Anyone who cares about the reliability of corporate financial information in the US—and everyone should—ought to oppose threatend Congressional action that would expressly politicize accounting standard setting. Since the 1930s, accounting standards in the US have been set by a private, independent, non-political body called, since the mid-1970s, the Financial Accounting Standards Board (pronounced faz-bee).
Corporate America often hates what FASB requires—on subjects ranging, over the years, from accounting for pensions, mergers, stock options, and, today, financial instruments. It plies friends in Congress to push back against FASB when stakes are high enough. Sometimes that means FASB fights for its life. (For a scholarly take on this, see Bill Bratton’s insightful BC Law Review piece here.)
An example: in the late 1990s, corporate America got Senator Joe Lieberman to threaten to preempt FASB if it required corporate America to account for stock options—a threat FASB heeded until after that period’s financial frauds restored its insulation from political pressure. (Since, FASB has required corporate America to account for stock options as an expense. Then-SEC Chair Arthur Levitt recounts the story in his memoir Take on the Street.)
Banks are today’s most vehement proponents of turning accounting standards into political products—detesting FASB’s accounting standards concerning off-balance sheet financing, securitizations, and, especially, measuring financial instruments at fair value. Banks want to politicize accounting standards because they are extremely good at influencing politicians, but have essentially no power to manipulate FASB directly. One reason is Washington’s revolving door—banks have teams of lobbyists who formerly worked there, on the Hill or in agencies. Read More