Monday, May 10, 2010

Investor Groups Oppose Legislative Accounting Standards in Senate Reform Bill

In a letter to Senate leadership, investors groups opposed any effort to legislate accounting standards in the financial reform bill, S 3217, that is moving through the Senate. . In the letter to Senate Banking Committee Chair Chris Dodd and Senator Richard Shelby, the committee’s Ranking Member, the Center for Audit Quality and the Council of Institutional Investors said that the accounting standards underlying company financial statements filed with the SEC derive their legitimacy from the confidence that they are set based on independent, objective
considerations focusing on the needs of investors, who are the primary users of financial statements.

In order for investors and other users of company financials to maintain this confidence, continued the investor advocates, the process by which accounting standards are developed must be free, both in fact and appearance, of outside influences that inappropriately benefit any particular participant in the financial reporting system to the detriment of investors. In the view of the groups, which included the AICPA., political influences that dictate one particular outcome for an accounting standard without the benefit of a procedure that considers the views of investors and other stakeholders would have adverse impacts on investor confidence and the quality of financial reporting.

In the letter, the groups expressed particular concern with an amendment to S 3217 that would require the SEC or a standard setter selected by the SEC (presumably FASB) to adopt a standard mandating that SEC reporting companies record all assets and liabilities on their balance sheets. The amendment, SA 3853, sponsored by Senator Sherrod Brown, would require the adopted accounting standard to include that the recorded amount of assets reflects the company’s reasonable assessment of the most likely outcomes of the amount of assets and liabilities and also any financing of assets above a minimal level.

The standard would allow a company to exclude a liability from its balance sheet if it can not determine its amount. But the use of the exclusion is conditioned on the company disclosing the nature of the liability and why it was incurred and the most likely loss, as well as the maximum loss, which could be incurred from the liability. The standard must also condition the exclusion on the disclosure of persons who have recourse against the company with regard to the liability and whether the company has any continuing involvement with an asset financed by the liability or any beneficial interest in the liability.