In the first part of this series on the Financial Accounting Foundation’s (FAF’s) Post-Implementation Review (PIR) of Statement of Financial Accounting Standards No. 157, Fair Value Measurement (FAS 157), I provided ‘my two cents’ on the FAF’s PIR finding that, “Our research indicates that there have not been any significant unanticipated consequences resulting from the application of Statement 157.” See: No Unintended Consequences? Really?
I promised to share my thoughts today on the FAF PIR’s conclusions as to how much of the cost of implementing FAS 157 can be attributed to the standard itself, vs. other SEC, PCAOB or Congressional regulatory or legislative initiatives, or preparers’ and auditors’ behavioral reactions related thereto.
In my opinion, (once again, please refer to the disclaimer below), the discussion of costs in the FAF’s PIR on FAS 157 attributes too great a portion of the implementation cost to the implied or real pressure of regulations and regulatory oversight of the SEC and PCAOB, as well as the Sarbanes-Oxley Act (particularly Section 404), rather than the letter of FAS 157 itself.
My reason for believing there may be too much cost-shifting put to blame here, from the accounting standard to the regulators, is two-fold:
1) I have listened to webcasts of FASB board meetings in years past (admittedly over two years ago) where board members stated something to the effect that it is the FASB’s job to come up with the “right” accounting, and the job of auditors, the SEC and PCAOB to develop auditing and regulations relating to that rule after the fact. Said another way, some FASB board members believed in neutrality so strongly back in the day, they felt they had no need to consider ‘auditability’ or ‘practicability’ of their standards -- just the theoretical constructs of the standards – and essentially, to leave the auditing standards and auditability of the standard to the auditors and their clients.
I never felt this siloed approach to accounting and auditing standard-setting, with the additional layer of SEC enforcement and PCAOB inspection and enforcement layered on top, made sense, absent recognition of the need to consider auditability up front -- when accounting standards were being developed.
If indeed the PCAOB needed to fill a vacuum for guidance, particularly for auditing the valuation of ‘level three’ securities as defined in FAS 157’s three-tier hierarchy, following white papers developed in the private sector that were also aiming to ‘fill the GAAP’ short of full due process, some of the gap was due to the wording in GAAP, representing the need for a close working relationship or at least advisory/communication channels between the SEC, PCAOB and FASB. This point is all the more important, with word that the PCAOB may be preparing to take on another standard-setting project this year relating to auditing fair value measurements. (See, e.g. PCAOB Chief Auditor Marty Baumann’s speech at the AICPA’s Annual Conference on Current SEC and PCAOB Developments, Dec. 10, 2013, and SEC Deputy Chief Accountant Brian Croteau’s speech Dec. 9, 2013 at the same conference.)
2) I would also question one assumption in the FAF PIR report about cost pressures “arising after the issuance of FAS 157 such as the requirements associated with Sarbanes-Oxley,” since Sarbox predated FAS 157; and I would question language in the FAF PIR report that talks about increased costs attributable to use of third-party valuation experts and service providers as “not exclusively a result of the Statement 157 requirements.”
To me, wording about costs being “not exclusively” a result of FAS 157 is primarily defensive in nature, but not necessarily a clear, plain-English statement on exactly what incremental costs were or were not borne out by the language of FAS 157. Similarly, there will always be SEC reviews of financial statements, and PCAOB inspections of audits. Those are standard and for the most part, I would remove those costs from the analysis, except to the extent that FAS 157 had an inordinate effect on increasing those costs.
The sentence in the PIR report stating, “Additionally, some of the costs may have been amplified by the global financial crisis of 2008, “ I believe, is one of the great understatements of the new millennium, since preparers were scrambling to value illiquid securities to meet the requirements of FAS 157 as well as their auditors.
For an excellent summary, see: Fair Value and Mark-to-Market Accounting.
Can There Be ‘Too Much’ Disclosure?
The FAF PIR Report’s Summary describe the yin and yang of the desire for more (or less) detailed disclosures relating to fair value measurement, stating, “There are indications from some participants in each of the stakeholder groups included in our research that
the volume and extent of disclosures may be beyond what is necessary for investors and other users of financial statements, “ and at the same time finding, “However, there are
also indications from some investors that additional disclosures would be helpful, particularly around the distribution of unobservable inputs. “
Kevin Spataro, senior vice president, accounting policy and research, Allstate Insurance Co., an articulate panelist on numerous SEC and FASB roundtables on Fair Value Measurement, shared with us, “The
amount of disclosures about financial instruments is
excessive and now
may be crowding out other, more relevant disclosures about the performance and financial condition of financial services entities. “ He continued, “
A reconsideration of the entire suite of financial instruments disclosures would be useful, as while
I have no doubt that some sub-segment of the user community would like to see them expanded, the
vast majority find them excessive, and
shift the focus away from other more useful disclosures.”
