June 23, 2009 / 12:57 AM / in 8 years

Investor group says FASB's independence has eroded

* Investors panel blasts political interference in FASB

* Asks that FASB be restored to seven members from five

* Says FASB’s governance structure is “insufficient”

By Emily Chasan

NEW YORK, June 22 (Reuters) - The independence of the U.S. accounting rulemaking body has been tarnished by recent political pressure over mark-to-market accounting changes, according to a letter sent by an advisory panel of investors to the Financial Accounting Foundation last week.

The group said the governance structure of the Financial Accounting Standards Board has been “insufficient” in fighting off pressure from special interests and politicians seeking more flexibility for banks with toxic assets on their books, and asked that the FASB board be restored to seven members from its current five.

The letter was addressed to Financial Accounting Foundation Chairman John Brennan, who oversees the accounting rulemakers at FASB.

The panel, called the Investors Technical Advisory Committee (ITAC), was set up by FASB to give investors’ perspectives on accounting rules.

Its members include 13 investment professionals from suchorganizations as the Council of Institutional Investors and the CFA Centre for Financial Market Integrity; a former regulator; and analysts from Moody’s Corp (MCO.N), Standard & Poor‘s, Goldman Sachs & Co (GS.N), J.P. Morgan Securities (JPM.N) and the California Public Employees’ Retirement System.

Citing a congressional hearing in March over mark-to-market accounting, the investor group said it had “grave concerns about what we believe to be a substantial erosion in the independence of the accounting standard setting process.”

At the hearing, lawmakers told FASB Chairman Robert Herz to deliver new guidance on mark-to-market accounting within three weeks or face legislation changing the rule that had forced banks to write down billions of dollars in assets.

FASB bowed to pressure from Congress and the financial industry in early April by allowing banks more flexibility in valuing toxic assets.

“LOSS OF TRUST”

The group questioned whether “weaknesses” in FASB’s structure and governance would undermine the quality of accounting rules issued by the board in the future.

    The Investors Technical Advisory Committee said in the letter that it believes that poor transparency in accounting is partly responsible for the lack of investor confidence during the financial crisis and that FASB’s inability “to assert its independence in the face of onslaught” was “exacerbating” the current problems.

    “Many investors responded negatively to the reduced quality of information, as reflected in their investment decisions, but that response cannot compensate for the loss of information and, perhaps more importantly, the loss of trust and confidence in financial reporting and accounting standard setting,” the group wrote.

    To help FASB better fend off political attacks, the advisory panel urged the Financial Accounting Foundation to reverse changes made to its governance structure last year.

    It asked that the five-member board be restored to seven members, with the two additional members coming from investor groups.

    The group also said because of “very public threats and intimidation” by Congress against FASB’s chairman, another of the recent changes -- giving the chairman sole authority over what accounting projects end up on the board’s agenda -- should be reversed.

    In February 2008, the foundation downsized FASB and increased the chairman’s power, saying the changes would help U.S. and international accounting standards converge. But plans to have U.S. companies switch to International Financial Reporting Standards as soon as 2014 are now being reevaluated by the U.S. Securities and Exchange Commission.

    The investor advisory panel said in its letter that while FASB’s governance issues were troubling, the situation “appears to be if anything even more dire outside the U.S.” as the London-based International Accounting Standards Board has also faced threats from regulators and politicians abroad.

    A FASB spokesman was not immediately available for comment on the letter. (Reporting by Emily Chasan; Editing by Gary Hill)

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