Nov. 11 (Bloomberg) -- Famed hedge-fund manager James Chanos in recent speeches has outlined lessons from the financial crisis. A top one: “Accounting matters a lot.”

Chanos, who has flagged numerous accounting frauds over the years including the one that ultimately brought down Enron Corp., is concerned investors will quickly forget this and other warnings from the implosion of the financial system.

He doesn’t have to worry about banks missing this point. As Congressional debate over financial reform intensifies, banks are committed to ensuring that accounting rules serve their own needs.

Their latest push concerns the possible creation by Congress of a council of regulators charged with overseeing firms whose failure might blow up the financial system. Banks want any such council, consisting primarily of banking regulators, to help determine how accounting rules are set, or have the power to shelve them during a crisis.

The result would be more politicized accounting rules and a process that gives Congress a more direct way to influence what companies must tell investors. It would also mean investor interests take a back seat to those of the banking industry.

As Chanos, head of Kynikos Associates Ltd. and one of the most successful short sellers on Wall Street, said in an e-mail, this is “a monstrous idea.”

And it isn’t just Chanos, other investors or accounting groups who are opposed. Even the U.S. Chamber of Commerce, not always known as the most investor-friendly organization, has come out against such moves.

Regulatory Overhaul

How far this proposal gets will depend in part on what happens next week inside the House Financial Services Committee, which is working on its version of regulatory overhaul. Representative Ed Perlmutter, a Democrat from Colorado, has drafted and may propose an amendment that would allow a systemic-risk council to scrap accounting rules the members don’t like, echoing legislation he introduced earlier this year.

Even if banks don’t succeed next week, they will have plenty of other opportunities to get their way. Senate Banking Committee Chairman Christopher Dodd yesterday began circulating what is likely to become his chamber’s version of reform legislation.

Any overhaul measures passed by the House and Senate will have to be reconciled by lawmakers. This will involve a lot of horse-trading, providing ample openings for bank lobbyists to keep trying to change the way accounting rules are set. And the American Bankers Association has said that such a change is a priority.

Dangerous Path

“A systemic-risk oversight council could not possibly do its job if it does not have oversight authority over accounting rulemaking,” ABA President Edward Yingling told Congress last month.

That is a radical, and dangerous, departure from our current, admittedly imperfect, system.

Corporate accounting standards are currently set by the Financial Accounting Standards Board. Those standards are overseen, and enforced by the Securities and Exchange Commission.

True, Congress can and does meddle in the process. Sometimes it has managed to bend the rules to its liking -- this spring the FASB watered down mark-to-market accounting rules after Congress demanded it do so. Yet a few years ago FASB successfully, and correctly, bucked Congressional opposition to recording employee stock options as an expense that reduces profit.

Ruling the Roost

Giving any council of regulators a greater, and legally enshrined, say over accounting will change the game in a bad way for investors. “Accounting rules will be viewed through the narrow lens of a few large companies from specific industries,” said a letter to Congressional committee leaders from the Council of Institutional Investors, mutual-fund trade group the Investment Company Institute, Center for Audit Quality and Chamber of Commerce.

In other words, big banks and their regulators will rule the roost. The catch is that bank regulators concerned with the safety of the financial system often have different, and conflicting, aims than investors.

Sometimes, bank regulators would prefer the market doesn’t know just how bad things are at a bank for fear of causing a run. Yet investors need that information if they are to make informed decisions and avoid unknowingly subsidizing weak banks.

High Stakes

Banks may also see this as a way to head off mark-to- market accounting rules that require them to value assets such as debt securities at market prices. Banks say the use of depressed, and volatile, market prices fuelled the financial crisis

Yet many investors believe these rules give a more grounded view of the current worth of a bank’s assets, and potential losses, than estimates that management comes up with. In his presentations on crisis lessons -- given last month at a conference held at the University of Virginia and another at a Yale School of Management Leadership Forum -- Chanos said that “mark-to-market accounting was not the cause of the credit crisis.”

Indeed, mark-to-market rules are often one of the few things that stymie banks and regulators who prefer to delay losses while praying that they go away.

The twist here is if banks succeed in muddying accounting rules, investors may end up charging them more for funds.

As Chanos said, “Why anyone thinks that’s good public policy is beyond me.”

And beyond most folks who think that markets exist to serve investors.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

Last Updated: November 10, 2009 21:00 EST