Is standard setting independence at stake, again? Would investors trust 'Generally Accepted Flexible Accounting Principles?'.

• Author: Cheney, Glenn A.
• Position: Financial reporting - Financial Stability Improvement Act

If a recent proposed amendment to the Financial Stability Improvement Act finds its way to law, the principles of accounting could become somewhat less principled and somewhat more flexible, according to several business and investment associations. The proposed amendment, introduced by Rep. Ed Perlmutter (D-Colo.) and Rep. Frank D. Lucas (R-Okla.) would give a "financial services oversight council" the power to modify, suspend or eliminate accounting standards that it believes could have a negative impact on capital markets.

The council's overall mission would be to preserve the safety and soundness of the American banking system. To accomplish that mission, Perlmutter and Lucas say, the council would need power over accounting rules.

The specter of banking regulators controlling accounting standards has provoked opposition from a wide variety of business organizations, including Financial Executives International, the CFA Institute, the U.S. Chamber of Commerce and the American Institute of CPAs. Needless to say, the U.S. Securities and Exchange Commission and Financial Accounting Standards Board also warn of dire consequences.

FASB has long held that its mission is to produce good accounting standards, not create accounting tools that can be used to manipulate the economy. Though industry groups have often claimed that rules could be fashioned to enhance profits and promote capital growth--the controversy over the standard on stock option compensation, for example--the board has steadfastly refused to consider economic impact when writing standards.

FASB spokesperson Christine Klimek warns that putting FASB under the purview of banking regulators would compromise the objectives of independent standard setting. "Such a shift threatens to change the objectives of financial reporting, potentially politicize the process of setting accounting standards and ultimately harm the capital formation process in this country," Klimek said.

The shift would be significant. As the proposed amendment reads: The council would have the power to "take such action as is necessary, including but not limited to suspension, modification or elimination of such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate."

Concerned about the possibility of accounting principles that can be modified to...