By Bill Flook
When Rep. Blaine Luetkemeyer, one of the loudest critics of the FASB in Congress, last year proposed to place the accounting standard-setter under extensive new procedural restraints, the accounting industry’s largest trade group sought to counter an attack on the FASB’s independence.
Angered by the FASB’s credit-loss rules, the Missouri Republican in late September filed H.R. 4565, the Responsible Accounting Standards Act of 2019, a bill that would place the FASB’s work under the purview of the Administrative Procedure Act, which sets out broad guidelines for notice-and-comment and other requirements that agencies such as the SEC and Federal Reserve must follow when issuing new rules. Also under the bill, the FASB would be required to consider the effect of accounting principles “on the broader U.S. economy, market stability, and availability of credit (particularly for low- and moderate-income borrowers),” and report to Congress and the SEC within six months on the changes it is making to ensure those effects are considered.
Opponents saw the measure as an attempt to trip up a standard-setter that has for decade done the deeply complex work of setting GAAP as an independent body with its own autonomy. The measure prompted an effort by the AICPA in which the group voiced its displeasure on Capital Hill over Luetkemeyer’s legislation.
The AICPA, in a February 4, 2020, statement to Thomson Reuters, said it believes that “subjecting FASB to political influence would threaten the independent accounting standard process.”
“The accounting standards’ underlying financial statements derive their legitimacy from the confidence that they are established, interpreted and, when necessary, modified based on independent, objective considerations that focus on the needs of investors, lenders, and other primary users of financial statements,” the accounting industry’s largest trade group said in its statement. “For stakeholders to maintain this confidence, the standard-setting process must be free – both in fact and appearance – of outside influences that may benefit any particular participant or group of participants.”
Added the AICPA: “To that end, we have spoken with Hill offices about our perspectives.”
In quarterly lobbying disclosures filed with Congress for the last three months of 2019, the AICPA and several Big Four audit firms listed either lobbying on the bill specifically or on the independence of accounting standard setting more broadly.
Ernst & Young LLP and PricewaterhouseCoopers LLP reported lobbying on issues related to the “independence of accounting standards setting,” while KPMG LLP, the Financial Accounting Foundation (FAF), and AICPA reported lobbying activity on the bill itself. The FAF is the parent organization of the FASB.
A source with knowledge of the discussions said firms did not mobilize a lobbying effort specifically for the Responsible Accounting Standards Act, although the issue was among several brought up in discussions with lawmakers.
Luetkemeyer’s bill has gone nowhere in a Democratic House. But dissatisfaction with the FASB, and in particular its 2016 current expected credit losses (CECL) standard, has recently gained bipartisan momentum in Washington. Most notably, outspoken CECL critic Rep. Brad Sherman, a California Democrat, late last year rose to chairman of the influential Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, a panel that frequently serves as a first stop for legislation affecting the SEC.
Sherman, Luetkemeyer, and other lawmakers in both parties want to freeze implementation of the FASB’s credit loss standard in ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard, which went into effect for large public companies this year, is widely seen as the FASB’s most significant and far-reaching response to the 2008 financial crisis, addressing criticisms that banks were far too slow to recognize souring loans on their balance sheets during the crisis.
Under the standard, banks and other financial entities will be required to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. Banks and banking industry trade groups have recently stepped up efforts to delay or scrub the standard, which they argue will force them to needlessly hold more capital and pull back on lending in a crisis when borrowers most need the funds. And those CECL opponents have found some sympathetic ears on Capitol Hill in both parties.
A spokeswoman for Luetkemeyer did not respond to a request for comment. In a September 2019 opinion piece published in The Hill, the Missouri Republican described the Responsible Accounting Standards Act as requiring the FASB to “abide by the same rulemaking guidelines in place for every federal financial regulator, including the Federal Reserve.”
The study mandated in the bill is “something FASB has admitted to me they did not consider while promulgating CECL,” Luetkemeyer wrote.
“This bill will not take away FASB’s independence, but it will force them to perform the due diligence they have proven unwilling to do,” he added.
The FASB, which has its own rules of procedure governing transparency in its standard setting, came out swinging against Luetkemeyer’s bill following its introduction. In a statement opposing the measure, the Financial Accounting Foundation said “the proposed bill misunderstands accounting standards.”
“They are not regulations,” the FAF said in the statement. “They are (and have always been) set by the private sector under authority delegated by the Securities & Exchange Commission. The Financial Accounting Standards Board (FASB) has neither rulemaking nor enforcement authority. Accounting standards have one purpose only: to neutrally reflect the economics of a transaction. In fulfilling this purpose, accounting standards provide the best possible financial information to all market stakeholders and allow them to make their own decisions confident in the accuracy of this information. Accounting standards, by themselves, do not tip the economic scales.”
This article originally appeared in the February 10, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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