Financial Accounting head urges changes

June 27, 2009 at 12:00a.m.

WASHINGTON (AP) — The head of the rule-setting board for corporate accounting on Friday said significant changes are needed in financial regulations to bring an end to massive, unbridled markets and prevent a repeat of the economic crisis.

“People have to believe that the system works properly” without conflicts of interest and incentives toward financial recklessness, Robert Herz, the chairman of the Financial Accounting Standards Board, said in remarks to the National Press Club.

The Obama administration has presented a sweeping proposal for overhauling the nation’s financial rule system, and Congress is grappling with crafting a plan in the aftermath of the worst economic crisis since the Great Depression. The administration blueprint calls for a fundamental shift in authority, undercutting the power of the Federal Reserve, and bringing hedge funds and complex financial instruments such as credit default swaps under government supervision.

Herz said any revamping of the system “must be perceived by the public as substantive, as balanced and as producing fair and equitable outcomes.” He said the balance must be struck between a regulatory regime that manages risks and one that promotes economic growth and competitiveness and “lets those that fail — fail!”

Also needed are changes in corporate governance to make executive compensation more transparent and rational, and active coordination between U.S. financial regulators and those in major economies around the world, Herz said.

He called some aspects of the Obama plan “directionally a good move,” though he refrained from judgment on other specific proposed changes.

The FASB, which writes the standards that guide accountants in preparing companies’ financial statements, has been lobbying to underline its independence as a private-sector body in the face of intense pressure from lawmakers acting at the behest of the banking industry and other interests.

Herz took note of the political pressure, which culminated at a House hearing in March at which lawmakers held out the threat of legislation to prod FASB to take steps that would give relief to banks on so-called mark-to-market accounting rules.

Though lawmakers are fulfilling a legitimate role in advocating for causes, he said, “What I don’t particularly welcome is when people try to exert political pressure on us to try to change accounting rules.”