The bill not only would create this new oversight board (FAOB), but also it would instruct the FAOB to “look beyond current accounting standards and balance sheets to consider broad national and international financial markets and economic conditions when applying GAAP.”  The authors claim that only FASB can create GAAP, but the bill would create an “environment where FASB will have the tools and flexibility it needs to adjust GAAP for future economic conditions.”

The premise behind the bill is incorrect.  The Representatives, who know little about accounting, believe that the current economic mess is being hindered by the use of fair value accounting.  They have listened to bankers who continue their propaganda effort in order to get the media focus off their greed and ineptness and, in some cases, criminal behavior.  Bank managers are the main culprits of this recession because they loaned money to those who could not repay it, they created derivatives they themselves did not understand, they organized special purpose entities to keep as much debt off the balance sheets as possible and lie about their financial leverage to investors, and they provided insufficient and late disclosures about their problems.  Why do the Representatives not put the blame where it belongs and try to reduce foolishness and criminal activities by bank managers?

The bill is misguided in two fundamental ways.  First, it would decrease the power of the SEC in its oversight responsibilities.  Second, it would allow Washington politicians to twist and bend accounting pronouncements in an effort to improve macroeconomic conditions. 

The FAOB would have five members.  They are the SEC chair, the Secretary of Treasury, the Federal Reserve chair, the FDIC chair, and the chair of the PCAOB.  Clearly, this constitution would skew the votes toward politically motivated decisions, enhance the power of the banking community, and stack the decks in favor of bank executives.

At present the 1933 and 1934 securities acts empower the SEC to regulate stock markets, including accounting financial statements and accounting disclosures.  Overall, the SEC has performed its job well, though in recent times good accounting has been thwarted under the leadership of Harvey Pitt and Christopher Cox.  The representatives have failed to demonstrate a need to impede and weaken the SEC.

If anything, the Congress should further strengthen the powers of the SEC so it can do its job more vigorously.  And it should vet presidential appointments more carefully to make sure the SEC commissioners are trying to protect the interests of investors instead of managers.

The most dangerous idea in this bill is that accounting standards should be modified to take into consideration the state of the financial markets and the macroeconomy.  In other words, these Congressmen are advocating accounting lies if they achieve better economic circumstances.

I find this suggestion morally reprehensible.  These representatives apparently would condone lying in accounting reports so that investors would feel gleeful about companies and bid up the stock prices to produce healthier stock markets.  Sooner or later the asset bubbles created by such lying would be discovered and the market crash would be horrific.  One lesson of history is that inordinately high stock prices always collapse to realistic levels.  Just look at stock prices during the last ten years.  Institutionalized prevarication won’t stop these market breakdowns.