During an event commemorating the 20th anniversary of the Sarbanes-Oxley Act of 2002, U.S. Securities and Exchange Commission Chair Gary Gensler defended the recent publication of Staff Accounting Bulletin (SAB) No. 121.
SAB 121, which was issued at the end of March to better protect investors, describes how companies should account for custodial services of crypto assets. Because of risks unique to crypto, the staff determined that companies should record a liability and corresponding asset on their balance sheets at fair value.
But there have been some criticisms, including by SEC Commissioner Hester Peirce, that the agency should have taken a more deliberative step to issue the guidance. Or the accounting standard-setter FASB could have taken up the project, she said Moreover, there was some initial pushback from the crypto industry, and banks have also been critical of SAB 121, heavily lobbying against it.
Gensler explained that Congress gave the SEC oversight of accounting for public companies in the early 1930s. Over the first three or four decades, he said that the SEC issued various guidance similar to a SAB. The FASB was created 50 years ago, and the SEC has since been issuing SABs.
“This was SAB 121; that’s because there’s been 120 before this over 50 years,” Gensler said on July 27, 2022, during the Evolution of Corporate Reporting event hosted by the Center for Audit Quality (CAQ), an affiliate of the AICPA which represents accounting firms that audit public companies.
“So, you can do the math; that’s two to three a year,” he said. “Two of them since I have been chair…. And this is consistent with what we’ve done on 121 of them. This is the same process that we’ve done before and gives public company issuers advice.”
He explained that in this case, a number of companies asked the SEC about how the crypto assets in custody should be accounted for.
“It’s very different than other parts of the market,” Gensler said. “Custody in crypto often means the public no longer has ownership of their bitcoin or crypt-ocurrency. And in fact, if the wallet provider or the crypto exchange or crypto lending platform goes bankrupt—we had a number of them go bankrupt in the last two months—when they go bankrupt, guess what, customers are … in line in bankruptcy court. So, we’ve had a lot of problems over the years with companies trying to push things off the balance sheet.”
And he made a reference to the 2008 financial crisis. While Gensler did not give specific examples, so-called Repo 105s and Repo 108s made the financial conditions of some investment banks such as Lehman Brothers Holdings. Inc. look better than they really were. Lehman, which collapsed during the crisis, has been loosely an accounting rule. Its trades allowed Lehman to reduce its asset size by about $50 billion each quarter, thus making the bank look less leveraged and better capitalized. There were also criticisms of banks waiting too long to record impaired assets. The FASB has since then written more prescriptive accounting rules to address the problems.
At the same time, Gensler said that regulators as well as standard-setters, including the FASB, need to act “expeditiously” when there are changes in the markets.
His remarks were in response to a question about the FASB.
There have been some criticisms that the FASB has been slow to write meaningful accounting rules that respond to changing times. For example, the board only recently added to its technical agenda accounting for and disclosure of digital assets and accounting for environmental credit programs despite push to do so for some time by some market participants, including investors, audit firms, and companies.
“I would say it’s the case whether it’s the Securities and Exchange Commission, or Public Company Accounting Oversight Board, or Financial Accounting Standards Board, that our markets are changing at a quicker pace than when I started in finance,” and advances in technology are happening more quickly, Gensler said.
For U.S. capital markets to remain at the top internationally, Gensler said “it’s important whether it’s an agenda of Securities and Exchange Commission or… Financial Accounting Standards Board, that they act on issues, taking into consideration with public comment, but act on it in a thoughtful, expeditious manner with some sense of urgency when new matters arise, whether it’s around new technologies or how new business models come about.”
While the FASB is an independent accounting standard-setter, the SEC oversees the board.
This article originally appeared in the August 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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