The United States Securities and Exchange Commission (SEC) announced that James Kroeker, the governing body’s chief accountant since 2009, is stepping down.
“Jim has provided superb counsel on a range of accounting- and auditing-related matters and has always stressed the importance of accounting to our investor protection mission,” said SEC Chairwoman Mary L. Schapiro.
Kroeker served as staff director of the SEC’s study of fair value accounting standards, which Congress mandated in 2008. He has led efforts to analyze the adoption of International Financial Reporting Standards (IFRS), one step that could lead to the establishment of a global accounting standard.
Kroeker’s departure is also significant because of the timing. The SEC is currently debating and completing the full analysis of bringing IFRS to U.S. public company accounting standards. Business and governmental leaders are anticipating the SEC’s analysis and decision as it would require a large shift in standards, most notably fair value accounting.
Jim is one of the good ones. He will be missed. The SEC has not announced a timetable for his replacement.
In a Financial Times article, writers Nicole Bullock and Hal Weitzmanin note that new accounting standards before the Governmental Accounting Standards Board (GASB) could cause some U.S. states to “see the reported shortfalls in their public pension funds grow sharply.”
The debate over pension plan accounting has been especially sharp in recent years, as decades of underfunding coupled with stock market losses during the financial crisis widened funding gaps, causing states to push for benefit cuts.
One of the GASB’s proposals, which Bullock and Weitzmanin say is likely to pass, would require that pension funds report assets on a mark-to-market basis.
Currently, states employ a “smoothing” method, which allows for losses to be spread over a longer period of time. Though controversial, the technique has allowed government pensions to prevent reported assets from fluctuating wildly as market values change.
“That change is going to be fairly dramatic,” said Laura Quinby, research associate at the Center for Retirement Research at Boston College. “Currently actuarial assets are higher than market assets because the full losses from 2008-9 have not been phased in yet.” The new standards “will better reflect the economic reality,” said Robert Attmore, chairman of the GASB.
Filed under: Fair Value Accounting, Generally Accepted Accounting Principles, Real Estate
In an opinion piece published in American Banker, president and chief executive officer of the Community Bankers Association of Georgia spoke in favor of current legislation that would “provide relief for real estate-related assets by allowing community banks to amortize losses on commercial real estate loans and ‘other real estate owned’ (repossessed properties) over 10 years for regulatory capital purposes.” The Communities First Act, first introduced to Congress in 2011, “provides a broad range of much-needed regulatory and tax relief for community banks and their customers,” said Brown.
Current mark-to-market rules under generally accepted accounting principles (GAAP) require the immediate recognition of losses.
Decoupling GAAP from regulatory accounting practices, says Brown, would allow community banks to more easily spread real estate losses over a longer period of time and give them better opportunities to work with borrowers rather than foreclose.
“Regulatory, tax and paperwork requirements disproportionately burden community banks, which lack the scale of larger institutions over which to spread legal and compliance costs,” Brown continued.
This legislation could stimulate a struggling economy by allowing small community banks to lend more easily to consumers and small businesses, many of which have limited funding options currently.
Amidst additional disclosures regarding its $2 billion loss and subsequent investigations, Morgan Stanley analyst Betsy Graseck painted a slightly brighter picture for the banking giant, noting that investors could see an “upside surprise.”
Although banking regulators, the United States Securities and Exchange Commission (SEC), and, reportedly, the Federal Bureau of Investigation (FBI) have opened inquiries into JPMorgan Chase’s hedging activities surrounding the loss, Graseck believes that answers to three questions could be “key to getting investors back into [JPMorgan Chase].”
First, “who knew what and when?” asks Graseck. This information is “critical to understand who in the organization” was aware of any accounting changes related to the loss.
Second, Graseck would like to see “more specific details on the components of the trade, size of the trade, strategy employed, and how that strategy was executed over time.”
Lastly, Graseck feels Dimon and JPMorgan Chase should provide “more detail on the latest mark-to-market of the position, size, max loss, and color on how analysts can potentially better forecast [the] ultimate loss.” The mark-to-market positions taken by JPMorgan Chase were seen as exceptionally risky for such a large bank, thus troubling investors.
In the wake of the JPMorgan Chase $2 billion loss and fallout, Harvard Business Review writer James Lam lays out various rules and guidelines for managing risky behavior.
As noted by Mr. Lam, “If risky behavior can happen at the house of Morgan under the watchful eyes of Jamie Dimon, it can happen anywhere,” and companies should have policies in place – at all levels – to protect from deceit.
Setting clear policies is one of Lam’s five most important rules for managing risky behavior. “For enterprise risk management, key policies include a statement of risk appetite and explicit risk tolerance levels for critical risks,” says Lam. But, “the right people have to be setting the rules,” he says.
As an example of unclear policies designed by those set out to deceive investors and regulators, Lam offers up the case of former Enron Chief Executive Officer Jeffrey Skilling.
Skilling, upon his hire, insisted upon mark-to-market accounting for Enron’s balance sheets. As a result of marking the company’s financial positions to market, Enron’s actual cash generated was a mere 3% of reported income. “Appropriate risk, compensation, and financial policies will set the incentives and boundaries for employee behavior,” Lam concludes.