William Isaac and Thomas Vartanian unfortunately conflated two separate issues in their
The authors, apparently unhappy about CECL, focused their criticism on the integrity of the standard-setting process in general. Their views are unjustified and unsupported by the facts.
CECL has its critics, and that’s no surprise. When to recognize loan losses is a critical issue at the heart of a bank’s operations. The current model, called the incurred loss model, proved problematic during the financial crisis because of unusually low loan loss reserve levels that resulted from the long prior period of benign credit conditions. In the aftermath of the crisis, a broad range of regulators, accounting firms and bank industry observers believed that it was time for a fresh look at loan loss accounting.
In 2009, banking and securities regulators strongly encouraged the FASB to develop alternative approaches to recognizing loan losses, a process that spanned the next seven years. The board dug deeply into accounting research to identify promising ideas, and then spent years engaged in extensive industry and public consultation to better understand the merits of different accounting solutions. This included a large measure of involvement from key stakeholders, including review of 3,360 comment letters and hundreds of meetings with investors, banks, regulators and auditors, along with 25 fieldwork meetings with banks of all sizes and 15 workshops attended by more than 90 organizations.
After many adjustments during a seven-year period to respond to stakeholder comments and concerns, CECL emerged in 2016, and the FASB set implementation dates of 2020 for the largest publicly traded banks, and 2021 and 2022 for other, smaller institutions. Subsequent to the issuance of CECL, the FASB continues to address implementation questions through various stakeholder engagements. While the standard remains controversial with some, key regulatory agencies have remained supportive and many institutions are moving forward with their CECL transition plans.
In this context, what is most concerning about the authors’ piece is its broader attack on the standard-setting process itself.
They describe FASB members and staff as a “pantheon of accounting gods” in Connecticut, implying that the FASB lacks interest in the very stakeholders it is charged to serve. This couldn’t be further from the truth. FASB members are men and women of the highest integrity who fully understand the vital role that stakeholders play in contributing to the development of accounting standards. FASB members and professional staff travel constantly to meet with stakeholders to understand their perspectives and concerns. They know that the first two words of GAAP are “generally accepted.” The only route to “generally accepted” is through engagement with involved, diverse stakeholders who contribute actively to the standard-setting process.
The FASB takes this duty to stakeholders seriously, and Financial Accounting Foundation trustees (who themselves represent diverse perspectives) meet with the FASB every three months for a broad review of the standard-setting process, including a review of FASB’s stakeholder engagement, to make sure FASB members consider all sides of accounting issues. It’s a governance model that has worked well for nearly five decades and been emulated elsewhere around the world.
Nor is there evidence for the claim of “financial wreckage caused by FASB.” The FASB opened for business in 1973 when the U.S. gross domestic product was less than $6 trillion (in today’s dollars). The economy now is more than three times larger, and immeasurably more innovative and productive, so where is the financial wreckage? The authors also describe “financial whiplash” that banks are allegedly suffering at FASB’s hands, but it has been 10 years since the implementation date of the last standard they cite, and by any objective measure of capital and liquidity levels, banks today are stronger than they have ever been.
Like other major new accounting standards, CECL is an issue on which reasonable people can disagree. What’s not OK is to use a disagreement about CECL to question the checks and balances, the accountability and the integrity that are designed into the modern accounting standard-setting process — a thoroughly robust and transparent process that has served our capital markets exceptionally well.
