Congress Gets Involved in Accounting Rules (Again)

Some fear a move to help banks could portend more political intervention in how rules are set

This is a companion piece to one published on Monday, April 13, in Institutional Investor by my guest author Michael Rapoport. Michael is a business and financial journalist who specializes in stories about accounting, banking, and financial regulation and a former reporter for The Wall Street Journal. His work has appeared recently in Quartz and Business Insider. Michael is on Twitter as @rapoportmike.

Congress is poking its nose into accounting rules again, to try to help banks cope with the COVID-19 pandemic. But some people are worried the effects might go beyond helping one industry with one accounting rule, and pose a risk for the whole process by which accounting rules are set.

As part of the CARES Act, the coronavirus-relief measure enacted in late March, Congress is allowing banks to hold off on adopting a new method for them to record their losses on loans that aren’t repaid. The new rule - known as “CECL,” for current expected credit losses - forces banks to book and reserve for loan losses much more quickly. Many regional and mid-sized banks complained that adopting it amid the pandemic as they were required to would cut into their capital just when they need it to make loans to help bolster the economy - so Congress is allowing them to put off adopting the new rule for months.

That’s going to keep investors from getting the kind of fuller, up-to-date information about the banks’ financial health that the new method was supposed to give them. But investor advocates are also worried that Congress’s move injects politics into the setting of accounting rules in a way it’s not supposed to be.

Accounting rules for U.S. companies are set by the Financial Accounting Standards Board, a private-sector body, under the auspices of the Securities and Exchange Commission. The idea is that while everyone has a chance to be heard when the FASB is formulating a new rule - the companies who have to follow the rules, the auditors and regulators who deal with the companies following the rules, the investors who use the numbers produced under the rules - ultimately the FASB makes the decision. The process is supposed to be free of influence from special interests, focused only on providing the best financial reporting for investors.

But some are worried that Congress’s move to allow banks to delay the loss-rule could more broadly jeopardize the FASB’s independence. If Congress is allowed to effectively overrule the FASB now, they wonder, what’s to keep them from doing so whenever they choose?

”I think Congress should not be in the business of writing accounting standards, because bad things happen when they do,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

Hal Schroeder, a FASB member, said the FASB won’t be swayed by outside influence. "I think the board has proven itself to be independent and do the right thing over time,” he said. “I think the board will weather this."

As Roper suggests, this isn’t the first time politicians have tried to intervene in how the rules are set. In the 1990s, for instance, pressure from technology companies and their allies in Congress defeated an effort to toughen the accounting for employee stock options. The failure to curb the culture of awarding options later played a role in the Enron scandal; it was only in reaction to the scandal that the FASB finally cracked down.

In 2009, Congress pressured the FASB into softening “mark-to-market” accounting, the rules requiring banks to value their investments by the ups and downs of the market. Banks had blamed the mark-to-market rules for worsening the problems they faced after the 2008 financial crisis.

Respecting the FASB’s independent rule-making decisions “is essential to the success of the U.S. capital markets and our economy both during and after this pandemic,” said Jeff Mahoney, general counsel of the Council of Institutional Investors, which represents pension and employee-benefit funds and other large institutions.

The CARES Act provision isn’t even the first time Congress has tried to intervene in CECL. In January, before the fears of coronavirus rose, a House subcommittee raked FASB Chairman Russell Golden over the coals regarding the loan-loss rule.

Rep. Blaine Luetkemeyer, R-Missouri, one of the lawmakers who criticized CECL at the January hearing, says the FASB needs more oversight, and he vows that he and others in Congress aren’t finished looking at the process by which accounting rules are set.

“It’s obvious they don’t study the rules before they implement them,” Luetkemeyer said. “In a time of trouble, if the rules you’ve promulgated are going to be harmful, you need to be thinking differently about those rules.”

You can find Michael’s Business Insider Prime stories here. His fabulous Quartz story from January about the state of the accounting industry is here.

© Francine McKenna, The Digging Company LLC, 2020