[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]





 
                  OVERSEEING THE STANDARD SETTERS: AN

                EXAMINATION OF THE FINANCIAL ACCOUNTING

                STANDARDS BOARD AND THE PUBLIC COMPANY

                       ACCOUNTING OVERSIGHT BOARD

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON INVESTOR PROTECTION,

                 ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 15, 2020

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-77
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                         



                            ______                       


              U.S. GOVERNMENT PUBLISHING OFFICE 
42-747 PDF            WASHINGTON : 2021 

                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            SCOTT TIPTON, Colorado
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
DENNY HECK, Washington               TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
RASHIDA TLAIB, Michigan              DAVID KUSTOFF, Tennessee
KATIE PORTER, California             TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa                     ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois                JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts       BRYAN STEIL, Wisconsin
BEN McADAMS, Utah                    LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia            WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts      VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
        Subcommittee on Investor Protection, Entrepreneurship, 
                          and Capital Markets

                   BRAD SHERMAN, California, Chairman

CAROLYN B. MALONEY, New York         BILL HUIZENGA, Michigan, Ranking 
DAVID SCOTT, Georgia                     Member
JIM A. HIMES, Connecticut            STEVE STIVERS, Ohio
BILL FOSTER, Illinois                ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER. New Jersey          ALEXANDER X. MOONEY, West Virginia
VICENTE GONZALEZ, Texas              WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TREY HOLLINGSWORTH, Indiana, Vice 
KATIE PORTER, California                 Ranking Member
CINDY AXNE, Iowa                     ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois                BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 15, 2020.............................................     1
Appendix:
    January 15, 2020.............................................    39

                               WITNESSES
                      Wednesday, January 15, 2020

Duhnke, William D. III, Chairman, Public Company Accounting 
  Oversight Board (PCAOB)........................................     6
Golden, Russell G., Chairman, Financial Accounting Standards 
  Board (FASB)...................................................     5

                                APPENDIX

Prepared statements:
    Duhnke, William D. III.......................................    40
    Golden, Russell G............................................    43

              Additional Material Submitted for the Record

Wagner, Hon. Ann:
    Accounting Today article entitled, ``CECL standard expected 
      to make a major impact''...................................    57


                    OVERSEEING THE STANDARD SETTERS:

                    AN EXAMINATION OF THE FINANCIAL

                     ACCOUNTING STANDARDS BOARD AND

                     THE PUBLIC COMPANY ACCOUNTING

                            OVERSIGHT BOARD

                              ----------                              


                      Wednesday, January 15, 2020

             U.S. House of Representatives,
               Subcommittee on Investor Protection,
             Entrepreneurship, and Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Brad Sherman 
[chairman of the subcommittee] presiding.
    Members present: Representatives Sherman, Maloney, Himes, 
Foster, Meeks, Gottheimer, Gonzalez of Texas, Porter, Axne, 
Casten, Ocasio-Cortez; Huizenga, Stivers, Wagner, Hill, Mooney, 
Davidson, Hollingsworth, and Steil.
    Also present: Representatives Luetkemeyer and Gonzalez of 
Ohio.
    Chairman Sherman. The Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of the subcommittee are 
authorized to participate in this hearing.
    Today's hearing is entitled, ``Overseeing the Standard 
Setters: An Examination of the Financial Accounting Standards 
Board and the Public Company Accounting Oversight Board.''
    I now recognize myself for an opening statement.
    I was honored recently to be elected Chair of this 
subcommittee. There was a contest. Most in the audience believe 
that I won on the basis of my good looks. That is not the case. 
I promised every member of the committee that, since I was a 
CPA, I would focus a lot of attention on accounting principles 
and the auditing process. And I was overcome with the wave of 
support that came from a decision to focus this subcommittee on 
the two gentlemen here before us today.
    If you write the rules of the game, you control what the 
players and the teams do. If the Major League Baseball 
accounting standards board decreed that every ball hit over the 
outfield fence was an out instead of a home run, you would 
change the whole game.
    The most powerful economic engine in history is the 
American private sector. The game is to push your stock price 
up. The most important element of that is earnings per share. 
When the titans of industry, the most important men and women 
in business, are told that they can increase reported earnings 
per share by jumping, their only question is, ``How high?'' 
Those who control the rules by which corporations are evaluated 
and stocks rise and fall control the behavior of the American 
private sector.
    So, Chairman Golden, you are the most powerful, totally 
anonymous person in the country.
    The Financial Accounting Standards Board (FASB) and the 
Public Company Accounting Oversight Board (PCAOB) tell us they 
are not government agencies, which is good because now they can 
be compensated at private-sector rates. But the fact is that if 
you deliberately violate FASB pronouncements, you go to jail; 
if you don't pay the FASB tax or fee, you go to jail. And the 
pronouncements of the FASB have a greater economic impact on 
the country than perhaps any other government agency. I have 
yet to find a political theorist who would say that FASB and 
the PCAOB are not government.
    FASB is protected from scrutiny, from oversight, and from 
democratic input by a wall that is more impregnable than the 
mighty stones that protected Constantinople for a thousand 
years. It is the wall of boredom. With the exception of 
accounting theory enthusiasts, everyone is convinced that 
accounting standards are simply too boring and too intricate 
for anyone to pay attention to.
    The most controversial action taken by FASB over the last 
20 years was on stock options, the decision saying you have to 
recognize an expense. No one fought harder on this committee to 
support that decision, because it was good accounting theory. 
When officers and employees receive something of value and it 
dilutes the interest of equity holders, that is an expense.
    My greatest concern on FASB has been FASB No. 2, issued 
many decades ago, under which research results cannot be listed 
as an asset on a balance sheet when the company does the 
research itself, and they cannot be listed no matter how clear 
it is that those research results have continuing value. This 
is a rejection of centuries of accounting theory. It is a 
rejection of what our profession stands for. And, without 
objection, I will enter into the record an article by NYU 
Professor Joshua Ronen explaining why.
    Without objection, it is so ordered.
    Now, what we see the FASB doing is doing things that are 
popular with accountants. And this mistake on research and 
development was popular with many accountants because it made 
their life simpler, or popular with stock analysts, who, after 
all, want accountants to project the future rather than just 
report historical facts.
    Today, the hot issue is Current Expected Credit Losses 
(CECL), where the stock analysts want to force the accountants 
to verify not the past but the future.
    I know that CECL is defended as causing banks to have 
higher reserves. Whether higher reserves are bad for America 
because they reduce lending and fuel our economy or whether 
they are good because they provide greater soundness and 
security for the banking system is not a decision that should 
influence what goes on at the FASB. That is a decision for bank 
regulators operating under our oversight here at this 
committee.
    And, finally, I think it is important that FASB go beyond 
providing standards for what goes in the three historical 
accounting statements. For example, old-fashioned retail stores 
often go up or down in value based on same-store sales. It 
would be useful if FASB would publish a definition--what is a 
same store? What counts as a sale?--so that we could get 
audited and consistent and comparable information from 
different retailers even though that isn't in the income 
statement or the balance sheet.
    Finally, we have the PCAOB. I think the issue I want to 
delve into is how China is not letting you do your job with 
regard to certain companies that are listed on American 
exchanges.
    With that, I want to recognize the ranking member of the 
subcommittee, Mr. Huizenga, for his opening statement.
    Mr. Huizenga. Thank you, Mr. Chairman.
    First, congratulations to you on becoming our newest Chair 
of the Subcommittee on Investor Protection, Entrepreneurship, 
and Capital Markets. And you have given me a new phrase in our 
first hearing already that I will try to work in ``liberally,'' 
with a small ``L''--the ``wall of boredom.'' I love that 
picture. That is a great word picture, and I will be using it.
    So it is not a surprise, with your background, that this is 
our first hearing out of the gate, overseeing the accounting 
industry.
    Chairman Sherman. The first of many.
    Mr. Huizenga. The first of many, okay. And I cannot get to 
your level of proficiency, but I have been boning up on my 
accounting.
    Today's hearing, overseeing the standards, will examine 
these activities of FASB and PCAOB. And while FASB was 
established in 1973, we have seen the PCAOB being a bit more of 
a recent creation. But both of them have a common theme in 
there about the U.S. Securities and Exchange Commission, and at 
some point I want to touch on that.
    But as you had mentioned, and one of the issues that I 
would like to have addressed today--and I had a chance to meet 
with Mr. Golden earlier to touch base on this--are those 
Current Expected Credit Loss (CECL) standards.
    FASB's 2016 accounting standards update introduced CECL 
methodology for calculating loan loss reserves by changing the 
incurred-loss approach to an expected-loss approach and will 
apply to all financial institutions issuing credit.
    Large banks that are SEC filers were required to be in 
compliance with the new standards by January 1, 2020. However, 
smaller banks and credit unions will have until 2023 to 
convert. Mr. Golden had explained how that 3-year threshold was 
reached, and maybe he can touch base on that later.
    I, along with several of my colleagues here today, have 
continued to express some concerns that the CECL accounting 
standard may adversely impact the cost and availability of 
credit once fully implemented. Financial institutions of all 
sizes have outlined the implications this new accounting 
standard will have on popular consumer products, especially 
during economic downturns. Nevertheless, FASB and the 
prudential regulators have been reluctant, despite some 
congressional pressure, to study the likely economic impacts of 
CECL.
    And I think that was something that you had talked about as 
well.
    The other standard setter that we are examining today, the 
Public Company Accounting Oversight Board, or PCAOB, is a 
nonprofit corporation that Congress established to oversee the 
audits of public companies. The PCAOB's responsibilities 
include: one, registering public accounting firms; two, 
establishing auditing, quality control, ethics, independence, 
and other standards relating to public company audits; three, 
conducting inspections, investigations, and disciplinary 
proceedings of registered accounting firms; and four, enforcing 
compliance with the Sarbanes-Oxley Act of 2002.
    Pursuant to Sarbanes-Oxley, Congress created the PCAOB in 
response to the various accounting scandals in the late 1990s, 
such as Enron, WorldCom, and the collapse of Arthur Andersen. 
Prior to the PCAOB's creation, the accounting profession was 
self-regulated. Sarbanes-Oxley gave the SEC the authority to 
oversee the PCAOB's operations, to appoint or remove its 
members, to approve the PCAOB's budget and rules, and to 
entertain appeals of any PCAOB inspection reports or 
disciplinary actions.
    Additionally, the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 established the current funding 
regime for the PCAOB, which is done primarily through annual 
accounting support fees which are assessed on public companies 
on broker-dealers.
    As I mentioned, through the Office of the Chief Accountant, 
the SEC not only has oversight of the PCAOB but also approves 
its rules, standards, and budgets.
    We had a discussion in this committee last term about the 
need for a whistleblower in this space and whether that was 
redundant with the whistleblower protections with the SEC. And 
it just seems to me that some of these redundancies may be a 
very inefficient use of resources in both of those 
organizations.
    It has been nearly 2 decades since Congress passed 
Sarbanes-Oxley and created the PCAOB. I believe that it is now 
time for Congress to holistically examine Sarbanes-Oxley, as 
well as the role and structure with the PCAOB, with the goal of 
furthering investor protection and making government as 
efficient as possible for American taxpayers. And I look 
forward to beginning this conversation today.
    With that, Mr. Chairman, I yield back.
    Chairman Sherman. Thank you.
    Today, we welcome the testimony of Russell G. Golden, 
chairman of the Financial Accounting Standards Board, and 
William D. Duhnke III, chairman of the Public Company 
Accounting Oversight Board.
    Witnesses are reminded that your oral testimony will be 
limited to 5 minutes. And without objection, your written 
statements will be made a part of the record.
    Mr. Golden, you are now recognized for 5 minutes.

