US senate committee tackles financial crisis prevention

Source: The Accountant

The US audit profession has defended the role of auditors in the financial crisis but suggested greater transparency could help prevent future crises. This week¸ regulatory bodies and standard setters were called as witnesses to a US senate committee hearing on the role the accounting profession should play in preventing another financial crisis.

At the Dirksen Senate Office Building¸ Securities and Exchange Commission (SEC) chief accountant James Kroeker said in the aftermath of the financial crisis SEC enforcement teams are still pursuing cases stemming from actions that contributed to it¸ following settled enforcement actions involving Countrywide Financial¸ American Home Mortgage¸ New Century¸ IndyMac Bancorp¸ and Citigroup.

“There is reason to consider the extent to which improper¸ fraudulent¸ or inadequate financial reporting relating to GAAP reported results or to disclosures outside of the audited financial statements played a role in the financial crisis¸” Kroeker added. “When poorly performed audits contribute to or fail to detect financial reporting abuses¸ there are existing mechanisms for dealing with such misconduct¸ including SEC or Public Company Accounting Oversight Board (PCAOB) enforcement actions. For our part¸ we will continue to prosecute those who fail to comply with their obligations.”

The SEC said it will look for ways to improve the financial reporting system in partnership with the Financial Accounting Standards Board (FASB) and the PCAOB.

Fair value accounting

FASB chairman Leslie Seidman defended the use of fair value accounting stating it was not a primary cause of the financial crisis.

“As the credit and financial crisis deepened and broadened in late 2008 and early 2009¸ significant attention was placed on ‘mark-to-market’¸ or fair value accounting¸ including the effect of applying the fair value standard to report the value of impaired securities¸” Seidman said.

“The controversy reflected¸ in part¸ the difficulty of determining the fair value of assets or liabilities in illiquid markets. It also reflected the concern that the accounting for problem assets held by financial institutions¸ including loans¸ was ‘pro-cyclical’ and may have exacerbated the crisis (even though loan losses are generally not measured at fair value).”

Seidman said that after recommendations from the SEC on how to improve fair value requirements¸ including the need for improved guidance on the determination of fair value in illiquid markets and the reporting of impairments¸ FASB made improvements in late 2008 and early 2009 by issuing three staff positions.

Since April 2009¸ the FASB has continued to make targeted amendments to fair value guidance addressing:

  • How to measure liabilities at fair value;
  • How to measure investments in certain companies that calculate net asset value per share; and
  • How to improve disclosures about fair value measurements.

The standard setter also plans to issue minor amendments to existing GAAP requirements later this month.