Posted by Douglas R. Terry

Via WebCPA:

Two members of the House Financial Services Committee have introduced a bill that would establish a new Federal Accounting Oversight Board and probably loosen mark-to-market accounting standards.

Ed Perlmutter, D-Col., and Frank Lucas, R-Okla., introduced H.R. 1349, which would create a new Federal Accounting Oversight Board to oversee the application of generally accepted accounting principles to the financial markets. The board would include the Treasury Secretary and the chairmen of the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and the Public Company Accounting Oversight Board. Currently only the SEC plays a role in how GAAP applies to financial markets, the congressmen pointed out. The board would approve the standards set by the independent Financial Accounting Standards Board.

The legislation does not change GAAP, the congressmen noted, but it would create an environment in which FASB will have the “tools and flexibility it needs to adjust GAAP for future economic conditions.

The government is proposing that you be permitted to formulate accounting practices based on changing environments. Accounting practices are established so that companies disclose a fair and accurate picture of their financial health to investors. It seems the government wants to redefine fair and accurate, placing them on a sliding scale that resembles subjective, malleable, conducive or just plain handy. Suspending mark-to-market rules today will help strengthen balance sheets but this certainly does nothing for investor confidence, transparency and disclosure. Like the bailouts, it provides the wrong incentives. In investing, you have credit risk, liquidity risk and default risk. In a leveraged deal with the devil, Wall Street miscalculated these 3 items. Yes, changing accounting principles for the “greater good” may help alleviate today’s economic woes. But, in the end, it muddies investor assessment of risk and waters down important lessons from the past few years.