Watching Paint Dry

When you think of chartered (a U.K. term) or certified public accountants (U.S.), if you have any images at all, you are likely to conjure up green-eye shade minions pouring over books and records (or, more likely, computer screens) or those guys with the briefcase at the Oscars who have tallied the Academy’s votes. Accounting stuff to most of us is about as interesting as watching paint dry. But these devilish souls often move from their little accounting cubicles into the highest ranks of the corporate world, from chief financial officer to chief executive officer, and their societies’ private rules often have more of an impact on financial transparency than government regulations. Without the implicit or explicit cooperation of these accountants, the pervasively nasty and twisted financial machinations that brought down the global economy could never have happened.

So when certified or chartered accountants from around the world address global standards in financial reporting, what it takes for them to “certify” a corporate financial statement for public dissemination, this seemingly little news strikes at the heart of financial reform and the perhaps-naïve hope that what happened in the debt-derivative-debacle in the last ten or fifteen years will be regulated in such a way that it will never happen again. We already have seen how Wall Street’s lobby watered down the only major federal legislation (Dodd-Frank) aimed at fixing the broken machine and convinced a GOP House not to fund the Securities and Exchange Commission (SEC) to create rules under that statute, rendering even that less-than-perfect legislation impotent.

So now we turn to how chartered and certified accountants are working to create global standards in financial reporting and certification of financial results. Europe, now reeling from a technically resurrected recession (yes, it’s official now) from its debt crisis, has pressed its accountants to create stronger rules and greater transparency. The big American financial institutions are pressing for continuing the world without significant new rules or greater visibility. Since the relevant assemblage of American CPA’s follow the Financial Accounting Standards Board (FASB), and most other countries adhere to the rules of the International Accounting Standards Board (IASB), the rules applicable to reporting and disclosure under these NGOs can differ depending on where you account. Interpretations of the same facts, even with the same rules, can also differ based on which board governs your transactions.

In June, the “Group of 20 Countries” – the most powerful economies in the world – met to address global financial instability and concluded with a goal of “continuing work to achieve convergence to a single set of high-quality accounting standards.” Nice words, but when major financial institutions faced the truth of having to report the genuine value of bad loans, loans which they carry on their books at full or unsustainably high value in bad market conditions and through defaulting borrowers, the thought of such accurate reporting – which would drop the value of their portfolios significantly triggering all kinds of financial ramifications – was simply too much to bear.

Europe and those nations following IASB rules favored truth. The Americans under FASB favored continuing existing practices. Indeed, in an election year, pressure was even placed on the SEC itself to leave the status quo in the U.S. American financial institutions believe that their misleading “bad loan” values support other needed financial structures needed for their continued operation, that dropping these loan values now would have devastating consequences for the American economy. The only path this is heading towards is literally a double standard of accounting – the United States vs. most of the rest of the world.

“[D]ays after the United States Securities and Exchange Commission made clear it was not going to move toward adoption of international standards anytime soon — the two boards found themselves in angry disagreement over one of the most contentious issues to emerge from the financial crisis: how banks should account for loans that may be going bad… The push for international rules in the United States turned out to have little domestic support. The major accounting firms love the idea, and so do some large multinational companies. But many domestic companies fear the expense of changing.” New York Times, July 19^th.

If anything, the future is likely to bring more divisions between these two mega-financial boards, making comparing an American company to a German company significantly more difficult, since reconciliation of differing valuations must be added to the mix.” Whatever happens to bank accounting, the two boards may move farther apart in the near future. Currently four of the 16 members of the international board are Americans, but two of them — including Paul Pacter, a former top staff official of the American board — have terms expiring this year. Some Europeans, including Michel Barnier, a member of the European Commission, have suggested that the board should be limited to people from countries that use the rules.” NY Times.

Europeans still blame the United States and its financial institutions (who are very present in Europe) for introducing the world to a culture of debt at every level, allowing financial institutions to bundle that debt and trade it like stock… demanding more and more debt to generate more and more transactional fees from trading more and more bundles. The global financial collapse was based on way too much debt without genuinely-supporting asset values.

The inability to reconcile how companies report “bad assets,” how they present their financial condition to regulators, investors and the society around them that is vulnerable to another financial collapse if they collectively don’t get it right, is serious stuff. It will impact how much you earn, what your home may be worth, your kids’ future and the viability of the United States as a functioning economy. But Americans rail at regulation, even when it is nothing more than a request to require truth and accuracy. How long can this continue without disastrous consequences… again?

I’m Peter Dekom, and I guess Wall Street just “can’t handle the truth.”