A new standard by Financial Accounting Standards Board should be reconsidered

In April of 2009 the American people were in the depths of the worst financial crisis since the Great Depression. An estimated 10 million Americans had lost or were about to lose their homes, the unemployment rate was nearing 10 percent, and roughly $17 trillion of U.S. household wealth had been lost. People on Main Street were focused on maintaining the ability to feed their families and wondering if America’s best days were behind us. It is also when the Financial Accounting Standards Board (FASB) largely vacated its “mark-to-market” accounting principle. Outside of a few articles in business journals and financial news outlets the decision went relatively unnoticed.

Despite the lack of attention, FASB’s decision was no small event, and it most certainly did not come easily. At the time critics accused FASB of giving in to political pressure – accusations to which board members took great exception. In a Wall Street Journal article dated April 3, 2009 then-board member Lawrence Smith reiterated the importance of the Board’s independence while going on to say they cannot “ignore what’s going on around us.” I commended FASB’s decision to end mark-to-market then and continue to do so today. A month later the S&P 500 bottomed out at 666 and the United States economy slowly started rebuilding.

To say mark-to-market was the only culprit of the recession oversimplifies the crisis. The blame for a downfall that brought the country to its knees and severely crippled the world’s economy cannot be solely blamed on an accounting standard. However, vacating the standard was an honest acknowledgement that it did severely exacerbate the devastation and served as an excellent example of the threat posed by insufficiently studying the economic effects of an accounting standard the entire financial system must follow.

Most of us have heard George Santayana’s famous quote: “Those who cannot remember the past are condemned to repeat it.” Apparently, those wise words never made it to Norwalk, Conn., where FASB is only a few months away from implementing its new Current Expected Credit Loss (CECL) standard, the largest change in accounting since 2009. While FASB will vigorously argue that CECL has been years in the making, members of the board have also admitted there has not been, nor will there be, an economic impact study performed despite repeated warnings that the procyclical nature of CECL will have similar effects to mark-to-market in a downturn. In a July 23, 2019 op-ed former FDIC Chairman William Isaac and executive director and law professor at the Antonin Scalia Law School, Thomas Vartanian stated, “A similar rush by FASB in the face of unanswered concerns resulted in disastrous financial consequences in 2008 when ‘mark-to-market accounting’ was redefined by FASB.” In addition, during a hearing of the House Financial Services Committee earlier this year JP Morgan Chase CEO Jamie Dimon stated, “CECL will constrain banks at precisely the wrong time.”

So why does FASB continually neglect to conduct studies on the economic impacts of its standards? Simply put: they don’t have to. Under current law, FASB and its overseer, the Financial Accounting Foundation (FAF) are independent, private-sector organizations that fall outside the purview of the laws that govern regulatory rulemaking and require adequate assessments before implementing standards. The fact of the matter is, prudence for the sake of the greater good has not yet made its way onto FASB’s agenda.

Accounting standards should not be a political issue, and FASB’s independence has served as a laudable method of keeping standard setting and the economic implications that come with it out of the political fray. However, when independence leads to complacency and that complacency threatens U.S. consumers, businesses, and the greater American economy, it is time for our citizens’ representatives to step in.

This week I am introducing a bill that will force FASB to follow the Administrative Procedures Act and abide by the same rulemaking guidelines in place for every federal financial regulator, including the Federal Reserve. The APA requires regulators to make proposed rules available for public comment, use the feedback to form a final rule, and perform a cost benefit analysis if a rule is considered “economically significant.” In addition, this legislation would require FAF to consider the impact their accounting principles will have on the U.S. economy, market stability, and availability of credit – something FASB has admitted to me they did not consider while promulgating CECL. This bill will not take away FASB’s independence, but it will force them to perform the due diligence they have proven unwilling to do.

Rules and regulations cannot prevent every economic downturn. However, it is irresponsible for Congress to stand by and allow shortsighted, hastily-implemented standards to add fuel to the fire. Particularly when the process producing that standard is eerily reminiscent of disastrous actions taken only a decade earlier.

Blaine Luetkemeyer represents Missouri’s 3rd District. He is ranking member of the Financial Services Subcommittee on Consumer Protection and Financial Institutions.