STATEMENT OF RUSSELL G. GOLDEN, CHAIRMAN, FINANCIAL ACCOUNTING 
                     STANDARDS BOARD (FASB)

    Mr. Golden. Thank you, Chairman Sherman, Ranking Member 
Huizenga, and members of the subcommittee. Good afternoon. My 
name is Russell Golden, and I am the chairman of the Financial 
Accounting Standards Board, also known as the FASB. Thank you 
for the opportunity to appear before you today.
    I will provide a brief overview of the FASB and our 
standards-setting process and discuss the importance of 
stakeholder engagement and feedback to our work.
    The FASB is subject to oversight by the Financial 
Accounting Foundation, a private-sector, not-for-profit 
organization, as well as the U.S. Securities and Exchange 
Commission. The SEC recognizes the FASB as the designated 
accounting standards setter for public companies, consistent 
with the SEC's congressionally-granted authority.
    The FASB also establishes financial accounting and 
reporting standards for private companies and not-for-profit 
organizations that follow U.S. Generally Accepted Accounting 
Principles (GAAP).
    Investors, creditors, donors, and other users of financial 
reports need credible, concise, and understandable financial 
information to make informed decisions about how to deploy 
their capital. The FASB carefully develops U.S. GAAP to present 
financial information neutrally and accurately. The FASB's 
approach has made U.S. GAAP essential to the U.S. and global 
economies.
    To create fair and robust standards, the FASB actively 
gathers input from all stakeholders, which is central to the 
FASB's standards development process. We proactively reach out 
to and meet with a wide range of investors, auditors, financial 
statement preparers, and academics, among others. We supplement 
this direct outreach by meeting often with our advisory 
councils and committees, whose members represent a broad cross-
section of stakeholder interests. We also meet frequently with 
the SEC, the Public Company Accounting Oversight Board, and 
banking agencies, among other regulators.
    Through broad consultation, the FASB can hear essentially 
all stakeholder views, identify potential unintended 
consequences of proposed changes to its standards, and improve 
acceptance and understanding of our standards.
    To further these goals, the FASB has completed several 
significant projects during my tenure as chairman that have 
improved the transparency and usefulness of information found 
in financial reports.
    One of the new standards, the Current Expected Credit 
Losses, or CECL, took effect on January 1st for larger, 
publicly traded banks, representing the vast majority of total 
bank assets in the United States. Based on the feedback we have 
received from the industry, we believe these institutions are 
ready to implement CECL.
    The process used by the FASB to develop and support the 
implementation of CECL was consistent with the process used for 
other notable improvements in financial reporting for the 
capital market. I know the appropriations bill passed by 
Congress last month directs the Treasury Department to study 
and report to Congress on the impact of CECL on bank capital. 
If asked, we stand ready to support the regulators in their 
work.
    Quality standards require quality implementation. With that 
goal in mind, we work hard to educate our stakeholders, to help 
preparers and practitioners understand the standards, and to 
solicit advice for ways to clarify or improve our standards. 
This is an important example of the results of continuous 
reevaluation of our work in response to stakeholder feedback, 
and it symbolizes the commitment that we have created at the 
FASB.
    The development of U.S. GAAP by the FASB reflects a deep 
and consistent dialogue with stakeholders from the earliest 
days of research through implementation and beyond. Not every 
stakeholder agrees with every decision, but all have a seat at 
the table.
    In closing, I would like to thank the subcommittee's 
members for the many opportunities I have had as the FASB 
chairman to work with you on behalf of your constituents and 
for your ongoing support of the FASB's mission. My written 
testimony provides more detailed information about our projects 
and activities, and I would be pleased to answer your questions 
at any time.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Golden can be found on 
page 43 of the appendix.]
    Chairman Sherman. Mr. Duhnke, you are now recognized for 5 
minutes.

 STATEMENT OF WILLIAM D. DUHNKE III, CHAIRMAN, PUBLIC COMPANY 
               ACCOUNTING OVERSIGHT BOARD (PCAOB)

