ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
The FASB announced yesterday that it will take a look at repo accounting. Again. As we don’t expect much improvement, we wonder why it bothers.
Michael Rapoport of The Wall Street Journal reports, “The Financial Accounting Standards Board agreed Wednesday to look at further revisions to how companies must account for their use of repurchase agreements, or ‘repos,’ a form of financing for securities-trading firms, following a previous revision last year. In particular, the board will look at ‘repos to maturity,’ a potentially risky variant that contributed to MF Global’s collapse last year.”
The Lehman Brothers collapse led to some small, insignificant changes in the repo rules. With the collapse of MF Global, the board thinks it desirable to consider some incremental but insignificant amendments. As last year’s revision was impotent, we expect more of the same from any revision this year.
What the board should have done a decade or two ago was to focus on the economic substance of the transaction, and the substance of a repurchase agreement is that it is a secured borrowing. Pure and simple. Thus, all repurchase agreements should be accounted for as secured borrowings.
The FASB’s statement yesterday says more about it than it does repo accounting. The board is incredibly slow and, with old age, is slowing down even further. The board is reactive instead of proactive; apparently, it cannot think about an issue unless there is some type of financial crisis. The board cannot think simple; instead, it seems to complexify whatever issue is at hand. Finally, the board seems beholden to banks and has been for some time. It appears to carry water for bankers, whether the topic is special purpose entities, derivatives, fair value accounting, or repurchase agreements.
Forget reforming repo accounting. Let’s reform FASB instead.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
Studying as I am for my thesis, I am reading many articles, and the FASB is one of the subjects I’ve had an interest in. When you look at the length of time the APB was in operation, and compare it to the FASB’s length, FASB has “lived” longer, not that the AICPA or SEC must automatically replace the standard setter ever so many years. There seems a consistency in the latter days of the APB as there is currently with the FASB, and yet at least the AICPA was honest enough to look at the problems of the APB and see the need for change. I would find it hard to believe, however, if someone acted on their courage for that in today’s SEC/AICPA.
I do admire your being fair when the FASB does something right, (can’t remember the blog title where this came up), but I agree with you, there doesn’t seem much positive to write concerning the FASB’s actions.
The FASB has become too governmentalized, if I may use a word that isn’t in the dictionary. Political is a far better word. Guess when the tax payer foots the bill for them, they can be reactive instead of proactive. None of the other quasi-governmental groups are proactive either. The accounting profession does have some rather important needs, but it appears the investor is priority. Maybe this is good, but I tend to think not.