At least three members of the Financial Crisis Advisory Group (FCAG), formed jointly by FASB and the IASB last year to advise the two boards on accounting matters related to the credit crisis, have warned that continued political and other external pressure on FASB - and the IASB in particular - could result in tragedy. The warning came from FCAG co-chair Harvey Goldschmid, and FCAG members Nelson Carvalho and Michel Prada, with Goldschmid adding the pressure could threaten 'the very existence of international accounting standards.' The remarks were made at FCAG's meeting held on Friday, May 22 in London.

The public portion of FCAG's meeting lasted one hour; the remainder of the seven-hour meeting consisted of a closed session for drafting FCAG's final report, due out in July. Goldschmid noted it is likely the group will meet one more time, on July 10 in NYC, to finalize its report. He added the group will hold a followup meeting on December 15 in London to consider developments since the issuance of its report.

FCAG Members Fear Pressure on FASB, IASB Could Result in 'Tragedy'

FCAG Co-chair Harvey Goldschmid, a former SEC commissioner, called on IASB Chairman Sir David Tweedie and FASB Chairman Bob Herz to update FCAG on developments since FCAG's last meeting (held in April).

Tweedie said, "What has happened, there has been a lot of pressure, that both of us [FASB and the IASB] get, about an unlevel playing field.” He explained the IASB has chosen to focus on its long-term project to improve financial instruments, a joint project with the FASB, vs. taking on, e.g. a new short term project on other-than-temporary impairment, which some asked it to do after FASB's April guidance on OTTI, a concept that is not currently part of IASB's literature. Tweedie said the IASB believes focusing on the broader, long-term and potentially converged solution regarding financial instruments would be of more benefit. (See additional discussion regarding differing views between the FASB and IASB on the current direction of the financial instruments project, further below.)

Hans Hoogervoorst, FCAG co-chair, and Chairman, AFM (the Netherlands Authority for the Financial Markets), responded to Tweedie's comments as to the pressure the boards are under, saying, "I am feeling increasingly uncomfortable with that situation, the boards have already implemented quite a few actual changes, [more] to come; still, continuous pressure is being exerted on the boards.. exerted by bankers, ministers of finance who are all bankers, and have very little interest in transparency, or don't have a natural interest in transparency, so the pressure for short term changes is completely lopsided - all in the direction of more favorable standards leading to more favorable balance sheet presentation...increasing the risk investors get a lopsided view."

Goldschmid noted, "I couldn't agree more with Hans' comment, when we use the word pressure ... the pressure on the two standard-setters has created more than a crisis, and for the IASB in particular, a threat to the very existence of international accounting standards." He added, "The financial crisis came about for reasons other than accounting; Clearly there were private sector failures.. foolish risk decisions.. regulatory failures, in the U.S. context , bank regulators, the SEC, FINRA all share part of the blame for what went wrong; not basic failures of the accounting, and scapegoating [accounting] is really a tragedy for all concerned." He continued, “From a U.S. standpoint, if we lose the IASB system, we are going back to reconciliation; it is only IASB IFRS that are accepted [for foreign filers in the U.S.], not a carve-out.. not national standards; the costs for everyone long-term will be immense [if something were to happen to the IASB]; I am very worried about the time we are in, very glad David [Tweedie] and Bob [Herz] are in charge of the two boards.” Critical of those who are "challenging accounting standards [and] challenging the two boards in ways that are unconstructive," he urged, "it is important the business community and government begin to speak out.. we could lose this entire system, and the costs for going backward are very [large]."

Nelson Carvalho, chair of the IASB’s Standing Advisory Committee, said, "If we were ever under risk of getting back to the old system we had, back to the 200-plus national sets of GAAP, that would be a tragedy, a tragedy toward the aim of restoring investor confidence, losing the wonderful work of the IASB ...the world would suffer dramatically, including the new emerging [markets] which are already discussing getting rid of the dollar as the common currency for bilateral trade.” He closed, “The boards are in desperate need of advice; the G-20 finance ministers might make better use of our advice: Please keep politicians away from accounting standards.”

Michel Prada, former chairman, Autorité des Marchés Financiers (AMF), observed, "A few months ago, I said I thought our role would be to participate in cooling down temperatures and cooling down direction-pressure, and now .... [we are] on the verge of a tragedy in accounting." He added, "I don't see a situation where bankers are opposed to accounting standard-setters...I believe we should try to calm down this, and [warn] politicians we shouldn't go that direction, if we go that approach, we will end up with the situation we were in 15 years ago."