    Mr. Duhnke. Thank you, Mr. Chairman, Ranking Member 
Huizenga, and distinguished members of the subcommittee. Thank 
you for the opportunity to appear before you today to discuss 
the work of the Public Company Accounting Oversight Board.
    I joined our five-member board in early 2018 along with 
four other members of the new board. Not since the PCAOB was 
first founded in 2003 have five new board members joined the 
organization at roughly the same time. With such a significant 
change in the board's composition came a significant 
opportunity. We had the chance to reflect on lessons learned 
over the prior 15 years, to innovate, and to improve how we 
approach audit oversight.
    In 2018, we used the opportunity to perform a comprehensive 
assessment of the PCAOB. To help our assessment, we engaged in 
significant public outreach. We sought input from our core 
stakeholders on what we were doing well, what we needed to 
improve, and how we could best improve audit quality. We heard 
from the SEC, investors, audit committees, financial statement 
preparers, audit firms, academics, and others.
    The message we received back was loud and clear: The PCAOB 
was ripe for change. The PCAOB had, in many respects, lost the 
public's trust. The organization was out of touch with market 
developments and stakeholder needs. It had not matured 
significantly since opening its doors in 2003. During that 
time, it developed a culture that lacked internal 
accountability. And its integrity had been compromised in 2017 
by employees leaking confidential inspections information to 
those we are charged to regulate.
    With that as our starting point, we set the PCAOB back on 
the path envisioned by Congress when it passed Sarbanes-Oxley. 
We published a new 5-year strategic plan in November 2018. That 
plan emphasizes the need for us to transform the PCAOB into a 
trusted leader and promotes high-quality auditing through 
forward-looking, responsive, and innovative oversight.
    It articulates five specific goals and identifies core 
values we expect our people to demonstrate as they work towards 
those goals: integrity; excellence; effectiveness; 
collaboration; and accountability.
    In 2019, we began the work necessary to implement our 
vision and execute our strategic goals. Doing so has required 
substantial change. That change has permeated the entire 
organization and has touched nearly every aspect of our work. 
Change is never easy, but the board collectively believes the 
changes we are pursuing are necessary to fulfill our mandate.
    We are grateful to those at the PCAOB who have embraced our 
current path. Because of their efforts, we have made 
substantial progress. Let me highlight a few examples.
    First, we have focused on improving the effectiveness of 
our oversight. That oversight involves inspections of audit 
firms, enforcing of audit standards and related securities 
laws, and standards setting for the audit profession.
    With respect to our inspections, we have begun a multiyear 
transformation of how we plan for, conduct, and report on our 
inspections. We have significantly increased our emphasis on 
audit firms' systems of quality control. We have also developed 
and will soon roll out publicly a revised inspection report. 
Our revised report will reflect incremental progress towards 
providing stakeholders with more timely, relevant information 
from our inspections. Further, we have begun to report not only 
audit deficiencies but also successful practices we have 
observed.
    In enforcement, where we share concurrent jurisdiction with 
the SEC, we have placed a renewed emphasis on investigating 
significant audit failures. We also have issued settled orders 
and decisions in numerous significant matters covering 
violations related to substantive auditing standards, auditor 
independence rules, audit documentation and alterations, and 
noncooperation with our inspections. Our investigative pipeline 
remains consistent with recent years.
    With regard to standards setting, we have been active in 
improving existing auditing standards. In late 2018, we adopted 
significant changes to the standards related to auditing 
accounting estimates, which are at the core of many public 
companies' reported financial results. We also adopted 
important changes to the standards governing auditors' use of 
the work of specialists.
    First, in 2019, we began the process of modernizing our 
standards that govern audit firm quality controls. Strong 
systems of quality control provide the foundation for audit 
firms to execute consistent, high-quality audits. Last month, 
we issued a concept release seeking input on how best to update 
our current quality control standards.
    Second, we have placed an increased focus on innovation and 
technology. We have met with numerous groups to explore 
technologies affecting both auditing and reporting standards. 
We must ensure that our work does not inhibit those innovations 
that support audit quality.
    Third, we have greatly expanded our engagement and outreach 
to stakeholders. We hosted numerous roundtables with investors 
and audit committees. And for the first time in the PCAOB's 
history, we invited every audit committee Chair for the U.S. 
audits we inspected to speak with us.
    Finally, we have launched significant process and cultural 
changes within the PCAOB: we recently stood up our Office of 
Enterprise Risk Management; hired our first chief risk officer, 
chief information security officer, chief compliance officer, 
and chief data officer; and reorganized our research and 
analysis function. We also drafted our first-ever human capital 
strategic plan.
    These are just a few of the changes we have pursued 
recently. As we continue to push forward with our core 
strategic priorities throughout 2020, we welcome feedback from 
our stakeholders, and we welcome feedback from the 
subcommittee, as well as investors, audit committees, 
preparers, and others, on our oversight efforts.
    Thank you, and I am pleased to answer your questions.
    [The prepared statement of Chairman Duhnke can be found on 
page 40 of the appendix.]
    Chairman Sherman. Thank you.
    Chairman Duhnke, I hope I get a chance to ask you about 
China not letting you do your job. But I want to focus on 
something else, and that is, how good a job are our auditing 
firms doing?
    The number of financial report restatements has been used 
as a metric to determine whether the auditors are doing a good 
job. Financial statement restatements have been in a steady 
decline for the last 4 years. In addition to the decline in 
restatements, surveys show that Main Street investors have a 
high degree of confidence in the quality of financial 
statements.
    In 2018, audit restatements reached an 18-year low. Does 
this indicate that there has been an improvement in audit 
quality?
    Mr. Duhnke. Mr. Chairman, I believe it does. And I think 
that is something that can be observed through the work of the 
PCAOB, through our inspections report and also our enforcement 
efforts.
    Those who wish can go back to the beginning of the PCAOB 
and look at the inspection reports. It would tell a story of 
severe deficiencies in the beginning of the PCAOB's inspections 
process and enforcement process. And what they will see over 
the years is a gradual improvement, although fits and starts 
when it comes to total deficiencies, about the severity and 
significance of those deficiencies.
    For example, the beginning of the process would show things 
like not even auditing revenue. And now, we are talking about 
deficiencies that are as less significant as missing one 
particular documentation for a factor in an internal control, 
for example.
    Chairman Sherman I want to move on to other questions, but, 
yes, not only has there been a decline in the restatements, 
many of those restatements now are merely revision statements, 
which are the lowest level of a restatement.
    I want to go on. I know Chairman Golden wouldn't be happy 
if I didn't ask him about FASB No. 2.
    It is bad accounting. With unanimous consent, I will enter 
into the record the statement of an NYU professor for 45 years 
of accounting, Joshua Ronen. And I will supplement this record 
with numerous other accounting theory statements. Without 
objection, it is so ordered.
    It's a departure from what our profession did for the 100 
years prior to the FASB, but it also adversely affects the 
country. Research is important. It is so important that we in 
Congress spend billions of dollars, through the Tax Code, 
providing tax credits to encourage research. That is money we 
can't spend on education or cancer research because we have to 
spend the money encouraging the private sector to do research. 
I would venture to say that FASB No. 2 does more to discourage 
research than our billions of dollars encourage.
    Since it is bad accounting theory, it is a departure of the 
idea of matching revenues and costs, I know it is simpler for 
the accountants, but have you taken a look at reversing FASB 
No. 2? And have you done any economic analysis on its effects?
    Mr. Golden. The last time I had an opportunity to meet with 
this subcommittee, I described an invitation to comment that 
the FASB had put out to ask our stakeholders, what are the 
future accounting improvements that the FASB should do? One of 
those projects was looking at accounting for internally 
developed intangible assets, including research and 
development.
    While we have not taken on that aspect of the project, we 
have taken on a project to potentially align the accounting for 
purchased, in-process research and development.
    Today, under U.S. GAAP, the purchase of in-process research 
and development in a business combination is capitalized, but 
the purchase of in-process research and development in an asset 
acquisition is not. That causes confusion to many--
    Chairman Sherman. I am glad you are focusing on that small 
detail of what is a problem that, no doubt, has hobbled our 
economy in competing with China, and led to us not developing 
cures for various cancers, et cetera. FASB No. 2's effect is 
enormous.
    Now, with regard to CECL, you did no economic analysis of 
the effect because, you said, that is not your job. You just 
thought it was good accounting. But now that you are called 
upon to defend CECL, many of those defending it say, oh, we 
should defend it because it has a good effect on the economy, 
because it might reduce the number of loans that a bank makes 
and, therefore, cause the bank to be more solvent.
    Are you defending CECL on the basis that it is good for the 
economy or good for bank prudential standards, or are you just 
defending it as a good accounting methodology and you haven't 
done the economic study?
    Mr. Golden. We believe CECL provides greater transparency 
to those who use the financial statements. It helps investors 
have a better understanding about the expected--
    Chairman Sherman. Please answer the question. Are you here 
to defend it because you think that the effect it has on the 
decisions made by banks and the size of their reserves is 
helpful to the economy?
    Mr. Golden. We believe it gives investors better 
information.
    Chairman Sherman. So, the answer to my question is, no? Or 
you just don't want to give me a yes or a no?
    Mr. Golden. I am trying to explain to you why we did what 
we did on CECL.
    Chairman Sherman. I would hope you would clarify your 
answer.
    And I will now move on to the ranking member of the 
subcommittee, Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman.
    First, I would like to ask unanimous consent to insert the 
opening statement of the ranking member of the full Financial 
Services Committee, Mr. McHenry, into the record.
    Chairman Sherman. This certainly improves the record. 
Without objection, it is so ordered.
    Mr. Huizenga. Thank you. This is going to be an easier job 
than I thought, working with you.
    Along those lines, Mr. Golden, the final House and Senate 
Fiscal Year 2020 FSGG appropriations agreement included 
bipartisan report language requiring a new study outlining any 
potential negative impacts of the CECL accounting standards on 
consumer credit and the economy to be completed and reported 
back to Congress in 2020.
    Given this development--and maybe this falls in line with 
something that the chairman was going after--don't you agree it 
would be prudent to impose a moratorium of some sort on the 
implementation of CECL until Congress has a better 
understanding of the negative impacts and, frankly, you all 
have a better understanding of the negative impacts on consumer 
credit? And doesn't FASB support a thorough assessment of the 
impacts of those standards on consumers and the economy and 
various communities affected?
    Mr. Golden. The report in the appropriations talks about 
understanding the impact of regulatory capital that comes from 
CECL. We believe that CECL improves the information to our 
capital markets, and--
    Mr. Huizenga. I understand that. We have gone over that.
    Mr. Golden. Yes.
    Mr. Huizenga. What I am asking is, don't you believe that 
you should have this study done and have those results before 
it is actually implemented?
    Mr. Golden. We don't. We believe CECL should be 
implemented, and we believe the data that will come from 
implementation will help improve the study.
    Mr. Huizenga. And you still intend to do the study?
    Mr. Golden. The study, I think, is done by the U.S. 
Treasury Department.
    Mrs. Wagner. By whom?
    Mr. Huizenga. Could clarify who is actually doing the 
study?
    Mr. Golden. I thought you directed Treasury to do the 
study.
    Mr. Huizenga. Okay. I will allow my colleague, Mrs. Wagner, 
to use her time to ask that.
    In an effort, Mr. Duhnke, to not let you feel left out of 
this hearing, I have a suspicion that there will be a number of 
things that will continue to be discussed regarding the FASB 
situation.
    We have been talking about PCAOB examinations and 
enforcement a bit at the hearing. The chairman brought that up. 
Is that what you would consider to be the core role of the 
PCAOB?
    Mr. Duhnke. Yes, the core functions of the PCAOB are 
inspections, enforcement, and standards setting, I would argue.
    Mr. Huizenga. Okay.
    Mr. Duhnke. And it is reflected in our structure. Our 
biggest part is our inspections.
    Mr. Huizenga. Okay. And am I correct in understanding that 
the SEC has oversight not only of your agency but also any 
specific enforcement action that the PCAOB undertakes?
    Mr. Duhnke. They are involved as an appellate authority, 
yes.
    Mr. Huizenga. Okay. And as I understand it, the SEC itself 
has an examinations program and an enforcement arm. Is that 
correct?
    Mr. Duhnke. They do.
    Mr. Huizenga. Would you say that the SEC's program and 
setup in that regard is similar to that of the PCAOB except 
that your organization only examines accountants?
    Mr. Duhnke. If we examine audits, yes, it is similar.
    Mr. Huizenga. The audits? Okay.
    Mr. Duhnke. Yes.
    Mr. Huizenga. I guess I am asking these questions because I 
am wondering if we are not seeing a duplication and some 
overlap between the PCAOB and the SEC, not to mention that 
redundancy on that side, but, also, I think we have a 
responsibility to ask what are those additional costs that are 
put onto public companies and broker-dealers and if we could 
reduce those costs?
    This committee has talked about IPOs and the challenges 
that we have had in growing this economy and making sure that 
it is not just unicorn companies. By the way, if there is a 
herd of them, I think we can no longer call them unicorns. But, 
at some point, we need to have a robust growth within our 
public-sector company area.
    And when this committee was considering the PCAOB 
whistleblower legislation, there was not a single person here 
opposed to whistleblowers and having them have the ability to 
