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FASB’s accountability problem

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Great news for banks. We’ve decided to establish a self-governing body to create federal common law principles governing corporate conduct.

Since Congress has never legislated in this area, the field is wide open. Our new Corporate Conduct Principles Board, or CCPB, will consist of lawyers, financial institution executives and former regulators. It will function as a self-perpetuating, standards-setting ecosystem, exactly like another model we found.

To project a veneer of objectivity and independence, the CCPB and its members will be financially independent from the legal and banking industries. Its board members will temporarily separate themselves from their law firms and banks during their tenure to avoid questions about their allegiance.

Operating funds will primarily be derived from assessments on member companies, users of its intellectual property and the publication of its standards. Penalties assessed by the CCPB will support a scholarship fund, and its annual budget will be subject to regulatory review.

As some of you might have guessed, our model is the Financial Accounting Standards Board. Established in 1973, the FASB is a self-appointed pantheon of accounting gods that sits in Norwalk, Conn.

The FASB has hit the regulatory jackpot: It has been designated by the Securities Exchange Commission as the private organization to which the SEC offloads its statutory responsibility for establishing accounting standards for public companies in the United States.

Ironically, Congress formally sanctioned this delegation of authority in the Sarbanes-Oxley Act in 2002, after the economy was rocked by the Enron and other financial and accounting scandals of that period.

The CCPB hopes to piggyback on the privileges the FASB enjoys and what some have described as its “culture of entitled noninterference.” We expect Congress to authorize the role of the CCPB, and the courts and federal regulators to implement and enforce its rules, giving them the force and effect of law. What we particularly like about the FASB model is that unlike Congress’ enactment of a law or a regulatory agency’s promulgation of a rule, the FASB’s actions are not challenged.

In fact, it’s hard to find a way to challenge what the FASB does when federal agencies convert it into federal law. The FASB is not subject to challenge under the Administrative Procedure Act. Nor can the public use the Freedom of Information Act to learn what the FASB considered or what it relied on when it creates “law.” Understandably, this is a lofty status that the accounting profession has zealously guarded.

Our CCPB aspires to a similar status but intends to avoid the FASB’s abysmal mistakes. With over five decades of regulating and representing hundreds of financial services companies, we have seen the financial wreckage caused by the FASB’s attempts to apply static accounting principles to the dynamic and constantly evolving business of recording and valuing assets, income, liabilities and capital — and wildly changing its collective mind along the way. Banks and other financial institutions have repeatedly suffered financial whiplash trying to contort their operations to conform to ever-changing FASB standards governing purchase accounting, the value of mortgage servicing rights and the massive mark-to-market accounting debacle.

Learning nothing from being at the epicenter of the crisis of 2008-2010, which nearly collapsed the global financial system, the FASB is now requiring financial institutions to forecast and book current and expected losses over the life of loans at the time the loans are made, known as the Current Expected Credit Loss or CECL, standard. Federal bank regulators, inexplicably, after having gone through the FASB-induced mark-to-market accounting global crisis just a decade ago, seem reticent to blow the whistle on CECL.

CECL will force banks — particularly community banks that are invested heavily in 30-year, fixed-rate mortgages, as an example — to either abandon long-term, fixed-rate loans or face potentially crippling loan losses. Middle America, just beginning to recover from the last accounting faux pas, will take it on the chin. One can only hope that the Trump administration is paying attention to this massive and reckless accounting blunder. The housing giants, Fannie Mae and Freddie Mac, still nationalized and unable to rebuild capital, may require even larger government investments if we don’t stop this latest accounting insanity.

But we digress. Let’s get back to our new Corporate Conduct Principles Board — what a great gig it will be. If it is to last, it’s best that it not appear to be entitled, arbitrary or unprincipled. While we would normally argue that the job of writing new laws should belong to Congress — a body that must answer to someone for its actions — we certainly don’t want to miss the opportunity the FASB model presents and cede corporate conduct principles to some other standard-setting entrepreneur. So, bankers say “hello” to your new CCPB.

What could go wrong?

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