Members create bills and pass legislation with little thought of the consequences.  Their ethical standards are less than industrial barons because these members are willing to make any assertion and to do any deed for the sake of re-election and power and money and a major share of the limelight.  But sometimes they get it right despite these handicaps.

Recall the 1995 Private Securities Litigation Reform Act and the 1998 Securities Uniform Standards Act.  The first bill made it more difficult for plaintiffs to file class action suits against business enterprises, corporate managers, and public auditors and it curbed the awards when plaintiffs won.  The second piece of legislation required class action lawsuits brought because of accounting issues to be filed in federal court.  Because Congress made it much harder for plaintiffs to sue wayward managers, directors, and auditors and because it capped the awards, the Congress encouraged managers, directors, and auditors to pillage the rest of us, which in fact they proceeded to do.  Many of the accounting scandals implicate Congress because Congress gave managers and directors incentives to cheat shareholders.

When the FASB issued its proposal to eliminate pooling of interests and require purchase accounting for all business combinations, members of Congress created legislation to delay its implementation.  Introduced on October 3, 2000, the Fair Accounting for Intangibles Reexamination (FAIR) Act would have required a research study to examine the effects of the proposed accounting rule.  The purpose was to defer the accounting statement forever and thwart improved accounting.  Fortunately, the bill did not pass.

When the FASB pushed through the expensing of stock options, members of Congress attempted to derail the FASB by introducing HR 1372 on March 20, 2003 entitled “Broad-Based Stock Option Plan Transparency Act.”  This bill would delay implementation of any FASB promulgation while several research studies were carried out.  The purpose again was to defer any accounting standard forever.  Fortunately, it too did not pass.

Now members of the House of Representatives have composed HR 4653.  Introduced to the House on February 23, 2010, this bill is different because it actually makes sense.  What has happened to these guys?

Entitled “Accurate Accounting of Fannie Mae and Freddie Mac Act,” this bill differs from the others cited because the title does not mock the English language.  This bill actually is about accurate accounting.

Section 2 of this proposed law is interesting because it addresses the manipulation by Congress and the President that disbursements to these government sponsored enterprises somehow should not be included in the budget of the federal government.  That position is utter nonsense.  The bill would require rectification by forcing any disbursements to add to the deficit, as it should.

Section 3 addresses the measurement of mortgages and mortgage-backed securities.  Of course, these measurements should be fair values.  Section 3 requires these fair values to incorporate an adjustment for market risks.  If we want economic truth, this requirement surely is appropriate.

Section 4 states that any debt incurred by the United States when it acquires the toxic assets of Fannie and Freddie to count toward the public debt limit.  In other words, debt issued by the United States will be treated as if it were issued by the United States.  Like, duh!

This bill is a simple but important piece of legislation because it asks the federal government to tell the truth about its cash flows pertaining to Fannie Mae and Freddie Mac.  Such an accounting would be a welcome change from Washington’s frequent fibs.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

Return to The Accounting Cycle

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) published by BNA in 2007.