go and expose wrongdoing. But I was opposed to creating a 
redundant whistleblower program, given the existence of the SEC 
Whistleblower Office that was created under Dodd-Frank. 
Additionally, the added costs associated with setting up a new 
whistleblower program only forced the PCAOB to divert precious 
resources from other projects in order to get this duplicative 
program off the ground.
    That is the sort of thinking I am puzzling about, and what 
I am trying to look at is, if we have the courage to have a 
good, hard examination of Sarbanes-Oxley and a number of the 
other things that are interconnected with this.
    I want to make sure that your work is not duplicative and 
that those that you are regulating aren't getting cross-
answers, that they are not getting two different sets of 
enforcement. It may not be intentionally, but--I know I am a 
little over. I know the chairman had gone a little bit over. 
Maybe if you could just wrap up and address that quickly.
    Mr. Duhnke. The short answer to your question is there are 
a number of similarities and redundancies between the PCAOB's 
mission and the SEC's just by the nature of its setup. It is 
unavoidable.
    Mr. Huizenga. Okay.
    Well, with that, my time has expired, and I appreciate it.
    Chairman Sherman. It is my understanding that the gentleman 
from Connecticut would like me to skip him and go on to the 
gentlelady from Iowa, who is recognized for 5 minutes.
    Mrs. Axne. Thank you, Chairman Sherman. And 
congratulations, by the way.
    Thank you so much for our witnesses for being here today. I 
very much appreciate it.
    Chairman Golden, I have a couple of questions for you about 
tax disclosures.
    Thanks to OECD and other agreements, tax authorities 
throughout the world are now collecting and exchanging reports 
from multinational corporations with information about their 
operations on a country-by-country basis. Despite that, though, 
we had a report last month that found that U.S. companies paid 
an average tax rate of only 11 percent, so, effectively, half 
the statutory rate of 21 percent.
    That kind of gap really drives home how critical this issue 
is. And we need better information to understand the causes to 
make sure that every single organization is paying their fair 
share. If it were public, investors could use that information 
to assess companies' exposure to tax havens and then the risk 
it represents to their value.
    Now, I know FASB is still reviewing their tax disclosure 
standards, but the latest proposal, which I think was from 
March, didn't include country-by-country disclosures. A growing 
number of analysts and investors see this information, though, 
as crucial for their analysis, and they are going to call on 
FASB to deliver that information.
    I believe, if I am correct, 100 percent of the investors 
who commented on the proposal, who represent more than $2 
trillion in assets, called on the board to make it mandatory to 
have those country-by-country disclosures. So, given that 
strong feedback, are you now considering including country-by-
country reports in your reporting standards?
    Mr. Golden. You are correct, we do have a project on our 
agenda, and we have received substantial feedback about doing 
that. And that will be brought to the board in the first 
quarter of 2020.
    Mrs. Axne. So, you will be bringing to the board 
specifically a question to include mandating country-by-country 
disclosures?
    Mr. Golden. We will have a specific debate about that, and 
board members will be able to articulate their views as to 
whether or not that is an improvement to financial reporting, 
yes.
    Mrs. Axne. Okay. Can you tell me a little bit about your 
opinion on that?
    Mr. Golden. I would like to hear the debate of my board 
members and see all the research before, but I can tell you 
what I have learned today is that, you are correct, there are 
many investors who would find that information very valuable. 
There are many companies that would say it is very costly to 
prepare. I question that cost.
    Mrs. Axne. Thank you, Chairman. I appreciate that.
    Moving on, the Global Reporting Initiative (GRI) released 
their voluntary standards for tax disclosures just last month. 
And while voluntary GRI standards are followed by 78 percent of 
the companies on the Dow Jones Industrial Average, further, 
Royal Dutch Shell voluntarily disclosed this information last 
month.
    Has FASB reviewed GRI's tax standards? And are you 
considering incorporating it into the GAAP income tax 
disclosures?
    Mr. Golden. I am not sure. I will have to get back to you. 
But we did review the Royal Dutch Shell disclosure information.
    Mrs. Axne. Okay. When would you be able to get us some 
information on that?
    Mr. Golden. I will need to talk to the staff about that 
project and get back to you.
    Mrs. Axne. Okay.
    Mr. Golden. Later this week.
    Mrs. Axne. I appreciate that. Perfect.
    Well, that answers my questions. Thank you again for being 
here.
    And I yield back the balance of my time, Mr. Chairman.
    Chairman Sherman. My God. That is the first time I have 
seen that happen. Thank you for your questions.
    And now, I will recognize the gentlelady from Missouri, 
Mrs. Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman, and congratulations 
to you.
    Chairman Golden, members of this committee have expressed 
concern that CECL accounting standards will adversely impact 
the cost and availability of credit once fully implemented. We 
have heard banks of all sizes--and let me underscore, all sizes 
of banks--outline the implications this new accounting standard 
will have on very popular consumer products, especially during 
economic downturns.
    Chairman Golden, after hearing concerns from both financial 
institutions and Congress, has FASB taken the time to study the 
likely economic impacts of CECL? And I am not talking about 
Treasury; I am talking about FASB.
    Mr. Golden. We have not done an economic analysis.
    Mrs. Wagner. Stunning.
    Did you study how CECL would affect lending or access to 
credit for consumers before issuing this new accounting 
standard?
    Mr. Golden. We did a cost-benefit analysis in connection 
with our mission, which is to provide better, more decision-
useful information to the capital markets and other users, 
including regulators.
    Mrs. Wagner. Lending and access specifically is what I 
asked about.
    Mr. Golden. No, we did not.
    Mrs. Wagner. No, you did not. Again, stunning.
    I would like to submit for the record the following article 
by Accounting Today, which estimates loan loss reserves under 
CECL--again, Accounting Today--loan loss reserves under CECL 
could range from, are you ready for this, $50 billion to $100 
billion, according to public disclosures made by various 
financial institutions.
    Chairman Golden, would you care to comment on this estimate 
of $50 billion to $100 billion?
    Mr. Golden. We plan to closely monitor the progression of 
the CECL implementation to ensure that it has been performing 
with our expectations as to what is the actual--
    Mrs. Wagner. So, you don't study anything, and now you are 
telling me you are going to closely monitor something like 
this--$50 billion to $100 billion, according to public 
disclosures on loan loss revenues?
    Mr. Golden. We do study the impact of our proposals on the 
capital markets and other users. We think that the information 
provided to investors is consistent with how they analyze 
financial institutions. They will be able to make more informed 
decisions that will help our capital markets, and we think that 
is a good thing.
    We also think the banking regulators will have better and 
more refined information, and they can make changes. And we 
think that is a good thing as well.
    Mrs. Wagner. A new accounting standard that affects the 
economy this much should have significant studies backing it, 
wouldn't you agree?
    Mr. Golden. I think that is why it is important that we 
work with the Treasury in consultation with the banking 
regulators as they perform their--
    Mrs. Wagner. Okay. But you haven't studied it at all. And 
we are talking about--
    Mr. Golden. We have studied, in connection with our 
mission, that this will provide additional and better 
information to the capital markets.
    Mrs. Wagner. Chairman Golden, what percentage of 
institutions will be able to comply with CECL efficiently and 
effectively?
    Mr. Golden. Based on our discussions with our stakeholders, 
those that are required to apply in the beginning, we believe 
are ready.
    We recently deferred the effective date for private 
financial institutions, not-for-profits, which includes all 
credit unions and smaller public financial institutions, so 
they have 3 years--
    Mrs. Wagner. What percentage of institutions will be able 
to comply with CECL efficiently and effectively? It has 
already--the date has passed. It is in.
    Mr. Golden. We believe all those that are required to apply 
will be able to apply.
    Mrs. Wagner. Chairman Golden, a number of commentators have 
suggested that CECL could have a procyclical effect. Can you 
please describe what impact CECL would have in a recession?
    Mr. Golden. There have been many studies that have been 
performed. Most recently, the Federal Reserve staff did a study 
that said leading up to the recession it would dampen lending 
and it would accelerate lending during a recession and, 
therefore, it would be less procyclical than the current model.
    Mrs. Wagner. I couldn't disagree more. These new accounting 
standards will have--what it does to popular consumer products, 
especially during an economic downturn, products that matter to 
my constituents in Missouri's Second Congressional District--
mortgages, credit cards. Again, I am just stunned.
    I have some questions about LIBOR and SOFR, but I will 
leave it at that.
    You are compelled, I think, sir, to study this further, 
about what impact this is going to have on real people, and for 
the institutions and the small, especially, size banks that are 
going to be affected.
    I am out of time, Mr. Chairman. I yield back.
    Chairman Sherman. I would just quickly comment that all the 
better information, transparency, information for analysts 
could have been provided in footnotes. I would call that good 
accounting, and the gentlelady from Missouri would be happy 
because it wouldn't have any of the economic effects we are 
talking about.
    Without objection, the article from Accounting Today 
referred to by the gentlewoman from Missouri will be entered in 
the record.
    And I now recognize for 5 minutes the gentleman from Texas, 
Mr. Gonzalez.
    Mr. Gonzalez of Texas. Thank you.
    I am here to ask a few questions for the independently 
owned and operated businesses throughout my district. These 
businesses will need to access capital several times over their 
lifetime. Whether it is start-up capital or simply because cash 
flow has a downturn, we depend on our local banks and credit 
unions to provide access to this capital. And this is the first 
kind of capital to tighten in response to regulation or 
accounting risk.
    I am very concerned about the consequences of CECL. The 
CECL standard leaves many questions unanswered, even for those 
who have already implemented it.
    The Financial Accounting Standards Board has an important 
role, obviously, to our nation's standards. Their accounting 
standards carry the force of the law for SEC filers, and their 
independence is an important aspect of the checks and balances 
necessary for the smooth running of our nation.
    I see several concerns with CECL. By its definition, it 
anticipates expected losses and relies on a predictive model 
for forecasting deficits. In practice, we are now expecting our 
banks to accurately predict the future and account for it.
    CECL seems to be too little too, much too late. The 
financial crisis peaked in 2006. For a crisis response to take 
13 years and leave us with so many questions and loopholes is 
beyond my understanding. Quite frankly, we could have had a 
financial crisis and recovered from it in the time that CECL 
was developed.
    Ultimately, the problem is not with the accounting 
standards but that these standards are going to affect banks' 
capital retention in a way that accounts and regulators cannot 
predict. Less capital means fewer small loans. It will be even 
harder for mortgages of under $100,000, many in my district, at 
a time when we need to incentivize lending at this level. My 
concern is that CECL will make lending more expensive in the 
short term. Lending is lowest in low- and moderate-income 
areas. Ultimately, we have a problem in our country getting 
mortgages under $100,000, and my concern is that CECL is bound 
to make that problem even worse.
    Credit unions face challenges on their own in obtaining 
additional capital retention because of their structure and the 
way new members are acquired. What would a credit union have to 
do to generate additional capital to meet a retention rule or 
regulation?
    Mr. Golden. My understanding is that a credit union would 
have to retain their income. One of the things about allowing 
additional time is it gives credit unions additional time to 
retain their income such that they will have additional 
capital. I agree with you that the FASB does not set the 
capital requirements for credit unions.
    Mr. Gonzalez of Texas. How does the retention of too much 
capital affect a bank?
    Mr. Golden. I would have to get back to you on that.
    Mr. Gonzalez of Texas. Would you oppose a cost-benefit 
analysis of the impacts of CECL on the affected industries, but 
especially on community banks and credit unions?
    Mr. Golden. We did a cost-benefit analysis as to whether or 
not this was additional information, more transparent 
information, at a reasonable cost. We have explained that in 
our basis for conclusion and other areas, and we are willing to 
defend that.
    Mr. Gonzalez of Texas. What sort of questions would you 
like to see answered?
    Mr. Golden. Regarding what?
    Mr. Gonzalez of Texas. Anything on CECL.
    Mr. Golden. I think it is very important that we study the 
judgments that are being made, to make sure there is not 
recency bias, that there is not conservatism. I have seen 
recent concerns that banks will, as they anticipate a downturn, 
over-reserve and then they will not appropriately adjust the 
reserves as the economy gets better.
    CECL does not allow for conservatism. It does not allow for 
recency bias. It requires management's best estimate based on 
the expected life of the loan. It does that by looking at 
historical information, adjusted for current conditions, and 
then a reasonable and supportable forecast period. We are not 
asking for companies to forecast over the life of the loan, 
just as far as they think that they can, and then you revert 
back to historical information.
    Mr. Gonzalez of Texas. Ultimately, the new standard has 
produced many concerns that CECL will have the opposite effect 
than intended, and rather than produce a safer financial 
outlook in a downturn, CECL could be procyclical and, indeed, 
cause problems for us during a downturn by tightening credit 
too much.
    Would you share with the committee the studies that your 
agency has conducted to evaluate how CECL would work in a 
significant economic downturn?
    Mr. Golden. I would be happy to share with the committee 
the analysis that the board has gone through to determine that 
this is a better financial reporting solution.
    Mr. Gonzalez of Texas. We would like to see that. Thank 
you.
    And I yield back.
    Chairman Sherman. Thank you.
    Without objection, I would like to enter into the record an 
October 2019 report from the Center for Responsible Lending, a 
public interest group, which indicates that CECL creates a 
significant disincentive for lenders to originate loans to low- 
