Now is the worst time for Congress to stall a new accounting standard that banks have long complained about.
But recent
For years, banks have fought against the CECL standard, which requires lenders to estimate future expected losses on new loans and book these losses presently as a reduction in earnings. The intent was to give banks the flexibility to make reasonable estimates using methodologies selected by the individual banks.
Critics of CECL have
Congressional meddling in financial accounting standards is no different from the idea of adopting legislation to set diagnostic standards for physicians. Politicizing that process risks undermining the professional judgment of practitioners in favor of political and interest group horse trading.
Under the stimulus package known as the CARES Act, banks have the option to delay implementation of CECL until such time as the president declares the national emergency over or the end of the year, whichever comes first.
Yet critics of independent accounting standard setting and CECL will not rest when this crisis is over but will lobby for continued delays of CECL implementation, and ultimately repeal through congressional action.
Independent standard setting is the bedrock of the nation’s financial reporting system. When Congress created the Securities and Exchange Commission in 1934, it was wise enough to leave the process of standard setting to independent representatives of the industry. The alternative would have involved politicization of accounting principles by Congress and government agencies subject to congressional appropriation.
Accounting principles are an interwoven network. As with a game of Jenga, to pull one block out at random is to risk causing the whole structure to come crashing down. That is precisely what is happening with the CARES Act.
Companies may choose to delay implementation of the CECL standard. This means that while some banks may implement it, others will not.
Indeed, the large, publicly traded banks have already implemented CECL. So the choice to opt out will not be based on underlying differences in the finances of the bank, but rather on a strategic decision by the bank’s chief financial officer.
As such, it imperils one of the key objectives of financial reporting: comparability.
Independently developed but universally adopted accounting standards facilitate comparison between companies. This is because financial analysis of an individual company by an investor or creditor is difficult unless that company can be compared against similarly sized businesses in the same industry and/or region.
Standard financial analysis involves comparison of ratios derived from the financial statements. These ratios can tell a story about profitability or solvency at an individual company as compared against specific competitors, or against industry benchmarks in general.
Because of the recent delay of CECL in such a critical time frame, investors and creditors will be unable to reliably compare financial statements of banks that have implemented CECL against banks that have not. Industry benchmarks for common investor metrics that involve loan-loss estimates will be meaningless.
The crude delay utilized by Congress also has implications for bank regulatory capital, as it blunts the impact of capital relief that regulators offered to help banks transition to CECL.
Thus, a second impact of the CECL’s delay is that regulatory capital measurements are no longer uniform between comparable banks.
This further erodes financial statement comparability, and puts pressure on bank safety and soundness regulation. At this point, the many banks that have already implemented CECL have begun to publicly argue that the CARES Act did more harm than good, thus sparking inter-industry fights in the banking world.
Any CECL transition relief or guidance meant to ease the impact of COVID-19 should be a decision left to the Financial Accounting Standards Board, which oversees the CECL standard. FASB already delayed implementation of the rule for nonpublic and small public companies until 2023.
It bears reminding that the CECL reforms are by no means new. They were finalized in June 2016 after years of work and banking industry input.
The CECL critics have pushed for delay after delay. As a result, they now find themselves implementing a new accounting standard in the middle of the COVID-19 crisis. They have only themselves to blame for this awkward timing.
As Congress considers another stimulus package, it should repeal the delay and have banks implement CECL under established guidelines. That’s the only way to effectively untangle the financial reporting and regulatory mess created by this political act of sabotage on independent accounting standard-setting.