Don Nicolaisen, former SEC chief accountant, and co-chair with Arthur Levitt last year of the U.S. Treasury Advisory Committee on the Audit Profession, commented, "Accounting standards as written are always going to be refined, we don't get it perfect; but what we do have is an extremely cynical investing public, less trustful of regulators, government, and business – plenty of blame to go around.” He added, “To have them not trust accounting standards, I don't think would help the situation, it would put us in the dilemma of fueling that cynicism, unwillingness to accept responsibility by any group.” He analogized, “If we are facing global climate change as a problem, and [someone says] the solution is to go to scientists and say recalibrate your thermometers and we don't have to do anything ... no one believes that." Similarly, with external pressures to change accounting, he said, "If we have reached the ridiculous, the answer is no, better to let the system deal with failure of our accounting standard-setters, if you think of it that way; we are not willing to compromise, not willing to (produce) results that are unrealistic economically." He added, however, along the lines of his opening sentence that some refinements may be warranted, "[To] deal with complexity, deal with issues that arise because we know more today than a year ago, it would be sensible, responsible ...to do that."

Jerry Edwards, an observer from the Bank for International Settlements, and former Chief Accountant at the Federal Reserve Board, said, "It is important to keep in mind the very good foundation that exists in a number of different areas, whether Basel, or the Financial Stability Forum, that have truly worked to support high quality accounting and independent standard-setting." He added, "I think the record shows those bringing pressure on financial standard-setters aren't those around the table, that pressure is coming from others. " Edwards then stated, "Accounting standard-setting is at its best when it brings its expertise and independence, [and] also shows it is responsible and reasonable in considering input... [and] hopefully, all these pressures will dissipate over time."

James Leisenring, a member of the IASB, and former member of FASB, advised the advisory group, "It is important for you to say, not only didn't [accounting] cause [the credit crisis], but [accounting] is not the solution. As Don [Nicolaisen] said, anything that increases cynicism or lack of confidence will prolong the crisis; recovery would be speeded if people had confidence in the information they see.”

FASB, IASB Views Currently Differ On Financial Instruments Project

Another subject discussed at the FCAG meeting was the status of the boards' joint efforts to improve accounting for financial instruments.

The IASB's current thinking, Tweedie explained, is to collapse what currently are four models of measurement or classifications into two: those measured at fair value, and those measured at amortized cost. In making the determination between the two categories of fair value and amortized cost, there are two possible ways the board could go, according to Tweedie. "You can say, anything that's traded is at fair value and anything else at (amortized) cost," [sometimes described as an intent-based model], "or, you can say, if you know the characteristics and cash flows of the instrument, and they are determinable, then [record at] amortized cost." He added, "We will probably allow a fair value option."

FASB Chairman Robert Herz sounded a note of caution. “I want to be as positive, constructive, and politic as I can be. We desire to get to a common, good answer with the IASB, we will make that effort to do so, but some of the direction they are currently headed in is very, very preliminarily not to the liking or acceptance of our board. In particular, one of our principles [is], you can't significantly widen the cost bucket, we don't think that's a step forward in financial reporting; there may be ways to deal with it through disclosure, that would mean more burden on U.S. preparers; if there was widening of the cost bucket, we might want to have a quarterly fair value balance sheet.” He added, "“We have talked with many investors, and the appetite in the U.S. for the sake of convergence vs. improvement is not there.” He added there is no bigger proponent of convergence than he, but questioned how impairment would be handled if more assets were potentially going to be carried at cost, or in his words, 'moved to the cost bucket’.

Tweedie said, "To clarify, I didn't want to give the impression there is no impairment test for cost [basis assets], we already have an impairment test... the credit loss model based on incurred loss."

Herz added that FASB and the IASB “need to work intensively together to see if can get to a common place, that means for other people, not just people putting pressure on the IASB, but other people who want to use global standards as their product, to be engaged in this.”

Fernando Restoy of the Committee of European Securities Regulators (CESR), an observer at the FCAG meeting, commented, "In terms of convergence, I have the impression there is [a] sort of underlying technical disagreement [on the financial instruments project]...it is hard to understand why we cannot get technical agreement on a well defined technical issue... at this stage of the ballgame, we should come out with a common technical solution... we cannot be in continuous discussion, we need to do something as soon as possible."

Herz responded, “Rest assured, we will move heaven and earth to try to come to a common solution [on financial instruments], but will not be on technically based narrow differences, the issue is much more fundamental to us, the issue is, what's good for investors, that's more than a technical issue; our big concern is significantly broadening a cost bucket is not perceived as a move forward, it may be a move forward to simplify things, we could only cure that with [more] disclosure.”

Tweedie replied, “I wouldn't want the impression to be given we [IASB] don't consider investors." He added, "we don't think great chunks of things will go out of fair value to the cost bucket; we are happy to consider FASB's objections, [we are] looking to try to have one model by July."