FASB: SocGen’s Kerviel accounting was right?

by Kurt Schulzke on July 9, 2008

Société Générale has been treated to all kinds of abuse for recognizing in 2007 Jerome-Kerviel losses “incurred” in 2008 just after the 2007 year-end cutoff. Floyd Norris has been especially critical of the French bank’s use of the “true and fair view” exception which he calls an IFRS “loophole.”

Well, as they say, what goes around comes around. In the Alice-in-Wonderland world of financial reporting standards setting the current U.S. financial accounting standards-setter (the FASB) is on the verge of effectively ratifying SocGen’s 2007 treatment of those Kerviel losses. This ratification comes in the form of an Exposure Draft — for lay readers, an “ED” is a draft of a new accounting standard — on the Disclosure of Certain Losses and Contingencies. More on that below.

What SocGen did, in fact, was book the losses in 2007 while disclosing their details so that anyone who wanted could put the 2008 losses right back in 2008 if they so desired. In other words, SocGen told the market everything (to the extent of SocGen’s then current knowledge) necessary about the Kerviel losses for reasonably informed participants to make decisions about the company’s stock. For some like Floyd Norris, this just wasn’t enough. Along these same lines . . .

In May 2008, during a Federation of Schools of Accountancy conference in Chicago, I spoke with the U.K. FSA‘s Auditing and Accounting Sector leader, Richard Thorpe. Thorpe disagreed with SocGen’s booking of Kerviel’s 2008 losses in 2007 on technical grounds. However, he also emphatically agreed that their approach hurt no one and nothing in the market — except possibly the “true and fair view” brand — because SocGen’s disclosures about the Kerviel affair were so transparent.

Thorpe also emphasized that despite his view that booking the Kerviel losses in 2007 was substantively wrong, SocGen followed the procedural rules in getting its auditors and the French AMF to approve the treatment. He said that even the FSA — whatever its views on the timing of the losses — would have no cause to enforce against SocGen on this issue.

Back to that FASB exposure draft. Paragraph 10 of the ED states that a company like SocGen who discovers a material loss or “more than remote” contingent liability after the end of the accounting period but before period-end financials have been issued can book the loss in proforma financial statements affixed to “the face of the historical financial statements, as if it [the loss] had occurred at the date of the financial statements.” In practical terms, this  is what SocGen did. I look forward to Mr. Norris’s commentary on this FASB proposal.

I hasten to add that I do not support the Exposure Draft because I believe it unnecessarily adds to the paperwork burden, seriously overemphasizes downside risks, and may jeopardize companies legally and strategically because of the disclosures that it requires. Perhaps I’ll offer more on this at a later date.