggests we have not yet fully taken on board the effects of globalisation.
More to follow when I am back in the office and have a chance to write a longer piece.
PS I am meeting Denis Howlett on Friday afternoon. You may recognise him as a very active "blogger" with some strong views on accounting matters and the audit profession. You can find his blog at http://www.accmanpro.com/. It should be an interesting afternoon.
BDO International 0 Comments
May 14th, 2009