and moderate-income families and communities of color. Without 
objection, it is so ordered.
    And the gentleman from Arkansas, Mr. Hill, is recognized 
for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman. Congratulations on 
becoming chairman. This has to be like a ``Jeopardy'' 
competition day for you, watching the world championships. We 
will take FASB for $600.
    Chairman Sherman. Alex Trebek is a constituent, and a 
friend of mine.
    Mr. Hill. Yes. God bless him.
    Mr. Golden, part of the accounting tradition is recognizing 
revenue and expense. Revenue recognition and expense matching 
is such an important concept, and it seems like CECL is not at 
all in keeping with that, in my view.
    And I want to echo my friend from Missouri's concept that 
the economic policy implications, the true cost-benefit 
analysis, not just to issuers versus users of the financial 
statements, but the big picture, is essential. It is a gap. To 
me, that should be a fundamental obligation of adopting an 
accounting standard. And based on your testimony here today, it 
doesn't exist.
    We look forward to what Treasury says, but I think Mr. 
Luetkemeyer and all of us here, on a bipartisan basis, would 
say the SEC and the bank regulators were not ahead of this 
issue. We have been talking about this since the spring of 
2015, and yet only in the last year have people started 
recognizing what a problem I think that this will be.
    Consistency also is a fundamental tenet of accounting. 
Would you agree? And would you say that an operating lease at 
Dillard's department store is treated the same way under GAAP 
that an operating lease at JPMorgan Chase is? Does GAAP treat 
an operating lease the same for any business in the United 
States?
    Mr. Golden. Yes, it does.
    Mr. Hill. Yes. Okay, it does.
    So by having not a good plan on this FASB issue, credit 
unions are now exempt from it, banks under $750 million are 
exempt from it, and public companies, no matter how big they 
are, are all fully responsible to comply with it.
    Now, that may be in keeping with how we all worry about our 
small community banks, but the point is, now you have a major 
difference in accounting standards. And I think that is a 
problem.
    I do think it is procyclical. I think it will enhance bank 
losses in a downturn. And I think it could also shorten terms 
of loans, since the way you calculate expected losses--people 
may now avoid making intermediate-term loans and make shorter 
loans so the financial accounting standards treatment is 
different. Is that a possibility?
    Mr. Golden. I don't think so. I recognize that point, but 
the way we have developed the model, the reasonable and 
supportable forecast is just over the period in which one can 
forecast. You are not required to forecast over 5 years.
    Mr. Hill. Mr. Duhnke, turning to you for 600, I wanted to 
talk to you about an interesting point an issuer brought up to 
me, which was PCAOB's inspection of an accounting firm's loan 
loss reserve papers at a client and that the Public Accounting 
Standards Board inspection was very much in conflict with the 
bank regulators.
    Have you heard about this issue, that an exam of one of 
your public accounting firms looking at loan losses is in 
conflict with the bank regulators? Has that topic come up?
    Mr. Duhnke. Conflicts are not news to me, but that specific 
issue is.
    Mr. Hill. Yes. And it also seems this question concerns the 
use of qualitative factors in determining the allowance for 
loan losses. And the PCAOB auditors to the accounting firm were 
disputing those, saying they shouldn't be counted and that the 
bank in question had a loan loss reserve that was far too high. 
And in my 40 years of banking, there has never been a loan loss 
reserve that was too high, probably.
    So I would ask you to look into that, if you would.
    Mr. Duhnke. I would be happy to do so.
    Mr. Hill. Thank you.
    Also, Chairman Duhnke, we have talked about the small 
broker-dealers, and we have had numerous letters back and forth 
and with Chairman Clayton at the SEC. Is that still an issue? 
Do you think you can find relief for our small broker-dealers 
under the Sarbanes-Oxley requirement?
    Mr. Duhnke. We are currently in the middle of our process 
of addressing the fate of our broker-dealer program. The 
aspiration is to wrap something up by this year, so, hopefully, 
those questions will be answered.
    Mr. Hill. Well, I hope you will bring relief to our small 
broker-dealers, whom I think deserve that relief in this 
inspection relief. And we have worked in the Senate and the 
House on that issue.
    Nobody has asked you a China question directly yet. And 
China, as I understand it, besides Belgium, is the only country 
to not fully comply with the PCAOB inspection standards. What 
is the latest on that?
    Mr. Duhnke. With one caveat on Belgium: We are working 
constructively with them and anticipate an agreement.
    On the China front, it remains status quo. My predecessor 
made a heroic effort to try to reach some accommodation with 
the Chinese, and we have been unable to do. So, we are at the 
same place we were a couple of years ago, and that is unable to 
inspect or enforce in China.
    Mr. Hill. I know Congress thinks this is an important 
issue. We look forward to working with you in the coming days.
    Thank you, Mr. Chairman.
    Mr. Duhnke. Thank you.
    Chairman Sherman. I now recognize the gentleman from 
Illinois, Mr. Casten.
    Mr. Casten. Thank you, Mr. New Chairman.
    And thank you to our witnesses.
    I want to pivot away from CECL. I have opinions on it, but 
I come at this as a new Member of Congress who spent 20 years 
in the energy industry. And having had to restate our entire 
books when FIN 46 came out and changed the variable interest 
accounting rules, where you could only really understand what 
our business did from reading the footnotes, I am not wild 
about changing accounting standards, but you can manage it.
    I also want to emphasize that, in an ideal world, 
accounting standards are value-neutral, and politically-
isolated. But, again, from the experience I come from, I don't 
have any experience with non-politically-influenced accounting 
standards, because our tax books are politically-influenced, 
and if you are a regulated utility, whatever the utility books 
are for your rate-making capital is politically-influenced. So, 
there is no way that you don't have a set of accounting records 
that are subject to some political influence just because FASB 
is independent.
    And, of course, there is significant discretion in, do you 
take a capital expense, do you take an operating expense, and 
how do you use that to smooth the earnings because we have our 
own political constituencies that we respond to as business 
leaders?
    All of that is okay. But I think the question, if we can't 
get away from political influence, is, how do we deal with the 
reality that we have?
    And so, with respect to CECL, the idea that banks have to 
book a reserve for some statistical likelihood of a future 
credit liability, and yet a business doesn't have to book a 
reserve for a whole host of other future, statistically 
possible liabilities, from customer loss to climate change and 
what have you, Chairman Golden, could you just explain to us 
very briefly what it is about CECL that leads FASB to conclude 
that that type of future risk should be booked but other types 
of future risks shouldn't?
    Mr. Golden. Sure.
    CECL is designed to show investors what are the cash flows 
the company expects to receive from the financial instrument on 
the books. One is trying to forecast, based on historical 
information, current conditions, reasonable and supportable 
forecasts of economic conditions, what are the cash flows that 
one expects to collect.
    If one expects to collect 100 percent of the cash flows, 
there is no loss. It is quite clear in the standard that if an 
entity held a U.S. Treasury bond, there would be no loss, 
because it is risk-free.
    Mr. Casten. Is it solely because CECL derives from 
regulation that the loss is booked? Because I could sit there, 
and I could say, I own a property in Miami Beach that is going 
to have significant flooding, and any scientist could sit there 
and say, yes, you have a serious exposure there, but that 
wouldn't be a bookable loss in the way that a CECL would be.
    Mr. Golden. That is right, because the event that has 
caused your loss associated with the flooding has not occurred. 
The event that has caused the risk to the financial institution 
has occurred, because they have either purchased the security 
or they have originated the security.
    Mr. Casten. Okay.
    Let me then shift back to my utility world. In 2013, I 
think, or so, the EPA said that essentially all existing coal 
boilers under their Boiler MACT rule were going to have to put 
significant back-end controls on or shut down. It was a change 
in law, and it meaningfully affected their cash flows.
    There wasn't a single utility or operator of a boiler that 
booked that loss on their books or booked that liability on 
their books. And this may be too far down in the weeds, but do 
you know what the difference was of why that didn't get booked 
as a loss?
    Mr. Golden. I am not familiar with that fact pattern. I 
would be happy to talk to you further to better understand why 
that was the case.
    Mr. Casten. I am not trying to play ``gotcha,'' but the 
difference was that all of the accounting groups said that was 
an obligation to invest in an asset as opposed to a liability. 
Same cash-flow future impact, but one of those never showed up 
on books, other than that people understood it. And so, again, 
it was a capital expenditures/operating expenses (CAPEX/OPEX) 
piece of distinguishing, so it sort of fell out of the 
accounting records, but we were sitting there saying, this 
business is materially affected, but you wouldn't know it from 
the financials.
    So, with the time I have left, my question for you is, if 
you can't take away that there will be political influence over 
accounting standards--and I am not advocating either of these 
extremes. One extreme, we throw our hands up, and we say, ``Do 
whatever you want.'' The other extreme, we say, ``FASB should 
be a branch of government,'' right? I am not suggesting either 
of those extremes.
    What could we do, as the Congress, when we pass these laws, 
whether they are environmental laws or tax laws or otherwise, 
to provide you with more clarity as to how to interpret, so 
that business owners aren't sitting there saying, I have to 
wait until all the FASB members complete the comment period so 
we can figure out how these will go through? Because, to my 
mind, that is the real risk. Is there something we can do in 
our legislation to provide you with greater clarity?
    Mr. Golden. I don't know. I would be happy to think about 
that. What comes to mind initially is strong and better 
enhanced communication between all parties.
    Mr. Casten. Okay. I see I am out of time, so thank you. I 
yield back.
    Chairman Sherman. Thank you. I have been informed that Mr. 
Steil from Wisconsin has his questions ready to go, so he is 
recognized for 5 minutes.
    Mr. Steil. Thank you very much, Mr. Chairman. Thank you for 
calling today's hearing.
    Mr. Golden, a question for you. As you know, many insurance 
receivables are important for assets for most property and 
casualty insurers. And reinsurance programs vary, the National 
Association of Insurance Commissioners (NAIC's) standards 
reflect that, both from an accounting and regulatory capital 
perspective.
    However, CECL treats all reinsurance receivables the same, 
and that seems to be causing friction between GAAP and the 
NAIC's statutory accounting principles. I have heard concerns 
from numerous folks that CECL is simply incompatible with the 
way that insurers are currently conducting their business 
model. The standard treatment of reinsurance receivables, I 
think, is one good example to kind of dive in to understand 
this with.
    This isn't a purely academic issue. The way CECL affects 
the treatment of balance sheet items like reinsurance 
receivables, affects the way that those insurance companies are 
doing business and thus ultimately impacts policyholders.
    Can you give explain how FASB works with investors to 
determine whether insurance-specific changes would improve 
transparency?
    Mr. Golden. Sure. And you are correct, insurance 
receivables are within the scope of CECL.
    We believe that the same accounting conclusion should be 
given to the same activity. And in essence, a reinsurance 
receivable is a receivable just like any other receivable. It 
is the same as a trade receivable.
    We have a specific group that is designed to help the board 
understand implementation questions, to help the board narrow 
diversity, and to help the board become aware of when we need 
to provide additional educational material.
    We specifically put a property casualty representative on 
that committee to help us understand if there are things that 
we need to do to provide additional education or narrow 
diversity for reinsurance receivable.
    Mr. Steil. Let me try to refocus the question a bit. How 
does that assist investors, in particular as it relates to 
transparency? Do you believe that this improves transparency to 
the benefit of investors?
    Mr. Golden. Yes, we do. What it does is it allows the 
investor to understand the real risk related to the reinsurance 
receivable.
    Mr. Steil. Okay. Let me follow up. As you know, CECL 
requires each financial institution to conduct its own modeling 
in order to determine their loss reserves. Because of that, it 
would appear that investors have to evaluate all of the 
different models that firms are using to determine the health 
of their loan portfolio, and this seems to be adding complexity 
and uncertainty rather than enhancing transparency for 
investors.
    And, in fact, I have seen reports that investors are 
calling on companies to include both the current allowance for 
loan and lease losses and CECL loss reserves in their 
reporting.
    Can you address some of this confusion as to how you are 
seeing this play out to enhance investors?
    Mr. Golden. We have had a lot of dialogue with investors to 
help them understand the additional information they are going 
to get from CECL.
    One of the crucial things, we believe, for the success of 
CECL is that it is a very flexible approach. It is a principle-
based approach.
    We specifically did that so that management would have the 
flexibility to do their reasonable and supportable forecast 
based on their specific banking, but we didn't want to mandate 
one model, one way to do that.
    As a result of that, there needs to be additional 
transparent disclosure as to how management has arrived at 
their estimate.
    Mr. Steil. I appreciate your feedback. I don't know that I 
agree with your conclusion.
    I am going to yield the balance of my time to my colleague 
with reams of paper to my left, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Steil.
    Just to follow up on the question here, you are talking 
about investors who--quite frankly, I can sit here, I have, as 
you said, piece of paper after piece of paper that says that--
here is a headline: ``Investors want new accounting standards, 
says FASB. Investors disagree.''
    Here is one from former FDIC Chairman William Isaac, from 
an op-ed from this past year: ``A January 2019 survey by 
Janney, the large investment house, found that 75 percent of 
bank investors oppose CECL.''
    Here is one from the tax accounting vice president of the 
American Bankers Association: `` Three-fourths of investors 
oppose.''
    Here is an FIG Partners survey that says 85 percent of 
investors feel current accounting rules for U.S. bank reserves 
are sufficient and 83 percent believe it is procyclical.
