Treasury Secretary Timothy Geithner’s plan to rescue the nation’s financial system doesn’t appear to signal a major departure from the current accounting regime, observers said.
“The [Treasury’s call for more transparency] doesn’t announce anything new,” said Paul B.W. Miller, CPA, Ph.D., a professor of accounting at the University of Colorado who has worked for both FASB and the SEC. “But it does commit Treasury to working with the standard setters instead of running around them. I don’t think either FASB or the SEC will give up on mark-to-market” accounting.
The Emergency Economic Stabilization Act, passed in the fall, directed the SEC to examine the effect of mark-to-market accounting on the balance sheets of financial institutions and on the bank failures of 2008. The study found that mark-to-market accounting did not appear “to play a meaningful role” in the bank failures. Rather, the report says the bank failures “appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.”
Geithner unveiled an outline of Treasury’s new financial stability plan on Tuesday that included a provision for increased transparency and disclosure of the condition of financial institutions’ balance sheets.
The plan’s six major parts include a financial stability trust, a public-private investment fund, a consumer and business lending iniative, a transparency and accountability agenda, an affordable housing and foreclosure prevention plan, and a small business and community lending initiative. The improved disclosure provision was outlined as part of the financial stability trust in what Geithner called “a comprehensive stress test” that would assess what banks need to do to keep lending during a severe economic downturn.
“We are going to bring together the government agencies with authority over our nation’s major banks and initiate a more consistent, realistic, and forward looking assessment about the risk on balance sheets,” said Geithner. “And we’re going to introduce new measures to improve disclosure.”
Although the full details of the plan were not immediately available, a fact sheet published on a Treasury Web site indicated that the department plans to work with bank supervisors, the SEC and accounting standard setters to improve public disclosure by banks. “This effort will include measures to improve the disclosure of the exposures on bank balance sheets,” the fact sheet says.
FASB, as the primary accounting standard setter for U.S. GAAP, responded positively to the Treasury’s announcement. “Increasing transparency is part of the FASB’s DNA,” said FASB spokesperson Christine Klimek. “While we have yet to review the plan, we fully support efforts to improve disclosure and transparency, and will work with the Treasury, the SEC, and others accordingly.”
The SEC did not respond to a request for comment.
“Contrary to popular belief, GAAP doesn’t call for using a mark that isn’t representative of an exit price,” said Jack Ciesielski, CPA, of the Analysts’ Accounting Observer newsletter. “So the [the Treasury] is affirming existing GAAP.”
But Ciesielski also offered what he described as a “malevolent” interpretation in reference to a sentence in the Treasury’s fact sheet that reads: “In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.”
“‘Take steps that could inappropriately constrain lending’ might be taken as a directive to make loans and use your balance sheet by any means necessary,” Ciesielski said.
Miller, who also acknowledged separately that the language in the fact sheet could be interpreted as a signal that the Treasury will loosen up loss recognition requirements, suggested that the Treasury’s statement may be partially in response to overly conservative auditors who tend toward a worst case scenario as a result of a desire to be cautious, prudent and limit their exposure to recrimination. “I believe that independent auditors for financial entities may be interpreting GAAP too strictly and are trying to force clients to value all financial assets at amounts that reflect the worst case,” Miller said. “All CDOs are not created equal; that is, some are in deep water, some shallow…”
“Transparency seems to lie somewhere between writing nothing down and writing everything down,” Miller said. “If that’s the case, I concur, and I believe this point of view is consistent with the clarifying comments that have been issued by FASB and the SEC…”
Other CPAs who specialize in financial reporting issues provided additional insight on the plan’s call for transparency and more disclosure.
“Bank supervisors have been advocates of increased transparency and disclosure for some time,” said Thomas Rees, CPA, of FTI Consulting Inc., a former deputy chief accountant in the Office of the Comptroller of the Currency. “Their belief is that entities can reduce analyst and counterparty concerns about an entity’s risk position by providing more robust and detailed public disclosures.”
Some financial institutions, however, are hesitant to provide too much information, particularly about market value. “Given the recent market turmoil and investor skittishness, there are legitimate concerns about whether the benefits of enhanced disclosures will be realized,” Rees said.
The full text of Geithner’s speech is available here. For a comprehensive discussion of the accounting treatment and recommended disclosures for troubled assets under U.S. GAAP, see “Weathering the "Other-Than-Temporary" Impairment Storm.”
— Matthew G. Lamoreaux is a JofA senior editor.