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March 24, 2009

US legislation proposes creation of federal oversight board

Legislation proposing the creation of a new Federal Accounting Oversight Board (FAOB) to oversee the application of accounting standards to financial markets has been introduced to US Congress.

The bill was introduced by Congressmen Ed Perlmutter and Frank Lucas, members of the House Financial Services Committee, who said it is designed to help ease future economic downturns.

The new FAOB would share power currently held by the US Securities and Exchange Commission (SEC) with representatives from four other organisations. The FAOB would be comprised of the SEC chairman, the Federal Reserve chairman, the Treasury Secretary, the Federal Deposit Insurance Corporation chairman and the Public Company Accounting Oversight Board chairman.

The SEC alone currently determines how GAAP applies to financial markets.

The Congressmen said the new board “fits into responsible regulatory reform because a broader group of individuals with a view of the greater economy should be in charge of applying GAAP”.

The bill is intended to create an environment where the Financial Accounting Standards Board will have the flexibility to adjust GAAP for future economic conditions. It states that accounting standards should handle illiquid and liquid assets differently.

In approving and overseeing accounting standards and principles, the bill said the FAOB should consider issues including the extent to which accounting standards expose the US public and financial markets, as well as global financial markets, to systemic risk.

The board would also consider whether standards should apply to distressed markets differently than well-functioning markets.

The American Bankers Association (ABA) has welcomed the bill.

“The Perlmutter-Lucas Bill represents much-needed reform that will help address systemic risks that accounting standards can have on the economy,” ABA president Edward Yingling said.

Both the PCAOB and the SEC said they do not comment on pending legislation.

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