Yesterday, the House Committee on Financial Services, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing entitled “Mark-to-Market Accounting: Practices and Implications.” Mark-to-market accounting requires companies and financial institutions “to value assets they hold at current market values.” In 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, “Fair Value Measurements (FAS 157),” which defines fair value and establishes a framework for measuring the fair value of assets and liabilities. The role of mark-to-market accounting standards in the current financial crisis is the subject of vigorous debate, and that debate played out during the hearing. Testifying before the committee were the following witnesses:

Panel 1

  • James Kroeker, Acting Chief Accountant, U.S. Securities and Exchange Commission
  • Robert Herz, Chairman, Financial Accounting Standards Board
  • Kevin Bailey, Deputy Comptroller for Regulatory Policy, Office of the Comptroller of the Currency

Panel 2

  • Jeff Mahoney, General Counsel, Council of Institutional Investors
  • Cindy Fornelli, Executive Director, Center for Audit Quality
  • Thomas Bailey, Chairman, Pennsylvania Association of Community Bankers, and President and Chief Executive Officer, Brentwood Bank
  • Lee Cotton, Past President, Commercial Mortgage Securities Association
  • Tanya Beder, Chairman, SBCC Group
  • Robert D. McTeer Distinguished Fellow, National Center for Policy Analysis
  • William Isaac, Chairman, The Secura Group of LECG (and former Chairman of the FDIC)

Chairman Paul E. Kanjorski (D-PA), in his remarks, called upon both accounting regulators and standard-setters to offer “achievable, concrete ideas” and provide revised guidance on mark-to-market accounting standards. Chairman Kanjorski cautioned that if regulators and standard-setters did not take immediate action to improve the standards, then Congress would “have no other option than to act itself.”

There was overall agreement among the regulators that participated on the first panel that measures needed to be taken to improve the application of existing mark-to-market standards, especially with respect to the application of those standards in illiquid markets. The participants also generally agreed with the conclusions contained in the congressionally-mandated report released by the SEC last December that strongly recommended against the suspension of fair value accounting standards. Mr. Kroeker emphasized that an independent standard-setter was “best positioned to promulgate financial reporting standards for all private industries free from undue influence” and referenced the joint efforts of the FASB and the International Accounting Standards Board (IASB), which formed a Financial Crisis Advisory Group last December to address financial reporting issues that have stemmed from the crisis on an international level. Mr. Kroeker also noted that financial reporting and transparency could only be improved with the collaboration of all capital market participants.

Mr. Herz stated that “[t]he role of accounting and reporting standards is to help provide investors and the capital markets with sound, unbiased financial information on the activities, results, and financial condition of reporting enterprises.” He pointed out that the role of financial institution regulators differed from that of the FASB and that the FASB’s standards were “not specifically designed” to meet the objectives of financial institutions. He noted, however, that the FASB would continue to work with the SEC, the IASB and other industry participants “on broader improvements to accounting standards.” Mr. Bailey noted that the Office of the Comptroller of the Currency also was actively working with the SEC, accounting standard-setters, the Basel Committee, the Financial Stability Forum and related parties to address the challenges related the application of mark-to-market accounting as applied by financial institutions, including “the appropriate use of fair value in financial reporting, bank regulatory capital, and macro-prudential assessments, such as pro-cyclicality.”

The second panel represented a diverse cross-section of industry participants and preparers of financial statements, who were all generally of the opinion that FAS 157 does not provide clear guidance as to how best to evaluate inputs when valuing an asset during a “time of changing or disrupted market conditions.” Mr. Mahoney stated that “the most appropriate approach to addressing concerns about the pro-cyclical effects of fair value accounting is not to change accounting standards, but instead to encourage the U.S. financial institution regulators to exercise their authority” to modify the standards as they deem necessary for regulatory capital purposes. Ms. Fornelli was of the strong opinion that regulators were responsible for the financial stability financial institutions and “need[ed] to form their own judgment on capital requirements.” She also specifically noted that market participants “should not confuse the independent FASB’s role to develop and improve financial accounting and reporting standards with the role and responsibilities of the regulatory bodies charged with the oversight and safety and soundness of financial institutions.” One community bank CEO noted that “[c]urrent mark-to-market accounting rules hinder transparency and distort the true condition of financial institutions,” in particular with respect to holdings of debt securities. He further stated that “[c]urrent accounting rules are hurting the markets ability to revive and establish market-driven pricing” and petitioned for Congress to hold the FASB accountable to provide guidance to financial institutions to address the present situation. During questioning, various members of the Subcommittee pressured Mr. Herz to have the FASB provide new guidance on mark-to-mark accounting within the next three weeks. Although, Mr. Herz initially agreed to work within the three-week timeframe, he later stated before the conclusion of the hearing that he would have to first consult with the other members of the FASB. Mr. Kroeker, however, agreed to work actively with the FASB to produce new guidance on the standard within the short time frame imposed.