    Where in there is the urgency to have this change for the 
transparency of investors for thousands of individual entities 
that are affected for the benefit of the 400 banks that are 
publicly traded?
    Mr. Golden. We took on CECL because there is evidence that 
the incurred loss model delays loss recognition, created 
procyclicality, and caused complexity and confusion because of 
the need to--
    Mr. Luetkemeyer. Created procyclicality? It is going to 
exacerbate it, sir.
    Mr. Golden. I am just talking about the incurred loss 
model. During the financial crisis and subsequent to that, it 
was quite clear that investors were not using their incurred 
loss model. They were using an expected credit loss model.
    We also, during that time, received feedback from 
investors, from preparers, and from banking regulators, both 
U.S. and global regulators, that we should make a change and 
focus on expected credit losses.
    Mr. Luetkemeyer. You don't think mark-to-market had 
anything to do with this downturn?
    Chairman Sherman. The gentleman's time has expired.
    Mr. Luetkemeyer. I yield back.
    Chairman Sherman. Thank you.
    The Financial Services Committee has three House Committee 
Chairs on it, including the new Chair of the Committee on 
Oversight and Reform, Mrs. Maloney, who also happens to be the 
former Chair of this subcommittee. The gentlelady from New 
York, Mrs. Maloney, is recognized for 5 minutes.
    Mrs. Maloney. I thank the gentleman for his leadership, and 
for recognizing me, and I congratulate him on his new 
chairmanship of this critically important committee.
    Before I get to questions, I just want to say that both of 
these entities, the Financial Accounting Standards Board and 
the Public Company Accounting Oversight Board, are very 
important, and I certainly strongly support their missions.
    The PCAOB directly regulates auditors of public companies, 
so we should treat them the same that we treat other financial 
regulators. We give financial regulators significant 
independence, but in return, we require significant 
transparency.
    But the PCAOB is not subject to the same transparency 
standards as other financial regulators. Specifically, they are 
not subject to the Freedom of Information Act, even though 
other financial regulators are.
    I just want to say that I would like to explore subjecting 
the PCAOB to the Freedom of Information Act in order to improve 
the transparency of this tremendously important regulator.
    And with that, I would like to get to some questions for 
Chairman Duhnke.
    In December of 2018, the SEC and the PCAOB issued a warning 
to investors about the challenges American regulators face when 
attempting to conduct oversight of U.S.-listed companies based 
in China and Hong Kong.
    According to the SEC, there are 224 companies listed on 
U.S. exchanges with auditors located in countries that 
prohibit--prohibit--the PCAOB inspectors' inspections of 
financial details. They have a combined market cap of more than 
$1.8 trillion.
    Chinese law, in particular, restricts access to accounting 
information, citing national security and state secrecy. But 
buying shares in a company that can operate under completely 
opaque auditing standards or oversight is really more of a bet 
than a true investment.
    I am very concerned that investors are not adequately 
protected. I can't help but think of the Enron scandal, which 
spurred the creation of the PCAOB.
    How are these 224 companies able to list on U.S. exchanges 
in the first place? And are there any nations, other than 
China, that restrict access to accounting information? And 
besides directly negotiating with China to access accounting 
information, what can be done to best protect investors?
    Mr. Duhnke. A couple of things.
    How are they listed? I will stay out of the SEC's 
jurisdiction, but to connect it to the PCAOB's jurisdiction, 
they require a PCAOB-registered auditor, which they have, and 
that allows them, through our process, to be listed on our 
exchanges.
    And how do we protect people? The statement you refer to is 
one of the steps that Chairman Clayton and I took. We thought 
it was important to make sure the market knows exactly what the 
status is so that they know what they are getting and not 
getting out of the process.
    We do a number of things at the PCAOB. We update and keep 
updated our website to make sure those who wish to find out 
what the status is can get it and understand what the current 
situation is.
    Any time I have an opportunity to include this one, I will 
speak publicly about our lack of access on the inspections and 
the enforcement fronts. And at this point, it is a buyer-beware 
situation; people should know that whatever protection they 
glean from our activities, they do not have them in those 
instances.
    Mrs. Maloney. Thank you.
    Independence is absolutely critical to the integrity of an 
audit, and under Sarbanes-Oxley, auditors are prohibited from 
providing services that, among other things, could create 
conflicts of interest or result in their acting as an employee 
of their clients. And in the last few years, the PCAOB 
inspections have found numerous violations by auditors of the 
independence rules.
    Do you know what evidence the SEC is looking at to suggest 
that there needs to be a loosening of auditor independence 
rules?
    Mr. Duhnke. Once again, I would defer to the SEC on their 
particular process, but our interaction with them is through 
our rules and standards, and that is what we would address.
    Mrs. Maloney. Okay. And we don't have anyone here from the 
SEC.
    I yield back.
    Chairman Sherman. Thank you.
    The gentleman from Ohio, Mr. Davidson, is recognized for 5 
minutes.
    Mr. Davidson. Thank you all very much for coming today. I 
always enjoy talking to FASB, and I appreciate the chance to 
talk about the public company side of that as well. As a 
smaller business owner and investor, I have experienced some 
consternation with FASB, and I just want to better understand 
how FASB goes about assessing the impact of decisions.
    Previous decisions that I think perhaps have been not 
accurate or effective or helpful for the market would be mark-
to-market, as an example. The way that was implemented, there 
might be times where it would be rational to mark-to-market, 
but why change the entire depreciation schedule for an asset 
when there is no planned leverage and no planned disposal of 
the asset?
    And another one is the distinction between operating in 
capital leases. Why obliterate that line that has been pretty 
well time-tested, and very well understood? And it all allows 
for misapplication in banks.
    As the regulators apply them, it could be dynamic. Cynics 
might say that this is an opportunity to create deal flow for 
the investors that serve on some of the boards. Others might 
just say, maybe the companies here are bigger, and they are 
looking at it from a more academic perspective and they are not 
adequately understanding the impact.
    What kind of testing does FASB perform before issuing 
standards? Does FASB engage in rigorous testing, engagement 
with industry, and cost-benefit analysis? Do you share that 
research?
    Mr. Golden. Sure. Let me address that with respect to the 
improvements we made with respect to lease accounting.
    Before we take on any project, we can trace it back to some 
issue in the capital markets. With respect to leasing, as a 
result of the Enron and WorldCom events, there was a request by 
Congress that the SEC do an off-balance sheet study. They 
completed that off-balance sheet study, and the number one 
observation was operating lease accounting.
    At that point, we took on a project to determine if putting 
leases on the balance sheets would be decision-useful 
information to investors. We went out to investors to look at, 
were they already putting operating leases on the balance 
sheet, and if so, would the board's measurement give them 
better information? And we think it did give them better 
information.
    Since I have been chairman, we have created a Private 
Company Council that is specifically designed to give the FASB 
input on what private companies think about our proposals, and 
what are some differences that private companies should do to 
save costs.
    One of the most significant achievements that we have had 
there is reducing the amount of disclosures for private company 
preparers, because we don't believe investors in private 
companies need the same amount of disclosures as public 
companies.
    We also ask them, is there a more practical way in which to 
apply our standards? And with respect to leases, we did work 
with them to come up with a different discount rate philosophy.
    Mr. Davidson. Okay. How much influence does the SEC, which 
oversees FASB, and of course, they are overseen by Congress, 
how much does it have on FASB's work?
    If you look at the influence of the SEC, I appreciate that 
you are creating this privately-held company. You don't 
necessarily want to create two entirely different standards, 
but perhaps you do if you are going to do things that really 
are relevant for the kinds of investors, institutional 
investors, and the kind of capitalization structures that are 
markedly different.
    Mr. Golden. Yes. We have had some successes with our 
Private Company Council to change quite substantially and have 
a different accounting for private companies. One is with 
respect to good will.
    With respect to your question about the influence of the 
Securities and Exchange Commission, their staff have, we work 
closely with the Office of the Chief Accountant, we work 
closely with the chief auditor of the PCAOB, with the banking 
agencies, and with others that use our information.
    We want to make sure the input we are seeking from the SEC 
is, are the standards enforceable, as well as, as they, through 
their Corp Fin review, see differences in opinion that are out 
there, we can narrow that diversity. If they have questions 
that can help them in their reviews or enforcement matters, we 
work with them to do that.
    Mr. Davidson. I appreciate that. I wish I had more time to 
go into a whole range of issues. I think CECL has been covered 
fairly adequately, but I think it is indicative of decisions 
where there is a lot of theory and not a lot of practice.
    And I appreciate the effort with the Private Company 
Council to maybe look at it from different perspectives, as has 
been suggested, with the way that CECL came to be.
    Thank you.
    Chairman Sherman. Thank you.
    Now, I am pleased to recognize the gentleman I have been 
sitting next to for over 20 years, on both of my committees, 
the gentleman from New York, Mr. Meeks, who is also the Chair 
of our Subcommittee on Consumer Protection and Financial 
Institutions, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    I am going to talk to Chairman Golden. I have been running 
around and talking to a number of folks, and I understand that 
switching to the CECL accounting method, from what they all 
tell me, will have significant real-world impacts on community 
banks, minority banks, and other providers of credit and 
banking services.
    The fact of the matter is, many small financial 
institutions have struggled since the financial crisis, and 
they seem to think--and I may agree with them--that CECL is 
likely to be an additional blow to the dwindling number of 
community banks and minority institutions.
    Small community banks have been disappearing at an alarming 
rate since the financial crisis, specifically the number of 
minority depository institutions, which has fallen from 215 
banks in 2008 to fewer than 150 today.
    According to the FDIC, following the financial crisis, 
minority banks were 2\1/2\ times more likely to fail than all 
other banks. Today, MDIs represent only 2.8 percent of FDIC's 
insured banking charters and 1.3 percent of assets.
    This matters because research confirms that MDIs play an 
active role in addressing persistent discrimination as they are 
far more likely to serve underbanked communities of color and 
low- and moderate-income communities than both large banks and 
nonminority-owned community banks.
    I say all this because when I engage with these banks and I 
start talking to the MDIs about the challenges they face and 
their principal concerns going forward, CECL systematically is 
at the top or near the top of the list of their concerns. Just 
about every one that I spoke with.
    Crucially, a negative impact on small- and mid-sized 
financial institutions will also reverberate to lower-income 
and middle-class Americans. If these financial institutions 
curb lending and restrict credit, low-income individuals could 
see their cost of borrowing rise or could lose access to credit 
altogether.
    Moreover, if CECL causes more small lenders to close their 
doors, the already growing problem of banking deserts and 
unbanked individuals will be exacerbated.
    Given these serious potential economic disruptions, let me 
ask you this. In response to questioning in this committee, 
banking regulators--and we have had them here--acknowledged 
that CECL will have a material impact on capital and may impact 
availability of loans to marginal communities. But all they can 
do is to seek to mitigate any such impact if FASB finalizes its 
rollout.
    Can you say almost definitively, without a study or 
anything else, that CECL implementation will not increase costs 
or reduce access to credit for low-income communities and 
communities of color, which have already faced well-documented 
hurdles accessing credit?
    Mr. Golden. There will be a cost to transition to CECL, but 
we think the ongoing costs to apply CECL are similar to the 
costs today with respect to the incurred loss model.
    With respect to the availability of credit, I think that is 
directly dependent upon the regulatory capital associated with 
the change.
    Mr. Meeks. My concern is that the ramifications are so 
crucial. And that is why I am so focused on making sure that 
there is a complete study beforehand, because once a bank--once 
you lose access to credit or an MDI closes, it is not going to 
come back. And so my concern with a major shift like this is, 
let's make sure to dot our i's and cross our t's.
    If, in fact, CECL's implementation curtails access to 
credit or the cost of credit for low-income communities of 
color, is there any opportunity--I don't know, is it possible, 
or would you be open to repealing and reconsidering and trying 
to think of some alternative ways to accomplish the intended 
accounting transparency rules without negatively impacting bank 
capital?
    Mr. Golden. We are always open to improving our standards. 
But most of the financial institutions, if not all of the 
financial institutions you are talking about, are not going to 
be required to implement CECL until 2023.
    There will be a lot of information about the CECL rollout 
for the larger public companies, and I think we can all review 
and study before those financial institutions you are talking 
about are required to implement CECL.
    Mr. Meeks. I see that, unfortunately, I am out of time.
    Chairman Sherman. I am sure the gentleman is gratified that 
the impact on low- and moderate-income families and families of 
color will be delayed to some degree until 2023, by which time 
I am sure we won't have any problem for low- and moderate-
income families by then, we hope.
    With that, I will recognize the gentleman from Indiana, Mr. 
Hollingsworth.
    Mr. Hollingsworth. Chairman Golden, earlier, in your 
opening statement, you had said some percentage--I think it was 
in the 80s--of total banking assets that CECL is going to go 
into effect upon as of January 1st. What was that number?
    Mr. Golden. I think I said the vast majority.
    Mr. Hollingsworth. Okay. So, we should be comforted by the 
