Meeting with SEC to focus on audits
Posted on Friday, October 3, 2008
U. S. Securities and Exchange Commission Chairman Christopher Cox, facing pressure from banks and lawmakers to relax accounting rules blamed for exacerbating the financial crisis, plans to meet with chief executive officers of the largest audit firms today.
Executives from PricewaterhouseCoopers LLP, KPMG LLP, Deloitte & Touche LLP and Ernst & Young LLP will sit down today with Cox, said two people familiar with the matter. The discussion will focus on a requirement, backed by Federal Reserve Chairman Ben Bernanke, that banks review their holdings each quarter and report losses if values have declined.
The fair-value accounting rule has become a sticking point as Congress considers a $ 700 billion rescue plan for financial companies. A Sept. 30 letter to Cox signed by 65 lawmakers urged him to suspend the requirement “immediately,” saying it has triggered markdowns that don’t reflect what assets are worth.
“In periods of market turmoil, financial institutions are forced to write down the value of long term, non-trading assets below their true economic value,” said the letter, signed by 58 Republicans and seven Democrats. The rules are “hamstringing the ability of banks to make loans to consumers and businesses,” according to the letter.
The collapse of the sub- prime-mortgage market has led to more than $ 587 billion of losses and write-downs at financial companies, data compiled by Bloomberg show. Treasury Secretary Henry Paulson is seeking authority from Congress to ease the crisis by buying mortgage-backed securities and other troubled assets from banks.
The Senate voted Wednesday to approve a rescue plan that requires the SEC to study whether fair-value accounting has triggered bank failures. The measure stopped short of suspending the rules, reiterating the regulator’s authority to take that step. The House may vote on the measure today.
Lawmakers are “trying to cover their flanks without destroying the financial system,” said William Black, an associate professor of economics and law at the University of Missouri in Kansas City who supports the use of fair-value accounting. “They have to give some sop to the crazies to broaden the coalition and pass this bill.”
Bernanke said last month that imposing a moratorium would erode confidence that companies are owning up to their losses. Accounting firms have made similar arguments.
Suspending the rules “will only obfuscate the current economic picture for investors and regulators, and might even plant the seeds for the next crisis,” PricewaterhouseCoopers Chairman Dennis Nally said in a letter sent Wednesday to every member of Congress.
The accounting industry’s “big concern has to be the litigation exposure,” said Adam Pritchard, a former SEC lawyer and now a professor at the University of Michigan Law School in Ann Arbor.
“When they sign off on nonmarket evaluations, in the cases where it turns out they were wrong, the accountants are going to get sued because their clients are going to be bankrupt,” he said. “Plaintiffs’ lawyers are going to be looking for someone to stick it with.”
Spokesmen for PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte had no comment about the meeting with Cox. The CEOs of Grant Thornton LLP, BDO Seidman LLP, Crowe Horwath LLP and McGladrey & Pullen LLP also will attend.
“The SEC continues to meet with regulators, standard setters, issuers, auditors and investors on fair value in light of current market conditions,” said SEC spokesman John Nester on Wednesday, declining to comment further.
Fair-value accounting requires companies to determine how much assets are worth based on what they could sell them for on the open market. The SEC issued “clarifications” Sept. 30 that urge banks and auditors to use judgments, such as expected cash flows, to assess asset values when trading has dried up.
The regulator took action after the American Bankers Association, a Washington trade group, held meetings with SEC staff members and lobbied the agency to give companies more flexibility in how they value assets.
Rep. John Shadegg, R-Ariz., said in a Bloomberg Television interview that he spoke with Cox for an hour Wednesday and thinks the SEC “will go further to try to readjust” fair-value provisions. Shadegg was among lawmakers who wrote the letter to Cox urging him to suspend the rules.
The SEC guidance won’t prompt accountants to gloss over banks’ write-downs because the industry still bears scars from scandals at Enron Corp. and WorldCom Inc. earlier this decade, said Gaylen Hansen, an auditor at Erhardt Keefe Steiner and Hottman in Denver.
Investors and lawmakers “really beat up the accounting firms after Enron,” Hansen said. “They do not want to be in that position again.”
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