I have to say, accountants have really been taking some uncalled-for heat for causing the 2008 financial crisis. I understand the need to identify scapegoats, but when people hire mortgage brokers to originate bad loans, sell interests in those bad loans to investors, and insure it all through AIG, is it really the accountants’ fault when those loans go bad? And if the federal bank examiners missed the fact that Fannie Mae and Freddie Mac were engaged in such shenanigans, what hope do we have of being able to adequately apprise investors of such details via financial statement disclosures?
Undaunted, FASB has taken a shot at developing new requirements for banks to report information in their financial statement footnotes about their exposure to liquidity and interest rate risk. I understand the pressure FASB is under, I really do. There’s something called the Group of Twenty, consisting of the top finance officials from the 20 largest industrialized countries, that’s been pressuring FASB to improve accounting rules in a manner that will somehow prevent future financial meltdowns. To me, the Group of Twenty sounds uncomfortably similar to the Gang of Four, which ran China with an iron fist back in the Sixties and Seventies, so, if I were FASB, this group would make me nervous, too.
On the surface, it seems reasonable to expect that more information about liquidity and interest rate risk experienced by banks would be a good thing, as these are probably the two risks you hear about most when banks fail. Dig deeper, though, and two points about these new proposed disclosures become apparent:
- Most of this information is already available to users, through SEC and bank regulatory filings.
- To the extent it isn’t, that’s because no one uses the information, not even management of the banks!
It would be interesting to look back at some of the banks that failed during the recent recession, identify which of the proposed disclosures weren’t already available to investors and regulators, and decide whether anyone would have reacted differently if they were. Or was it simply the case that bad business decisions were made, and, when that happens, companies go under? And when recessions hit, sometimes banks fail?
I remember a TV interview during the height of the 2008 crisis, in which the focus was on blaming stock analysts (they hadn’t gotten around to accountants yet). The interviewer asked, “How many stock analysts do we have to hang on Wall Street before they all get the message?” The expert he was interviewing said, “Probably just one.” I’m guessing that holds true for accountants, too. There are already rules in place to disclose significant risks, concentrations, obligations of the institution, and the like. If Lehman Brothers and AIG don’t follow them, appropriate sanctions (I’m not advocating hanging, mind you) should follow; we can pass more rules, but if they didn’t comply with the existing rules, what makes us think they’ll follow the new ones?
If you have questions, please reach out to Tyler Butler or Tracy Harding.
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