The Governmental Accounting Standards Board (GASB) recently issued an exposure draft to support the development of new accounting standards for “certain investment pools.” The new proposed treatment amends previous standards, with a goal of defining which investments qualify for valuation at cost, not at current market or fair value, given their assumed stability.
Historically significant issues underlie a false presumption of innocence for cash and cash equivalents in accounting standards, however, a longer story. We will be taking a critical and more thorough look at the exposure draft along these lines soon.
But for now, it is worth noting a disturbing underlying feature of the exposure draft.
Regulatory reliance on credit rating opinions proved central to the recent financial and economic crisis, the worst since (at least) the Great Depression. Unfortunately, in the new exposure draft, GASB works to cement credit ratings -- in a manner at odds with the spirit if not the letter of the law in the Dodd-Frank act.
The term “NRSRO” refers to Nationally Recognized Statistical Rating Organizations. A longer story, but these are basically the credit rating organizations that have been blessed by the SEC and banking regulators to have their opinions qualify for meeting regulatory requirements.
Dodd-Frank directed the regulators to stop referring to these organizations and relying on them for their regulations, including such fundamentals as capital requirements. The regulators have been dragging their heels on this, however.
This brings to mind one of the ways I got in hot water working at the Federal Reserve. Around 2000-2002 or so, I developed a catalog of all the references to credit ratings in Fed regulations and operating practices, and proposed studying how to eliminate all of them. I thought we were outsourcing our own responsibilities in ways we would regret, if the ratings were inflated and understating risks.
Thanks, but nope, you aren’t going to work on that anymore, I was told.
Well, in its recent exposure draft, it looks like GASB takes a 180 degree turn in the wrong direction. References to “NRSROs” are pretty scarce in most GASB standards, but the latest exposure draft, they have apparently won a new, warm place in GASB’s heart. The term is all over the place, relying on these opinions to determine what qualifies as the really good stuff.
In a classic 2002 TV commercial, Yogi Berra observed, “And they give you cash, which is just as good as money.”