fact that the vast majority of banking assets are already going 
to be subjected to this, and we will get the results of the 
vast majority of impacts and then we will make further 
determination afterwards?
    I want to associate myself with the many comments on both 
sides of the aisle, the many letters that have gone back and 
forth, expressing deep and grave concerns over CECL going into 
effect.
    You and I and others have had meetings about this where it 
has been explained to me that this is merely a temporal effect, 
we are taking those losses that are going to be incurred over 
time and we are just asking them to up-front characterize 
those, rather than over time characterize those, as though that 
is some small and minor effect.
    I deeply, strongly, and vigorously, as we discussed before, 
believe that creates a lot of procyclicality, which will be 
problematic going forward.
    We have read over and over again from economist after 
economist about some of the challenges the Fed may have in 
working through the next recession, given where interest rates 
are, given the quantitative easing that they have already 
undertaken in the past, and given subdued inflation. I am 
really concerned that we are setting ourselves up for an even 
larger problem going forward, caused by accounting.
    I think that puts us in a very precarious position, and I 
would rather see us develop countercyclical ballast to this 
economy rather than more procyclical problems.
    I will let others talk further about that, but rest 
assured, I feel as they do about the concerns on this.
    I wanted to address something else with you. In 2012, 
Congress passed the JOBS Act to expand the options for 
businesses to raise capital through exempt offerings and 
attract more private market companies to public markets, which 
I think is a really laudable aim.
    When you were discussing FASB reform efforts on liabilities 
and equity, you noted that this is an area where private 
companies and other smaller public companies might be 
disparately impacted by the complexity and confusion of the 
current standard. I wondered if you might talk a little bit 
about whether you take into consideration EGC on-ramp status or 
other things in thinking about some of these rules as they come 
on board for public companies that are smaller?
    Mr. Golden. Yes, absolutely. And I hope before my tenure as 
the FASB chairman is done, in the middle of June of this year, 
that we are able to complete a substantial improvement to 
simplify the distinguishing characteristics between liabilities 
and equity, which will allow us to decrease the number of 
restatements and reduce costs for those that are emerging 
companies.
    With respect to the JOBS Act and emerging growth companies, 
we recognize that there is a benefit of deferring effective 
dates for smaller public companies, and we instituted a new 
philosophy that we worked on throughout 2019--
    Mr. Hollingsworth. Can you explain to me what that benefit 
is that you recognize?
    Mr. Golden. That they are able to learn from public 
companies, that we were able to see an entire audit cycle, an 
entire Corp Fin review cycle, that the board can provide 
additional education material, narrow diversity, or make cost-
effective changes before smaller public companies, private 
companies, are required to implement our standard.
    Mr. Hollingsworth. Got it.
    Mr. Golden. In the past, we used to have a 1-year spread 
between public and private, and going forward, we will have a 
2-year spread.
    That said, on CECL, we are having a 3-year spread between 
when the public companies are required to go, and when the 
private companies, the not-for-profits, and the smaller public 
companies will be.
    Mr. Hollingsworth. Okay. This continues to be an important 
aspect that this committee and, frankly, other people are 
talking about.
    And with that, I am going to yield the balance of my time 
to the gentleman from Missouri.
    Mr. Luetkemeyer. I thank the gentleman.
    Quick question for you, Mr. Golden. You talked about the 
need for this with regards to transparency for investors, and 
basically at this point it is only the publicly traded 
companies, which is basically 400 out of the 5,000 banks, and 
it doesn't really include the 6,000 credit card companies.
    But if you go down the line and you talk about the GSEs, 
auto loans, insurance companies, even reinsurance companies, 
you are talking thousands and thousands and thousands of 
entities out here for the benefit of 400 entities.
    Tell me how that works. Tell me how you can justify 
supporting 400 at the expense of thousands of other folks and 
driving some of these folks out of business, when you look at 
the costs that they are going to incur, especially for credit 
unions and small banks.
    Mr. Golden. I believe by allowing a 3-year spread between 
public companies and smaller financial private institutions, we 
will be able to look at the use of CECL, the application of 
CECL, we will be able to narrow any diversity, we will be able 
to have additional cost savings before the community banks, 
before the credit unions are required to implement CECL.
    Mr. Luetkemeyer. I see my time has expired.
    Mr. Hollingsworth. I will yield the time back.
    Chairman Sherman. I now recognize the gentleman from 
Illinois, Mr. Foster.
    Mr. Foster. Thank you, Mr. Chairman.
    I was just musing over this, the business of procyclicality 
and countercyclicality. Speaking more generally, are there 
areas where we could introduce more countercyclicality into 
accounting generally? Just cast a wide net initially, and then 
I have some specifics.
    Mr. Golden. I don't have specifics of other standards. What 
we try to do at the FASB is we try to increase the decision-
useful, neutral information to investors that gives them better 
information so that they can allocate capital, so they can 
decide where they want to lend, and so other users can make 
more informed decisions. We believe allowing investors to 
better allocate capital reduces the cost of capital, helps make 
our capital markets more--
    Mr. Foster. Absolutely. And then, there is a bubble 
building about to collapse. That is the biggest misallocation 
of capital. The real estate bubble that we experienced a decade 
ago is probably the biggest misallocation of capital in human 
history.
    And so, I was just fishing for accounting principles, sort 
of the general principles I was thinking of, was just to treat 
skeptically the value of recently appreciated assets. For 
example, don't use the mark-to-market price, but use some 
average over the last few years to get a better idea.
    This thing is, this sort of principle, if applied 
throughout accounting, would really do a lot towards dampening 
bubbles and sort of automatically retracting the punch bowl as 
the party gets going, if you get my meaning.
    I was wondering, are there other examples of options you 
had considered where the cyclicality could be used as the 
deciding factor in leaning the scales to stabilize the system?
    Mr. Golden. I cannot give you any specific examples at this 
point other than, like I said, our process is designed to 
ensure that investors are getting better, higher-quality, more 
decision-useful information.
    Mr. Foster. Okay. Well, if things occur to you or if you 
come back with a more considered reply, either--
    Mr. Golden. We would be happy to.
    Mr. Foster. Yes, I would appreciate that, because that is 
something that we can do to, as I say, stabilize the system.
    And now, I will yield the remainder of my time to my 
colleague, Mr. Meeks.
    Mr. Meeks. Thank you.
    The chairman just indicated, and I agree, that for the 
small community banks and MDIs, this does not take effect for 
them until 2023. And I think that is as a result of a lot of 
individuals who listened to the comments. There was a lot of 
noise. Because otherwise, if it wasn't for them, it might have 
moved forward, but you heard them.
    The question then is, do you have the capacity to do the 
kind of research and investigations to determine where we are 
going with this? Would you agree to work with the Federal 
Reserve in trying to get something done in that regard? And 
then, what will you do with the information once you finish and 
do a complete study, particularly as it pertains to the 
community and small banks?
    Mr. Golden. We have sufficient resources at the FASB staff. 
Reviewing the information that comes from the capital markets 
of our change is not something new. We did it with respect to 
revenue recognition, we have done it with respect to lease 
changes, and we plan to do it with respect to CECL changes.
    As I said in my opening remarks, we stand ready to help the 
study that is mandated by the U.S. Treasury in consultation 
with the banking agencies. We look forward to reading that 
study. If there are any recommendations that come out of the 
study, we will carefully implement those recommendations.
    Mr. Meeks. Because one of the things that I took out of the 
decision to have implementation for all of the largest 
financial institutions is that you then understood that CECL's 
impact had not been adequately studied in a quantitative 
manner.
    And so, I hope that there is a quantitative study that is 
going to be done now, and once that quantitative study is 
completed and you see the standards, that it will have an 
effect on these banks as well as low- and moderate-income 
communities, that those findings then will be implemented and 
we don't continue, even--we are talking about 2023. Sometimes 
there is a delay, you do a study, there is no action as a 
result of the study, and then the same thing takes place and 
the same damages because of the cost.
    I am out of time. I do give you credit for listening to 
people, though, the first time, and pushing it back to 2023.
    Chairman Sherman. I thank the gentleman from New York, and 
I recognize the gentleman from Ohio, Mr. Stivers.
    Mr. Stivers. I want to thank you both for being here. And 
my first question is for Mr. Golden. The CECL change has been 
explained by some people as the biggest accounting change in 40 
years. I am not going to ask you whether you agree that it is 
the biggest change in 40 years. Do you believe it is a major 
change or a minor change?
    Mr. Golden. I believe it is a major change for financial 
institutions.
    Mr. Stivers. I think so, too.
    Can you tell me, did you engage in any field testing?
    Mr. Golden. We had 25 meetings over the course of the 
project where we went to the companies' sites and did field 
work.
    Mr. Stivers. And did you do comprehensive cost-benefit 
analysis?
    Mr. Golden. We think that our process was comprehensive. 
Again, the cost-benefit analysis was in connection with, was 
this going to give better decision-useful information to 
investors?
    Mr. Stivers. So you looked at it only under the lens of, 
does it give more information to investors, not a total cost-
benefit analysis?
    Mr. Golden. We try to understand, is this going to give the 
investor better information about making more informed 
decisions, what are the costs that companies will incur to 
comply with the standard. That is how we have done our cost-
benefit analysis, and that is what we did on this.
    We also produced a document that describes in essence, in 
plain English, how we describe and consider the cost and 
benefits.
    Mr. Stivers. And did you look at any potential market 
instability created by CECL or procyclicality?
    Mr. Golden. I don't recall looking at anything related to 
market instability.
    Mr. Stivers. Great. I think you should look at all of 
those. Market instability is pretty important. And I will tell 
you my concern about CECL is, I think it is a rule for 
accountants, by accountants, which is 10 years too late, it is 
unnecessary, and it drives procyclical behavior and forces 
capital into artificially restricted buckets.
    We need capital to protect insolvency and against future 
problems everywhere, not just restricted capital. Restricted 
capital might be available, or it might not be available, given 
what is going on and what the problem is, and that is my 
concern about CECL.
    I have talked to the Federal Reserve about looking at CECL 
in accordance with their total capital standard and sort of 
adding it, giving credit for the CECL reserves as part of 
capital. But that still doesn't solve the problem, because it 
is restricted capital, and I am very concerned about that.
    So I am going to be pursuing some legislation to require 
the Securities and Exchange Commission to put some controls 
around FASB because I am very concerned about no testing, no 
looking at what is going on with regard to market instability, 
and the impacts. Cost-benefit analysis needs to look at what 
happens and what the outcome of that will be, not just the cost 
in a myopic way of, do investors get more information?
    And there is a whole bunch of private institutions that 
will have huge costs related to CECL, too. So, I am very 
concerned, and I am going to be looking at some serious 
legislation as a result of it. And that just is what it is.
    I also want to ask Mr. Duhnke about our decline in initial 
public offerings that we have seen over the last 2 decades, 
frankly. And I know it came up in the JOBS Act question. They 
are sort of related. But we have had a decline because of the 
cost of compliance and the cost of going public in companies 
choosing to go public and take an IPO.
    What is the PCAOB doing to look at regulatory costs that 
are reducing the number of companies that are going public? 
Because that means less investments available to mom-and-pop, 
Main Street investors. If you are a private company and not a 
public company, it is not available to my Uncle Bill, but if 
you are a public company, it is.
    What are you doing to try to look at that?
    Mr. Duhnke. I think what most directly relates to your 
question is, when our inspectors go in and do an inspection and 
they require documentation from audit firms, that request and 
that demand can extend to the company, which can make them 
incur additional costs. So, we are very focused on that, to 
make sure that we are not exceeding the requirements of our 
standards.
    Mr. Stivers. How do you streamline those regulations and 
processes to make sure that the process is not overly 
burdensome? And I want to make sure you get the information you 
need. But what are you doing to make sure you are not overly 
burdensome in those contexts?
    Mr. Duhnke. It is less a question of, how do we change a 
standard, as, how do we implement a standard?
    Mr. Stivers. Okay.
    Mr. Duhnke. We can do it through our inspections process.
    Mr. Stivers. Great.
    Chairman Golden, as far as FASB goes, do you think there 
are any rules, accounting standards, that have come out of FASB 
that have resulted in precipitating the decline of IPOs over 
the last 20 years?
    Mr. Golden. No, I don't. I actually think the standards 
that we put forward have helped our capital markets.
    As I talked to the gentleman earlier about the differences 
we made for private companies, we are careful to make sure that 
the differences do not impact entities' abilities to go public, 
and so far we have discovered that it does not.
    Mr. Stivers. I hope that is true, but I really worry that 
the burden you place on companies in a quest for more 
information for investors drives up the cost of companies going 
public, discourages companies from going public, and has 
precipitated the decline of initial public offerings, which 
means mom-and-pop investors get less access.
    Chairman Sherman. Thank you.
    Mr. Stivers. Thank you. I yield back.
    Chairman Sherman. It is now appropriate to recognize 
members of the Full Committee who are not members of the 
subcommittee, starting with the gentleman from Missouri, Mr. 
Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Golden, you just indicated that you believed that CECL 