In
FASB’s response to FAF’s PIR report, FASB Chairman Russell Golden stated, “We recognize that the PIR team received conflicting or mixed feedback from stakeholders in some areas including the sufficiency and completeness of disclosures.”
With calls for a focus on disclosure reform coming from SEC Chairman Mary Jo White and others at the SEC, as well as FASB’s projects on simplification and the disclosure framework, there will be an opportunity to address some of the issues relating to disclosure that were noted during the FAF’s PIR of FAS 157.
FASB’s Golden recognized this as well, stating, “In considering this feedback [from the FAF’s PIR], the FASB plans to conduct research and outreach with stakeholders in connection with in-process projects and initiatives, such as the Disclosure Framework Project, the simplification initiative research project, the research project on accounting issues in employee benefit plan financial statements, and the ongoing involvement of the Private Company Council (PCC) and Not-for-Profit Advisory Committee (NAC).”
He also added that in response to FAF’s specific recommendations on FASB’s standard-setting process, improvements were put in place after FAS 157 was issued, and “the FASB continues to evaluate, consider, and implement ways to better document cost-benefit considerations and stakeholder outreach, consistent with the recommendation by the foundation’s PIR team. Thus, while the FASB has made significant progress in those areas since the issuance of Statement 157, they continue to be focus areas for continuous improvement.”
Light at the End of the Tunnel
Although I don’t fully support the FAF PIR’s one-sentence conclusion that there were no unintended consequences from FAS 157, and I believe too much of the cost factor in the report is being shifted directly or indirectly to the SEC and PCAOB (or preparers’ and auditors’ concern with satisfying reviews and examinations or inspections thereof), it is immensely important to keep the FAS 157 story in perspective.
Donna Fisher, senior vice president, tax, accounting and financial management, American Bankers Association: “FAS 157 didn’t cause or trigger the crisis. Instead, it had a heavy hand in
exacerbating the crisis. If FAS 157 had represented real fair values during the crisis, then tough luck; too bad. But, in a frozen market, exit prices no longer represented the “fair value” that an efficient market might otherwise provide. Thus, it wasn’t tough luck, it was bad accounting.”
Although I questioned the FAF PIR’s conclusion that there were no unintended consequences from FAS 157 – the very reason why I challenged that conclusion is because – granted, after a perhaps elongated period of prodding (or staunch attachment to a particular interpretation of ‘neutrality,’ freedom from bias, or a particular attachment to a theory of economics) – in the end, FASB
was responsive to calls for clarification, and comments from its constituents. My point was that
some of the suggestions for improvement, I believe, were made in some of the earlier comment letters (FAS 157, and the Fall 2008 FSP) and perhaps could have been implemented
sooner than the April 2009 FSP.
Much has happened in the way of improvements at the standard-setters since that time, as duly noted in the FAF’s PIR report and FASB’s response thereto, including improved constituent outreach and maintenance of related records.
Other important changes took place as a result of the FAF’s ‘whistle-stop’ tour a few years ago. During this tour, FAF trustees and senior staff got an ear-full of what constituents thought the FAF, FASB and GASB were doing right, and what they thought the three organizations could do better. Since that time, there appear to have been solid improvements in the governance and output from FAF and FASB (note: I do not follow GASB closely so I will not opine on them specifically.) Much of this has been written about in FAF President Terri Polley’s “From the President’s Desk” column.
In the area of Private Company Standards, specifically, a large amount of progress has been seen in a relatively short period of time, particularly measured in, let’s say, FASB-project-years. FASB should be applauded for this work.
Equally significantly, FASB should be applauded for recognizing that many “improvements” and “simplifications” that originate in the form of requests by its private company constituents can also benefit public companies. FASB has stepped up to the plate and already knocked some home runs in quickly moving some improvements originally contemplated for private companies only, and either finalizing those simplifications for public companies as well, or fast-tracking potential simplifications for consideration by the board.
With improved responsiveness to constituents in recent years, particularly private company constituents who believe they really have a voice at the FASB now (with the formation of the Private Company Council, and with Daryl Buck on the FASB board) and with a project timetable that may possibly be less pressured as the FASB-IASB convergence projects wind down (and that in and of itself may be a lesson learned in the post-implementation world) these things all bode well for the standard-setting process.
See also the video posted earlier this week on the AICPA’s Journal of Accountancy site, featuring FASB Chairman Russell Golden speaking on,
How Changes to Accounting for Private Company Standards May Lead to Improvements for All Companies.
DISCLAIMER: Unless specifically noted, the views in this column do not necessarily represent the views of FEI, its officers, directors, agents, employees or members.