Financial Crisis Advisory Group Urges Convergence and Voices Concern over Pressure to Make Rapid Changes in Accounting Standards

A joint FASB-IASB expert group has urged the standard setters to develop a single set of high quality, globally converged financial reporting standards providing consistent information, regardless of the geographical location of the reporting entity. In a seminal report, the Financial Crisis Advisory Group simultaneously encouraged all national governments that have not already done so to set a firm timetable for adopting or converging with IFRS. The expert group also said that it is critical that the accounting standard setters themselves enjoy a high degree of independence from undue commercial and political pressures, and employ appropriate due process, including wide engagement with stakeholders. In particular, to protect its independence from undue influence, the IASB must have a permanent funding structure that can generate sufficient funds on an equitable and mandatory basis.

The Financial Crisis Advisory Group is co-chaired by former SEC Commissioner Harvey Goldschmid and Hans Hoogervorst, Chairman of the Netherlands Authority for the Financial Markets. Other members of the group include: Jerry Corrigan, former President of the NY Fed, Gene Ludwig, former Comptroller of the Currency, Don Nicolaisen, former SEC Chief Accountant, and Lucas Papademos, Vice President of the European Central Bank.

The report strongly emphasized that the Boards must make substantial progress on converged and improved standards on consolidation and derecognition and the other areas within their Memorandum of Understanding. In the meantime, FASB’s new off-balance sheet standards should be implemented without revision or delay. In the consolidation/derecognition projects, improvements should be made with an eye toward a more transparent depiction of the risks involved, especially with complex financial instruments.

Although accounting standards were not a root cause of the financial crisis, noted FCAG, the crisis exposed weaknesses in accounting standards that reduced the credibility of financial reporting. The weaknesses primarily involved the difficulty of applying fair value accounting in illiquid markets, the delayed recognition of losses associated with structured financial products, off-balance sheet financing structures, and the extraordinary complexity of accounting standards for financial instruments.

The FCAG has become increasingly concerned about the excessive pressure placed on the two Boards to make rapid, piecemeal, and uncoordinated changes to standards, particularly fair value standards, outside of their normal due process procedures. While it is appropriate for public authorities to voice their concerns and give input to standard setters, said the FCAG, in doing so they should not seek to prescribe specific standard setting outcomes. Such restraint is important in maintaining public confidence in the independence of the standard setting process, said FCAG, and, thus in financial reporting and the financial system as a whole.

As a specific example of its concern, the FCAG noted that in October 2008 the IASB’s oversight body, under EU pressure, allowed the Board to waive its due process procedures to amend IAS 39 to exclude with limited retroactive effect certain financial instruments from asset classifications subject to fair value accounting. Similarly, in April 2009, under pressure that Congress would change accounting standards by legislation, the FASB accelerated its normal due process before issuing guidance in several fair value areas.

The expert group believes that the truncating of due process, whether in fact or appearance, undermines public confidence in the integrity of the standard setting process and therefore hinders broad acceptance of the standards themselves. Also, threats of potential carve-outs might eventually lead to a renewed fragmentation of the standard setting process and reverse the momentum toward convergence.

At the same time, FCAG understands that at a time of acute crisis an expedited due process may be needed for a timely response by the standard setters. For this reason, FCAG urged the Boards to define in advance the circumstances under which it is appropriate to act on the basis of expedited due process; and also define the contours of such expedited due process in a way that ensures maximum consultation practicable under the circumstances.

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