Can you handle the truth? Reps. Ed Perlmutter (D-CO) and Frank Lucas (R-OK) apparently cannot.
They are proposing in HR 1349 to create the Federal Accounting Oversight Board to supposedly ease the economic downturn. In fact, says Ed Ketz at SmartPros, ” Its real purpose is to halt accounting truth-telling via fair value accounting.”
The legislation, Ketz says, “would condone lying in accounting reports so that investors would feel gleeful about companies and bid up the stock prices to produce healthier stock markets.” Ketz says:
The bill not only would create this new oversight board (FAOB), but also it would instruct the FAOB to “look beyond current accounting standards and balance sheets to consider broad national and international financial markets and economic conditions when applying GAAP.â€Â The authors claim that only FASB can create GAAP, but the bill would create an “environment where FASB will have the tools and flexibility it needs to adjust GAAP for future economic conditions.â€
The premise behind the bill is incorrect. The Representatives, who know little about accounting, believe that the current economic mess is being hindered by the use of fair value accounting. They have listened to bankers who continue their propaganda effort in order to get the media focus off their greed and ineptness and, in some cases, criminal behavior. Bank managers are the main culprits of this recession because they loaned money to those who could not repay it, they created derivatives they themselves did not understand, they organized special purpose entities to keep as much debt off the balance sheets as possible and lie about their financial leverage to investors, and they provided insufficient and late disclosures about their problems. Why do the Representatives not put the blame where it belongs and try to reduce foolishness and criminal activities by bank managers?
The bill is misguided in two fundamental ways. First, it would decrease the power of the SEC in its oversight responsibilities. Second, it would allow Washington politicians to twist and bend accounting pronouncements in an effort to improve macroeconomic conditions.
J. Edward Ketz is accounting professor at The Pennsylvania State University. Dr. Ketz’s teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) published by BNA in 2007.
