The nation's top accounting regulator told banking supervisors Tuesday they are free to apply their own judgments to bank financial statements.
"It may not be possible [for accountants and bank examiners] to find common ground in every case, not because we aren't communicating, but because our different missions take us down different roads," Robert Herz, the chairman of the Financial Accounting Standards Board (FASB), said in a speech to the American Institute of Certified Public Accountants. "[Bank] regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system."
Such a "decoupling" would "enhance the ability of both the FASB and the regulators to fulfill our critical mandates," Herz said.
"The bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy," he said.
The speech did not give bankers what they want most: a repudiation of mark-to-market accounting from the FASB. Instead, Herz would only "concede that the use of fair value can have procyclical effects." He added, "But so can any information that accurately reports current economic and market conditions and trends."
While the Office of the Comptroller of the Currency and the Federal Reserve Board declined to comment on Herz's proposal, industry representatives panned the speech.
"The call-for … differences wouldn't be acceptable to the industry," said Donna Fisher, the American Bankers Association's senior vice president of tax, accounting and financial management. "The banking regulators are huge users of our financial statements and there needs to be some sort of compromise for the best accounting for all our users."
Kip Weissman, a partner at Luse Gorman Pomerenk & Schick, agreed and said two sets of accounting standards would be costly for banks. "We've come full circle," he said. "This is going to be expensive."
The fight between accounting and banking officials goes back decades.
Until the Financial Institutions Reform, Recovery and Enforcement Act, banks provided separate statements to their regulator and the Securities and Exchange Commission (SEC). That 1989 law paved the way for one statement provided to the SEC.
Banking regulators do have some room to deviate from the SEC statements, which adhere to generally accepted accounting principles.
The banking agencies, for instance, can advise banks to use different measurements to determine regulatory capital.
The SEC roiled bankers in 1998 when it accused SunTrust Banks Inc. of using its loss-reserve to smooth out its earnings and forced the bank to restate three years of results.
Bank regulators objected, and argued that banks ought to be able to build up reserves in good times. When "bad times" hit in 2008, banking regulators felt vindicated and accountants backed off a bit. But the FASB has continued to press for applying fair market values to all bank assets.
It's a campaign that has caught Congress' attention.
When Herz appeared before a House Financial Services subcommittee hearing in March, lawmakers gave him an earful about the problems caused by the FASB's insistence on using mark-to-market rules.
"When a collapsing market and struggling financial institutions are in need of expedited and comprehensive guidance, FASB must be more nimble and responsive to these concerns," Rep. Scott Garrett, R-N.J., said at the time.
Days later, the FASB issued rules that would ease the impact of other-than-temporary impairments caused by market-to-market accounting. Congressional criticism has eased but the House is poised to approve legislation this week that would require a systemic-risk counsel to weigh in on accounting issues that pose a risk to the broader economy.
On Tuesday Herz reiterated the need for reporting rules to be developed in an "independent, objective, thorough, and neutral fashion." He made clear that it was not always easy to achieve that goal during the heat of the financial crisis.
"There were intense efforts by certain financial institutions and their trade groups and lobbyists," he said, "not only for us to address perceived issues in applying fair value and impairment standards in inactive and distressed markets, but also for the SEC and Congress to eliminate or defer the requirements to recognize losses or impaired financial assets."