The recent revelation that the nation’s top accounting standards organization was pressured to relax audit rules by a bailed-out Wall Street firm and members of Congress has CPAs crying foul and urging their industry’s leaders to stop caving in to outside pressures. An alternative to the maxim “all politics is local” for the current economic era could be “all accounting is politics,” as was evidenced by Financial Accounting Standards Board chairman, Robert Herz who said the rules-making body he leads was pressured by Congress to ease up its rules for valuing troubled assets. What’s worse than appearing to bow to political pressure, making it easier for companies still holding distressed assets to improve their balance sheets, is possibly appearing to do so on behalf of the poster child of risky practices and federal bailouts. Indeed, FASB’s Herz left little doubt he was talking about AIG in his recent speech to the National Press Club in Washington. “Unfortunately, there have been certain major companies including ones that subsequently failed and had to be rescued by the government and industry trade groups that have sought political intervention into accounting standard setting,” Herz said. His comments surprised many in the media, on Wall Street, and in Congress by their forcefulness and candor. However, a spokesperson for Herz insisted the FASB chairman did not say the organization arrived at a decision to relax so-called mark-to-market rules (standards used for valuing or “marking” securities and other assets at current fair-market value). “Politicization of accounting standard setting by special interests risks undermining public confidence in the integrity of financial reporting,” the spokeswoman said. Herz’s spokeswoman added that the FASB chairman did not mean to leave the impression that mark-to-market rules were relaxed as a result of the alleged pressure, just that the process was expedited, perhaps unduly, as a result of that pressure. “Mr. Herz did not say FASB was pressured into changing the mark-to-market rules,” she said. “We did all the due diligence, only then were the rules modified.” Nevertheless, many believe the change was a direct result of political intervention. “Absolutely, politics is involved,” said Kevin Breard, principal at Northridge-based Breard & Associates. “We deal with a lot of these rules because of our securities clients, and we should, as CPAs, be free of the influences of outside parties and politicians.” Breard calls himself an “accounting purist,” and believes the professional reputations of all CPAs, and the accounting profession moreover, are at stake because of accounting scandals of the past, such as Enron and WorldCom, as well as the meltdowns of various institutions and markets on Wall Street this and last year. “Whether it’s fair or not, people are blaming accountants as much as bankers,” Breard said. “Now would be the time to return to a more independent stand, where the accounting industry is and appears to be objective, independent and free from influence from outside pressures.” According to Rep. Brad Sherman (D-Sherman Oaks), a ranking member of the House Financial Services Committee, part of the reason politicians are now so involved in shaping accounting standards, is of failed self-regulation. But that’s not to say Sherman, a former accountant himself, is a fan of AIG’s bid to loosen audit rules for its troubled holdings. Sherman recently lambasted witnesses at a hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, harping particularly on Robert Pickel, CEO of the International Swaps And Derivatives Association, a derivatives industry organization of which AIG is a member. “Now, is there anyone on this panel that can say that your organization came to Congress a couple of years ago and said, ‘My God, you’ve got to stop what’s going on in our industry. It threatens the world economy. AIG has gone crazy. Other companies have gone crazy,'” Sherman at the hearing. “Is there anyone here that wishes to say that being on the frontline they looked, they saw, and they won?” Sherman believes tougher government regulation of the insurance and financial services industries is a better answer than reliance on FASB or any other “self-policing trade organization.” A future defined by government-as-standards-setter is the most lamentable fallout of the past decade’s missteps in the accounting profession, according to Breard. “I popped out of school around 1982,” he said. “We CPAs were thought of on the opposite end of the spectrum away from lawyers and used-car salesman. By 2003, that was gone. Now, we’ve lost everything in the way of credibility to police ourselves.” Breard said it’s impossible to overstate the value of credible self-regulation. “We had the ability to say to the government, ‘thanks, but no thanks,’ we can self-regulate,” Breard said. “But once that’s gone, it’s gone.” According to him, the Public Company Accounting Oversight Board (PCAOB), a quasi-government standards and oversight organization led by a private-sector board is steadily supplanting FASB’s role as the oracle of all things accounting. “It practically castrated AICPA (American Institute of Certified Public Accountants) and FASB when Sarbanes-Oxley created PCAOB,” Breard said. “I sometimes ask myself, what does AICPA do now, and FASB to a certain extent as well.”
