Investor and Consumer Groups Question FASB's Independence over Mark-to-Market Guidance

In a letter to Rep. Paul Kanjorski, a wide-ranging group of participants in the Corporate Reporting Users Forum (CRUF) expressed concern that FASB’s independence and due process was undermined by its recent adoption of guidance on mark-to-market accounting. Rep. Kanjorski is Chair of the House Capital Markets subcommittee. The letter was also sent to Financial Services Committee Chair Barney Frank and Ranking Member Spencer Bachus, as well as to SEC Chair Mary Schapiro.

On March 12, the subcommittee held hearings on mark-to-market accounting. The letter expresses the CRUF members’ agreement with Rep. Kanjorski’s opening remarks at the hearings that Congress should not interfere through legislation in the area of establishing specific accounting rules. However, the subcommittee then proceeded to demand that FASB alter its mark-to-market accounting rules or face imminent legislation. The following Monday, the FASB complied with a proposal to provide guidance on mark-to-market accounting, which it adopted on April 2.

In addition to concerns over FASB’s independence, the investment professionals are also worried that, having seen Congress act in this case, special interests will pursue this avenue in the future to advance narrow agendas at the expense of the broader market. If investor confidence is to be restored, they reasoned, it is critical that investors have access to transparent information truly useful to investment decisions. They urged Congress to recognize the independence of FASB and the importance of preventing lawmakers from rewriting accounting principles during times of economic stress. More broadly, the forum participants believe that political interference will only serve to further destabilize confidence in the financial system.

Echoing these concerns in its comment letter to FASB, the Consumer Federation of America said that, in rolling out these proposals in obvious direct response to congressional pressure, FASB abandoned all pretence that it is an independent standard-setting body. By offering this radical change in policy with only a two-week comment period and with a vote scheduled for the following day, stressed the Federation, FASB also abandoned any pretence that it is a body guided by expert analysis and a respect for due process. Similarly, the Securities Industry and Financial Markets Association said in its comment letter to FASB that it was concerned about the lack of due process and the limited comment period. Rushed projects increase the probability of unintended consequences, noted SIFMA.

Under pressure from Congress to ameliorate the application of mark-to-market accounting in asset-backed securities in illiquid markets, FASB adopted guidance on whether a market is not active and a transaction is not distressed. New FAS 157-e affirmed that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, not a forced liquidation or distressed sale, between market participants at the measurement date under current inactive market conditions.

At a press conference announcing the guidance, FASB officials said that the Board’s independence remains intact; and that due process was faithfully observed in the adoption of the guidance, with all public comments carefully considered. The officials emphasized that the Board reached out to many investors, institutional and otherwise, and the majority supported what the Board was doing.