Sunday, October 18, 2015

Race to the Bottom on Accounting Disclosures

Accounting is the tool that should prevent corporations from misrepresenting the state of their business to investors and the public.  The Federal Accounting Standards Board plans to drop minimum standards in material disclosures in notes to financial statements.

Existing phrases like “an entity shall at a minimum provide,” which may make it difficult to justify omitting immaterial disclosures, would be replaced with less prescriptive language.
What language is that?

"A company at its determination, in consultation with public auditors, can chose to at its leisure or pleasure to..."
Materiality would no longer be an accounting concept, but a legal one.  The accounting profession is turning over their definition to lawyers!  This would anathema to my deceased grandfather, a former President of Price Waterhouse (when it was solely an accounting firm).

The International Accounting Standards Board requires this on materiality, according to FASB:

An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions
FASB's document states their amendment update does not address this IAS requirement.

A comment letter FASB posted on its website offered:

The valuation of securities is another area subject to high volatility as evidenced by the VIX index. VIX is one popular measure of the market's expectation of stock market volatility over the next month. High volatility as demonstrated by the VIX index will mean that valuations in individual portfolios are subject to wide swings up or down-sometimes due to purely irrational reasons. 

A related problem is that collateralized loans will have unstable security valuations due to unforeseeable investor fears and perceptions. For the accountant, the practical problem involves reacting to and assessing sudden and sometimes steep market drops which impact collateralized loans, as well as, securities valuations themselves. In reality, market swings do alter the total mix of information available to decision makers, regulators and investors alike. 

Foreign currency valuations is another area which impacts portfolios, loans made, receivables and other accounts.
To hide our "financial market casino" companies need the freedom to not disclose.  The overemphasis on finance and legal consideration has distorted business, especially in the last decade.  FASB's acquiescence to having no standard in materiality fits with the drive to the lowest global common denominator in nearly everything that benefits corporations (which fuels income for companies and their PEU owners)

The rush to free corporations on materiality feels like a preventive move for the next crisis, which will be driven by insane debt driven and CEO incentivized business practices.  It's sad irrational people ruin rational markets and corporations must find a proper fix, courtesy of a compliant FASB.  That's the world they would have you see.

Update 11-27-15:  The accounting fox is in charge of the hen house, at least in Ireland where four KPMG senior partners were arrested for tax evasion.

Update 6-17-19:   KPMG will pay a $50 million fine to settle SEC allegations that it not only altered past audit work, but did so after receiving stolen information from an industry watchdog.  

KMPG officials sought and obtained a list of inspection targets by the PCAOB because the firm had experienced a high rate of deficiencies. With the data, the former employees oversaw a program to revise certain audits to reduce the likelihood government inspectors would find shortfalls.
Update 2-21-22: Wall Street on Parade noted "the largest global firms — Deloitte, EY, KPMG, and PwC— and the largest next tier firms such as Grant Thornton, BDO, and RSM, are less focused on performing their public duty of auditing and more interested in playing all sides of client opportunities to optimize their payday."