Politics Creeping Into Setting Accounting Standards

The recent revelation that the nation’s top accounting standards organization was pressured to relax audit rules by a bailed-out Wall Street firm and members of Congress has CPAs crying foul and urging their industry’s leaders to stop caving in to outside pressures.

An alternative to the maxim “all politics is local” for the current economic era could be “all accounting is politics,” as was evidenced by financial Accounting Standards Board chairman, Robert Herz who said the rules-making body he leads was pressured by Congress to ease up its rules for valuing troubled assets.

What’s worse than appearing to bow to political pressure, making it easier for companies still holding distressed assets to improve their balance sheets, is possibly appearing to do so on behalf of the poster child of risky practices and federal bailouts.

Indeed, FASB’s Herz left little doubt he was talking about AIG in his recent speech to the National Press Club in Washington.

“Unfortunately, there have been certain major companies including ones that subsequently failed and had to be rescued by the government and industry trade groups that have sought political intervention into accounting standard setting,” Herz said.

His comments surprised many in the media, on Wall Street, and in Congress by their forcefulness and candor.

However, a spokesperson for Herz insisted the FASB chairman did not say the organization arrived at a decision to relax so-called mark-to-market rules (standards used for valuing or “marking” securities and other assets at current fair-market value).

“Politicization of accounting standard setting by special interests risks undermining public confidence in the integrity of financial reporting,” the spokeswoman said.

Herz’s spokeswoman added that the FASB chairman did not mean to leave the impression that mark-to-market rules were relaxed as a result of the alleged pressure, just that the process was expedited, perhaps unduly, as a result of that pressure.

“Mr. Herz did not say FASB was pressured into changing the mark-to-market rules,” she said. “We did all the due diligence, only then were the rules modified.”

Nevertheless, many believe the change was a direct result of political intervention.

“Absolutely, politics is involved,” said Kevin Breard, principal at Northridge-based Breard