If the devil is in the details, the fudging is in the footnotes.
So says the Financial Accounting Standards Board (FASB), the little-known organization that
is authorized by the Securities and Exchange Commission to set accounting
standards for publicly held companies, known as Generally Accepted Accounting Principles.
The FASB's latest rule has the business community in an uproar. The rule
requires that companies include derivative holdings--financial vehicles valued
at billions of dollars in the economy as a whole--as assets and liabilities in
their balance sheets when they file financial statements with the SEC.
Currently, the complex financial devices are nestled in footnotes at the back
of annual reports.
Companies are loath to include derivatives in their balance sheets, as this
can make what would otherwise appear to be a successful company look
considerably less well off.
So an informal coalition of banks, business groups, and Wall Street traders is
lobbying Congress to pass legislation to overturn the rule. And senior
executives from the nation's top companies and banks have written to the FASB
asking it to hold up the rule, which is in its final stages of preparation and
is slated to take effect in fiscal 2000.
The bills, sponsored by Sen. Lauch Faircloth (R-N.C.) and Rep. Richard Baker
(R-La.), would do more than reverse this FASB rule. They would also
permanently curtail the FASB's power and put it directly under government supervision. Both
bills are awaiting subcommittee action.
"Good accounting rules should be created in an open--and accountable--process,
" Baker, chairman of the House Banking Committee's securities subcommittee,
wrote in The New York Times.
"That is not how it works today."
The FASB is a private-sector organization in Norwalk, Conn., set up in 1973 to
write accounting rules on everything from how to compute stock options to how
to account for mergers and acquisitions. Composed of accountants,
businesspersons, and academics, the board devises its rules with input from the
financial community. But the FASB's real impact stems from its symbiotic
relationship with the SEC--which doesn't formally adopt the FASB's rules but
polices them.
FASB officials say its rule-making process is even more rigorous than the one
most federal agencies go through. But critics say the process does not give
aggrieved parties sufficient opportunity to air their complaints. They want the
SEC to formally adopt FASB rules to allow for better review.
"No one really takes responsibility for the economic impact of accounting
standards," says Paul Salfi, who is lobbying on the issue for the American Bankers
Association, along with Donnas Fisher, who directs the ABA's tax and
accounting division. He says if banks follow the proposed rule for accounting for
derivatives and hedging, it will create distortions in their income statements
and balance sheets.
FASB project director Jeffrey Mahoney disagrees, saying that the rule-making
process is very flexible and open. He points out that the FASB had 140 public
meetings on the derivatives project in the last six years.
Mahoney argues that the corporations' lobbying push is simply an attempt to
escape uncomfortable regulations and to politicize the rule-making process.
"With the federal government involved, special interest groups can manipulate
the process," says Mahoney.
"If enacted, the Baker legislation would essentially kill the FASB altogether
and get the derivatives and hedging standard delayed or watered down or
killed."
Mahoney and the FASB's chairman, Edmund Jenkins, have registered to lobby to
fight the business groups.
Derivatives, which first gained popularity in the go-go 1980s, are commonly
used but little understood. Companies and banks often use them to hedge
against market risks such as sudden changes in interest rates. But they can also be used
recklessly, to make fast profits from risky bets.
Financial derivatives came to the attention of regulators after major losses
by the likes of the Procter & Gamble Co. and Gibson Greetings Inc. Perhaps the best-known horror story
occurred in 1994 in Orange County, Calif., where speculations in derivatives by
the treasurer cost the county $1.7 billion.
One company that says it would be adversely affected by the FASB's rule is the
Hershey Foods Corp. The change would force Hershey, a publicly traded
company,to disclose its hedging activities in cocoa futures to its main competitors--the
Swiss company Nestle and the privately held Mars--who are not bound by FASB rules.
To make sure that nobody forgot what was at stake, somebody put Hershey's
Kisses in members' chairs at a House Banking Committee hearing on the issue
last October. Hershey's lobbyists on the issue, Robert Rosenbaum and Martha
Cochran of Arnold& Porter, denied responsibility.
Also pushing the legislation is the International Swaps and Derivatives
Association, which has hired James Butera of Butera & Andrews and Donald Moorehead of Patton Boggs, the former chief minority
counsel to the Senate Finance Committee.
ISDA board member Mark Brickell, a J.P. Morgan bank official, has been flying
to Washington to talk to members about the issue. The U.S. Chamber of
Commerce is also pushing for an FASB overhaul.
Against this onslaught, the only organization that has publicly taken the
FASB's side is the American Institute of Certified Public Accountants.
"We are very much in favor of the rule-making process remaining in the private
sector," says AICPA lobbyist Tom Higginbotham.
"I really don't think it does much good to bring the rule-making process close
to the Congress and subject it to political pressures and considerations."
Both the SEC and the Federal Reserve have reportedly taken sides behind the
scenes. The SEC is in favor of retaining the current system because it already
has final authority over the FASB, but it wants to keep the organization
independent of outside influence. And Fed Chairman Alan Greenspan has
written three letters to the FASB objecting to the rule, according to The Washington
Post.
An SEC spokesman declines comment on the pending legislation.A Fed
spokesman did not return a call.
The broader of the two bills, sponsored by Baker, would bring the FASB under
direct SEC supervision, and require FASB rules to be put forth for public
comment and to be open to review in federal court. (FASB fans say its actions
are already subject to federal court review.)
Sen. Faircloth's bill deals specifically with banks. It would exempt banks
from FASB rules unless banking regulators determine that a bank's earnings and
risk-management practices would not suffer.
Supporters of the current legislation admit that their chances are slim, but
hope they can persuade FASB to reconsider. We are trying to make the point that
the current process is flawed," says a Hill aide.