SEC Loosens Accounting Rule Banks Blame for Crisis
Tuesday, September 30, 2008; 6:24 PM
Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis.
Regulators said that the new guidance will help companies figure out the value of complex mortgage-related investments at a time when there are few trading partners willing to purchase them.
Under an accounting standard that took effect last November, businesses are required to employ "fair value" accounting, in which they put a price tag on their assets even if they do not intend to sell them right away.
The standard, also known as "mark to market," has led portfolios to plunge in recent months as banks affixed fire sale prices to their assets, a move that sometimes required them to raise still more capital to meet regulatory requirements. The measure also led to clashes between corporate executives and independent auditors over how low the markdowns should be forced to dip.
In a meeting last week, lobbyists for the American Bankers Association and the Financial Services Roundtable urged the Securities and Exchange Commission to suspend or relax the accounting provision. A similar advocacy effort continues on Capitol Hill, where lawmakers are reconsidering efforts to aid the financial industry after the House yesterday failed to pass a recovery plan. That bill also would have forced a re-evaluation of the "mark to market" accounting rules.
The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether.
But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be "disorderly" or seized by liquidity problems. It also gives companies room to determine whether the impaired value of their assets is no longer temporary, a conclusion that could trigger massive write-downs.
Regulators reminded companies today that in exchange for using more estimates and judgment, the need to disclose their methods to investors is all the more important. SEC officials sent letters reminding businesses of their obligations twice already this year, in March and September, after expressing concern that many financial institutions were using opaque measurements.
Banking groups cheered today's changes, which they said had been growing in urgency because the third fiscal quarter for many companies ends today, Sept. 30.
"This is a significant first step and adds stability, confidence, and liquidity within the capital markets," said Steve Bartlett, chief executive of the roundtable.
ABA President Edward L. Yingling said the guidance "will help auditors more accurately price assets that are difficult to value under current market conditions."
"More and more of our members in recent weeks have raised concerns that a number of accounting firms were mistakenly interpreting SFAS 157 in a way that required marking assets to fire sale values," he added.
But trade groups representing audit firms and financial analysts have warned against going too far to ease accounting provisions.
The Center for Audit Quality, a coalition of 800 accounting firms, pointed out in a letter to members of Congress today that overinflated valuations only made the savings and loan scandal of the 1980s all the more "devastating when the bubble finally burst."
Cynthia M. Fornelli, executive director of the audit center, said today's guidance "doesn't change the underlying principles" of the accounting measure.