Politicization of Accounting

Emergency Economic Stabilization Act of 2008 (EESA)

EESA commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and supply cash directly to banks.

Troubled Assets Relief Program (“TARP”)

The centerpiece of the EESA is the Troubled Asset Relief Program or “TARP” under which the Secretary of the Treasury is authorized to purchase troubled assets from any financial institution.

Section 133 of the Act,

Titled "Study on Mark-to-Market Accounting," requires the SEC, in consultation with the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings

Mark-to-market

Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price, or for similar assets and liabilities, or based on another objectively assessed "fair" value.

Fair value accounting has been a part of Generally Accepted Accounting Principles (GAAP) in the United States since the early 1990s, and has been used increasingly since then.

Mark-to-market accounting can change values on the balance sheet as market conditions change. In contrast, historical cost accounting, based on the past transactions, is simpler, more stable, and easier to perform, but does not reflect current fair value.

The Emergency Economic Stabilization Act of 2008 was passed during a time of substantial stock market declines in the united state and the world. In your opinion , was Congress correct in directing a .review of an accounting standard? Discuss

This is an opinion question:

A review of the accounting standard was likely justified considering the economic situation. Should the review have been done by the SEC or FASB independently of congress?

Did the SEC play a proper role in addressing the standards that governed mark-to-market accounting? Discuss.

Securities and Exchange Commission has the primary right and responsibility for generally accepted accounting principles. They have primarily elected to have the private sector develop generally accepted accounting principles and have designated the Financial Accounting Standards Board as the primary source.

Yes. The SEC has the authority to govern GAAP in the U.S. A case could be made that the SEC should have acted sooner.

Did the SEC have the authority to change mark-to-market accounting for

the U.S. GAAP ? Discuss.

As indicated in previous question , the SEC has the authority to govern GAAP .

Did the FASB follow its usual procedures in addressing the mark-to-market issue ?

Discuss.

FASB (Financial Accounting Standards Board): In the United States, the highest-ranking authority in the private (non-government) sector for making pronouncements on GAAP — and for keeping these accounting standards up-to-date.

Government decision on commercialization may will be needed for short time frame. And here the time frame is short.

Is politicization of accounting standard justified under material economic turmoil? Comment

Probably not. In the long run, the involvement of congress is likely to be negative.