Banks are pressing Congress to let bank regulators override accounting standards developed by the independent Financial Accounting Standards Board (FASB) the next time systemic risks threaten to overwhelm financial markets. Essentially, the banks want to be able to change the rules so they can mask how insolvent they are and avoid having to raise more capital.
This should be a non-starter. Audited financial statements provide investors and companies with information that is vital to making investment and business decisions. The accounting standards underlying such financial statements derive their legitimacy from the confidence that they are established, interpreted and, when necessary, modified based on independent, objective considerations that focus on the needs and demands of investors – the primary users of financial statements. For investors, businesses and other users to maintain this confidence, the process by which accounting standards are developed must be free of outside influences that inappropriately benefit any particular participant or group of participants in the financial reporting system to the detriment of investors, businesses and capital markets.
Granting bank regulators, whose mission is not focused on the needs of investors, the authority to override the independent accounting standard setter on the substance or timing of standards is bad public policy. It would reduce the overall quality of financial accounting and reporting, harm investor confidence in the markets and damage the long-term prospects for US economic growth.