Here is the text of the letter the AAA Financial Accounting Standards Committee sent to Barney Frank and Spencer Bachus opposing Perlmutter’s amendment, which would allow a newly-created systemic regulator to override GAAP to achieve the goals of financial stability.  Are there any academics who would support such a proposal?  If you disagree with the sentiment of the committee, I would love to hear from you.  I am not sure the FASC has been this unified on anything since I joined last year.

November 10, 2009

The Honorable Barney Frank
Chairman Committee on Financial Services
U.S. House of Representatives
2128 Rayburn House Office Building Washington, DC 20515

The Honorable Spencer Bachus
Ranking Member House Committee on Financial Services
United States House of Representatives
2129 Rayburn House Office Building Washington, DC 20515

Dear Chairman Frank and Ranking Member Bachus:

We are writing with respect to proposed language from Congressman Ed Perlmutter (D-CO) to amend the Financial Stability Improvement Act of 2009.  Such an amendment would shift the power to promulgate accounting standards from the Financial Accounting Standards Board (FASB) to a Systemic Risk Oversight Council, and it would shift the objectives of financial reporting away from providing useful information to investors toward giving bank regulators greater control over accounting standards to achieve stability in financial institutions.

This comment letter was developed by American Accounting Association’s Financial Accounting Standards Committee (FASC) and does not represent an official position of the American Accounting Association. The American Accounting Association promotes worldwide excellence in accounting education, research and practice.  Currently the Association has about 6,000 members in the United States and 2,000 international members.  The Financial Accounting Standards Committee (FASC) is charged with commenting on regulatory proposals on financial reporting with an aim to provide a research-based perspective and input to regulators and government officials.

The members of FASC are united in strong opposition to this amendment.  We believe in having generally accepted accounting standards that serve all users including investors and bank regulators.  However, when there is a conflict between these two or more groups, we believe strongly that the needs of investors should be paramount.  This amendment would surely lead to intensely politicized lobbying for accounting standards that would hinder the usefulness of financial reporting for investors.   If regulators are concerned that regulatory capital for banks is poorly measured by accounting standards intended to provide useful information to investors, a far more appropriate approach would be to decouple regulatory standards from financial reporting standards.  For example, regulators might ‘add back’ some losses banks are required to report when the fair value of their assets declines, if they judge that such add-backs would enhance the stability of our financial system.  This committee has no opinion on whether such regulatory changes would be appropriate or helpful; however, we feel strongly that such changes should not alter the financial reporting being provided to investors, who use financial information for purposes very different from those of regulatory bodies.

We often disagree with standards proposed by the FASB and acknowledge that poor accounting standards might contribute to financial instability.  However, it doesn’t mean that banking regulators will somehow be better able to determine good accounting standards.  We fear that a government banking regulatory body will be more likely to develop poor accounting standards from the investor’s perspective, undermining investor confidence and further destabilizing U.S. financial markets.

The amendment also has serious implications for convergence towards a uniform set of international accounting standards.  Even though the committee has mixed views on the benefits of such convergence, we feel obligated to point out that the proposed amendment would make convergence far more challenging, by interjecting national politics into a matter that the SEC and many others are ultimately hoping will result in international cooperation.

Karim Jamal
Chair, AAA Financial Accounting Standards Committee 2009- 2010

American Accounting Association
Financial Accounting Standards Committee 2009 – 2010
Robert Bloomfield, Cornell University
Ted Christensen, Brigham Young University
Jonathan Glover, Carnegie Mellon University
Sue Haka, Michigan State University, Liason to AAA Executive Committee
Karim Jamal (Chair), University of Alberta
Paul Munter, KPMG LLP
James A. Ohlson, New York University
Stephen Penman, Columbia University
Kathy Petroni, Michigan State University
Eiko Tsujiyama, Waseda University
Ross Watts, MIT

(Note: The letter was slightly revised after I posted, so I have updated the post to reflect the letter actually sent.)