Sept. 23 (Bloomberg) -- Here’s one thing that leaders of the Group of 20 nations don’t need to work on when they meet in Pittsburgh this week -- accounting rules. There is no surer way to give investors short shrift, or lay the groundwork for future financial crises, than to politicize accounting.

Nor do investors need bank regulators sticking their noses into this area. If regulators want to ensure that banks are better able to withstand losses, they have the power to do so on their own.

Unfortunately, politicians and regulators from a number of countries are using the G-20 meeting and other discussions about how to overhaul financial regulation as chances to twist accounting to suit their own needs, not those of investors. The mistaken idea is to have accounting serve regulators and bank executives, as well as investors.

This is a continuation of the political pressure that has been brought to bear over the past year on the two main bodies that set accounting rules, the Financial Accounting Standards Board in the U.S. and the London-based International Accounting Standards Board, which sets rules used by companies in more than 100 countries. Both boards, by the way, are supposed to be independent organizations and were set up to be insulated from political meddling.

Last fall, the European Union arm-twisted the IASB into rules changes at the behest of banks. This spring the U.S. Congress browbeat the FASB into changes that watered down the impact of using market prices to value hard-hit securities.

Turn the Screw

Since then, politicians, banks and bank regulators have kept turning the screws. Countries within the EU have seen the G-20 summit as a way to put the IASB on a short leash. Banks in the U.S. are hoping the U.S. government will do the same.

The political heat has gotten so high that a remarkable back and forth has taken place between bodies connected to the IASB.

The IASC Foundation, an independent, non-profit organization that oversees the standard setter, wrote a letter Sept. 15 to President Barack Obama, who will chair the Pittsburgh G-20 meeting. The missive attempted to appease banks and regulators, saying the board is working on rule changes that reflect suggestions from the G-20 earlier this year. It also noted that the IASB would take more note of the considerations of regulators and other “stakeholders.”

Main Objective

This was followed yesterday by a statement from a group of securities regulators, including the U.S. Securities and Exchange Commission, that work with the IASB. The statement took a starkly different view, reiterating that the primary objective of financial reporting is to provide information “for present and potential investors,” with no mention of “stakeholders”.

It added that “accounting standards should not be allowed to become a surrogate for robust bank risk management or effective bank supervision.”

That constitutes a sharp rebuke to bank regulators who have argued that the basis for accounting should be changed to reflect wider societal and banking goals. Over the past two weeks, both Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Federal Reserve Governor Elizabeth Duke have echoed that view.

Bair issued a veiled warning when she said “I strongly caution” the FASB to carefully consider possible changes to accounting rules that would require banks to use market prices when valuing loans that they hold.

Duke, meanwhile, pushed the notion that accounting should “directly link reported financial condition and performance with the business model and economic purpose of the firm.”

Duke’s Confusion

Duke confuses the goals of capital -- a buffer managed by regulators to help banks withstand losses -- and accounting. In her view, the information investors receive should reflect management’s goals and the wider role a business plays in markets.

That approach would stand the centuries-old purpose of accounting on its head. As Jack Ciesielski, editor of the Analyst’s Accounting Observer, said in a blog post responding to Duke, “Accounting is supposed to present economic information in a neutral, objective fashion so that investors can make informed decisions about where to place capital.”

Duke’s statements also ignore that accounting rulemakers and bank regulators have different public policy missions. FASB Chairman Robert Herz outlined these in a June speech: accounting rulemakers are concerned with providing “relevant, transparent and unbiased financial information,” while bank regulators focus on “the safety and soundness of individual financial institutions, protection of customer deposits, and on the overall stability of the financial system.”

Sometimes those goals conflict. That is the case today, especially when it comes to questions of how banks should value things like loans and debt securities.

When that happens, “It is not appropriate to subordinate or subvert external reporting to investors to the needs of the regulators or vice versa,” as Herz said.

This is just what some politicians and bank regulators now are trying to do. Better to make a clear distinction between the numbers provided to investors and the figures regulators use to gauge the soundness of banks and the wider financial system.

Mixing them up will do more harm than good.

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

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

Last Updated: September 22, 2009 21:00 EDT