Unfortunately, I also find Herz lacking in courage and moral fortitude.  Whenever some bully comes on the scene and challenges him and the FASB to a fight, he runs away.  When accounting truth is at stake, he compromises and enables corporate managers to use methods and vehicles by which they can cook the books.  Shame!

The first thing the FASB did at its April 2 meeting concerns whether a market is not active and a transaction is not distressed.  In this FSP FAS 157-e, the board allows business enterprises to weigh the evidence whether the a transaction involved an orderly market; in reality it will permit managers to ignore distressed conditions, some of which they themselves created, and to pretend some “value” based on normalcy.  Clearly, this will buoy asset prices on the balance sheet and reduce losses or create gains on the income statement.  Too bad this is fiction.

In the second matter the FASB addressed other-than-temporary impairments.  In this FSP the FASB permits managers to overlook other-than-temporary impairments if management believes that it does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis.  Of course, that will be just about everybody so this is a vacuous recognition condition.

The FSP goes on to state that gains or losses due to credit risk will go into the income statement, while noncredit gains and losses will bypass the income statement and go directly into comprehensive income.  This distinction appears academic as in practice it is hard to distinguish credit losses from noncredit losses.  Clearly, this decision will give managers ample room to manipulate the income statement.

The FASB got pushed into this decision and Robert Herz caved in.  This isn’t the first time either.  Herz became chairman after Enron’s special purpose entities exploded on Wall Street and has yet to do anything about them.  These special purpose entities have also played a part in the current banking crisis.  Herz also presided over the new rules on business combinations.  While I applaud the elimination of the pooling option, which enabled many corporate frauds, I remain skeptical of the treatment of goodwill, which is another loophole.  And Robert Herz keeps preaching against complexity and for simplicity and principles-based accounting, which are keywords to allow corporate executives the power to do as they wish with the recognition and measurement of revenues and other elements.  (Bob, if these FSPs are based on any legitimate principles, pray tell us which ones.)

Writing about these items when originally proposed, Jonathan Weil referred to the FASB as the Fraudulent Accounting Standards Board.  I am sympathetic with his f-word, but I think it may be too harsh.  After all, the board is “merely” allowing managers to commit fraud without facing any disincentives.  But I think there are other f-words that we could employ, such as fearful, feckless, and futile.

Mr. Herz, please resign.  You are making the board ineffective as a standard bearer for accounting truth.  While I think you have a sense of right and wrong, you are not willing to hold bankers accountable for their mistakes and you are not willing to stand up against politicians who favor lies.