is a major rule. Do you think mark-to-market was a major rule?
    Mr. Golden. Yes, I do.
    Mr. Luetkemeyer. How did that work out?
    Mr. Golden. We have made a number of changes.
    Mr. Luetkemeyer. Not so hot. You had to rescind it, right?
    Mr. Golden. We did not rescind mark-to-market. We changed--
the thing you are noting that occurred here had changes to 
where mark-to-market was--
    Mr. Luetkemeyer. But it exacerbated the downturn and you 
had to make some tremendous changes in that to make it actually 
stick around?
    Mr. Golden. You are correct.
    Mr. Luetkemeyer. And you did no study, you did no cost-
benefit analysis on that before you implemented that one, 
correct? That is what you told me in private before. I assume 
that is still correct.
    Mr. Golden. I believe that is correct.
    Mr. Luetkemeyer. Okay. So, here we have another major rule 
that could have a similar dramatic effect and impact on our 
economy, and again we did not study, did not go to individuals, 
did not go to the private sector, which is going to have to 
implement this rule on a day-to-day basis and figure this out.
    You had no concerns about this at all. Is that right?
    Mr. Golden. No. I recognize the concerns of this committee 
and the concerns of the various financial institutions. We take 
those concerns--
    Mr. Luetkemeyer. Yes, but not before you made it, not 
before you implemented it, apparently. Otherwise, you would 
have made some changes or not done it at all.
    Mr. Golden. I think CECL is an improvement to investors. I 
think it will help the public capital markets.
    Mr. Luetkemeyer. With all due respect, Mr. Golden, I think 
this is a solution in search of a problem. I think you 
structured this thing completely wrong. You have it to the 
benefit of 400 companies who don't want it, investors who don't 
want it, to be able to analyze those balance sheets, and at the 
expense of the other thousands and thousands of companies who 
are going to have to implement it and their costs and the 
effect on their customers.
    In this committee, not too long ago, we had a gentleman 
from the National Association of Home Builders who indicated 
that for every thousand dollars' worth of increase in the cost 
of a home, 100,000 people got priced out of a home. They 
couldn't afford the home, to go for a mortgage anymore, and 
live the American Dream of having a home.
    Did you ever consider the effect on the real people in the 
real world when you proposed this rule?
    Mr. Golden. Our thorough process was based on--that is 
consistent with our mission--whether or not--
    Mr. Luetkemeyer. So, you didn't talk to the real people in 
the real world who are going to have to deal with the effects 
of this, which means that when the banks and the credit unions 
have to implement this and be able to find enough resources to 
put into the reserves, they are going to have to raise the 
price of their products, especially for small banks and credit 
unions. Where are they going to get the income to be able to 
address these reserves?
    And I can tell you, I have a study sitting right here with 
regards to the credit unions. One association gave me a study 
that says it is going to cost $14 billion to $15 billion. Where 
do you think that comes from? Are you concerned about that at 
all?
    Mr. Golden. Yes. And, again, that is one of the reasons why 
we gave an additional year for community banks and for credit 
unions so we can monitor the implementation for the public 
companies and stand ready to make--
    Mr. Luetkemeyer. Again, with all due respect, Mr. Golden, 
monitoring after the fact shows the negligence and 
incompetence, in my mind, when you have mark-to-market that you 
already had in place in the past that didn't work, without a 
study or a cost-benefit analysis to show that it wouldn't work.
    And now you have done the same thing, and you are sitting 
here trying to implement something again and monitor after the 
fact. To me, that is the definition of insanity, doing the same 
thing over and over again that doesn't work. It just blows my 
mind to see what you are doing.
    There is no Federal agency that would be able to get away 
with what you just did. Do you realize that?
    Mr. Golden. We did a very rigorous cost-benefit analysis in 
connection with our mission.
    Mr. Luetkemeyer. No, you didn't. You told me you didn't. 
Either you fooled me before or you are fooling me now, because 
you told me in our private meeting that you didn't do a cost-
benefit analysis and you didn't do a study on this. So, which 
one is it?
    Mr. Golden. We did a cost-benefit analysis in connection 
with our mission as it relates to--
    Mr. Luetkemeyer. Well, your mission, but that is not on the 
customers it is going to affect.
    Mr. Golden. Right.
    Mr. Leutkemeyer. How many people is it going to take?
    Mr. Golden. I'm sorry, what?
    Mr. Leutkemeyer. How many people is it going to take to get 
your attention, that this is going to affect real people in the 
real world, sir?
    I deal with the real world. I am a business guy. I sit 
across the table from real people. I am a legislator. I sit 
across the table from my constituents. I go home every week and 
talk to them. These people are going to be hurt by your rule. A 
simple accounting standard is going to decimate the people in 
my district's ability to have home mortgages.
    And it is a bipartisan effort. My friends on the other side 
of the aisle are as upset about this as I am. This has to stop. 
This can't continue. You should stop and look at the damage you 
are going to be doing to the citizens of this country.
    And in essence, after that happens, it is going to 
devastate our economy. The ripple effect is going to be awful.
    And without a study, you can't prove me wrong. I hope you 
can prove me wrong, because I don't want to see this happen to 
my constituents.
    And the study, by the way, that the Treasury is going to 
do, that is my study I requested, and I hope you do work with 
them on that, and you do implement their changes, because 
hopefully, it will show that this has to be changed. This can't 
continue, sir.
    With that, I yield back.
    Chairman Sherman. Thank you.
    We will now recognize the gentleman from Ohio, Mr. 
Gonzalez.
    Mr. Gonzalez of Ohio. Thank you, Mr. Chairman.
    I think the independence of FASB generally is a good thing, 
right? I think, generally speaking, it has been positive. And I 
think you don't want us making your rules for you. We don't 
have that expertise. Mr. Luetkemeyer does, but a lot of us do 
not.
    Having said that, I can't help but echo the comments that 
others have made with how irresponsible the CECL decision feels 
from the outside.
    You have testified multiple times that you have made CECL 
as consistent with your mission to provide useful information 
to investors, correct?
    Mr. Golden. Correct.
    Mr. Gonzalez of Ohio. And you believe because there are 
exclusions for smaller banks, you will be able to know the 
effects ex-post and you may course-correct?
    Mr. Golden. Yes.
    Mr. Gonzalez of Ohio. Okay. But you have also testified 
that you could care less about the real-world economic impacts 
of the decision to implement CECL, because you are solely 
focused on your mission--which is a noble mission, I grant you. 
But it is not clear to me that anything that you see going 
forward, unless it is that investors are complaining, would 
ever force you to course-correct.
    And so, it is hard for me to square that. You either 
consider the economic real-world impacts, in which case you 
should have done it before CECL, or you don't, in which case 
anything that happens is going to be immaterial to your 
decision to change.
    Mr. Golden. One of the items we are looking forward to 
seeing the results of from the Treasury study is the impact on 
regulatory capital. And I think it is very important to 
understand how the impact on regulatory capital impacts the 
types of things that Mr. Luetkemeyer is talking about.
    Mr. Gonzalez of Ohio. Okay. Again, I am going to give the 
gentleman from Missouri time in a second, but I want to switch 
to Chairman Duhnke.
    I want to talk to you about China, specifically. It doesn't 
make any sense to me why Chinese firms should be able to avoid 
audits when American companies have to go through that process.
    Do you need legislation from us to enact that change, or 
can you do this through the regulatory environment?
    Mr. Duhnke. The process that we follow is inspection. If 
there are violations, enforcement, resolution of the 
enforcement issue, and then whatever the sanction might be.The 
sanctions can be anywhere from something minor, to a fine, to 
deregistering of a firm.
    Just to make sure we are clear here, we are not talking 
about Chinese companies. We are talking about auditing firms. 
That is whom our jurisdiction is over.
    Then, once a decision for deregistering takes place, that 
implicates the SEC's world, and they have to look at listing 
standards and whether or not they would continue to qualify.
    Mr. Gonzalez of Ohio. And how far along are we in terms of 
getting China up to those standards, in your estimation? Are we 
close? Are we far away? Where are we at?
    Mr. Duhnke. Again, let me be more specific than saying, 
``close'' or ``far away.'' We require sort of a three-pronged 
principle before we enter into negotiations with somebody for 
an inspections and enforcement agreement, and we have yet to 
reach agreement on those principles with the Chinese. Whereas, 
it is accepted by every other bilateral relationship we have, 
they have not accepted it, so therefore we have not been able 
to enter any substantive conversations.
    Mr. Gonzalez of Ohio. Okay. And we will follow up. I would 
like to hear more on how we can be assistive in that.
    And with that, I will yield to Mr. Luetkemeyer.
    Mr. Luetkemeyer. I thank the gentleman from Ohio.
    Mr. Golden, I think that this standard is going to have a 
dramatic effect on the capital and reserves. As I said a while 
ago, I have something in my folder here with regards to one 
group of credit unions associations is $14 billion. I was 
talking to some FDIC folks yesterday, and they have a couple of 
banks. One of them is $4 billion, another one is $30 billion, 
and it is going to have to do some additional reserves.
    How big an impact do you think this is going to have? Have 
you ballparked it at all? Mrs. Wagner talked a while ago about 
$50 billion to $100 billion. I think we are going to blow past 
$100 billion. But do you have an idea? Is it concerning?
    Mr. Golden. I do agree that there is a significant increase 
in the allowance, which is a direct impact associated with 
capital. We do observe that the banking regulators have looked 
at that. They have given a transition, which will make it 
easier, and we look forward to seeing the Treasury report as to 
the totality of the impact on regulatory capital.
    Mr. Luetkemeyer. How big a number does it take before you 
do something?
    Mr. Golden. I'm sorry, I didn't--
    Mr. Luetkemeyer. I said, how big a number is it going to 
take to get your attention so that you make some changes or 
scrap this thing?
    Mr. Golden. You have our attention now. We don't set 
regulatory capital. So to the extent that this is required to 
impact and increase regulatory capital, that is not in the 
space of the FASB. We write standards that neutrally reflect 
the economics. We don't write standards to impact regulatory 
and bank capital--
    Mr. Luetkemeyer. But, sir, as my friend from Ohio put it 
very succinctly here, your lack of concern for the citizens of 
this country is breathtaking. Your inability to see the 
economic impact on our economy as a whole is breathtaking. That 
doesn't concern you?
    Mr. Golden. No, it absolutely does concern me. What I am 
saying is that we need to work with the banking regulators to 
better understand what types of capital changes they are going 
to do as a result of this.
    Mr. Luetkemeyer. Okay. My question then--I will restate 
it--is, what number gets your attention? A hundred million? Two 
hundred million? At what point do you sit down and say, ``Whoa, 
this is too much, we have to scrap this thing and do something 
completely different?''
    Mr. Golden. I don't know the specific number, but this 
hearing, the results, you have my attention.
    Mr. Luetkemeyer. How big a number do you think it takes? 
Can I get a ballpark?
    Mr. Golden. I don't know.
    Mr. Luetkemeyer. Sir, I appreciate the additional time from 
the chairman, but this really concerns me.
    Chairman Sherman. Thank you.
    Mr. Luetkemeyer. I yield back.
    Chairman Sherman. One announcement about future hearings. I 
would very much want to hear not only from the ranking member 
but everyone else about their ideas on what should be the 
topics of future hearings.
    So far, I have seen a need for us to hold a future hearing 
on LIBOR and legacy LIBOR, to hold a future hearing on bond 
rating agencies, also known as credit rating agencies. And 
after this hearing, it is very clear to me that we need to 
bring in some accounting professors, and then hear again from 
the FASB.
    With that, pursuant to a prior understanding, I will 
recognize the ranking member for a 1-minute closing statement, 
and then I will finish with a 1-minute closing statement.
    Mr. Huizenga. Thanks, Mr. Chairman.
    Chairman Duhnke, thank you for showing up at our CECL 
hearing, CECL overview today.
    I do want to follow through on some of my concerns that I 
had expressed about some of the redundancies, the overlap, the 
efficiencies, this is a time when many are concerned about 
deficits and spending, that we look the American taxpayer in 
the eye and tell them we are giving them the best value that 
they can possibly get out of their hard-earned dollars.
    Mr. Golden, I appreciate you being here. I know it is clear 
to you that there is broad bipartisan concern about the 
direction, and the timing, as I had indicated in my opening 
statement, with the Treasury report that is being worked on. 
And I know the efforts of my friend and colleague from Missouri 
to get that study done and put into the FSGG appropriations. It 
is something that many of us believe should, and certainly 
must, in my opinion, have valuable information, not only for 
us, but for you, with what is transpiring here.
    My time is up. I appreciate this. And I look forward to 
future hearings.
    Chairman Sherman. The FASB has a bigger impact on 
Americans' lives than any other entity I can name, that they 
can't name and do not know about. It exercises governmental 
power and needs oversight.
    As to CECL, all of the supposed benefits could be obtained 
by simply providing supplemental disclosures in footnotes. That 
provides all the transparency. That gives the analysts all of 
the information they could possibly want. And if they want 
more, we could give them another footnote.
    The decision to instead affect the basic financial 
statements poses a grave danger to our whole concept of 
accounting, since it moves us down the road of saying, we must 
predict and pre-recognize all imaginable or future bad events. 
That isn't historic, that isn't reporting verifiable history. 
That is doing the analysts' jobs for them and predicting the 
future.
    And finally, research and development. It is obviously bad 
accounting. It cannot be defended. It wasn't used for a hundred 
years. And it hurts our competitiveness around the world and is 
responsible for us not getting a lot of the research results we 
need.
    Before we adjourn, I want to thank our witnesses for their 
testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 3:59 p.m., the hearing was adjourned.]

                            A P P E N D I X



                            January 15, 2020
                            
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