Regulators urge politicians to ease pressure for accounting changes

July 28, 2009

By Huw Jones
LONDON, July 28 (Reuters) – Accounting did not trigger the credit crunch and policymakers should avoid putting pressure on standard setters to make hasty rule changes without proper consultation, a high-level group of regulators said in a report on Tuesday.

“Accounting was not a root cause of the financial crisis, but it has an important role to play in its resolution,” Hans Hoogervorst, co-chair of the Financial Crisis Advisory Group, told Reuters in an interview.

The group was set up in 2008 by two of the world’s top accounting rule setters, the International Accounting Standards Board and the U.S. Financial Accounting Standards Board.

The aim was to look at the role of accounting in the crisis and make recommendations and help cool some of the political heat on the two standard setters.

However, last October after heavy pressure from European Union countries and U.S. Congress, FASB and IASB took only days to relax their so-called mark-to-market rules which policymakers blamed for being “pro cyclical” or amplifying the crisis.

The change gave banks more wiggle room to value assets that were untradable in the credit crunch in a bid to limit the writedowns that required raising fresh capital.

Hoogervorst said accounting rules on financial instruments needed drastic simplification while other rules had made it too easy for banks to park assets out of sight.

The result was a general “clear understatement of losses” rather than overstatement, said Hoogervorst, who is also chairman of the Dutch markets regulator AFM.

This year the IASB agreed to accelerate a full overhaul of its IAS 39 mark-to-market rule in stages so that a key part will be ready for compiling 2009 annual reports, as demanded by EU finance ministers.

Politicians have a right to voice concerns but in a more restrained way, the report said. “We urge them to refrain from seeking to prescribe specific standard-setting outcomes.”

Hoogervorst said “boundaries were crossed here and there” by policymakers but the mood has improved.

“I believe the situation is better than a couple of months ago. The European ministers of finance are appreciative of changes now being made to IAS 39 that will result in drastic simplification of the financial instruments standard which was long overdue,” Hoogervorst said.

Accounting has its limitations, providing a snapshot and not a perfect insight into effects on the economy, the report said.

Better market infrastructure for off-exchange traded assets such as derivatives and structured products would also provide better quality data for accountants to use, the report added.

Central clearing of credit default swaps, which starts in Europe this week, will help generate more reliable prices in future, Hoogervorst said.

Moving chunks of over-the-counter traded derivatives onto exchanges, as the United States is planning, would reap even better quality data for accountants, Hoogervorst added.

Some observers say concerns over the independence of standard setters may delay convergence or the creation of a common set of global accounting rules.

The United States has resisted giving a firm date while Japan is looking at mandatory adoption of global rules in 2012.

“To sustain momentum, we encourage all national governments that have not already done so to set a timetable that is both practicable and firm for adopting or converging with International Financial Reporting Standards,” the report said.

Hoogervorst hoped that countries do not resort to protectionism in accounting rules.

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