In today’s Washington Post, former Securities and Exchange Commissioner Arthur Levitt raises some interesting points about the independence of accounting standard setters. However, the larger picture needs to be framed to understand the issues at hand.

The cause célèbre in the world of accounting and finance is Mark to Market accounting. While Mark to Market accounting standards did not cause the worst financial crisis in 75 years, their procyclicality has exacerbated the impacts. Mark to Market is just one symptom that our financial reporting policy apparatus is broken.

Mark to Market accounting represents a significant shift in accounting philosophy. Many felt that the S&L crisis and the lost decade in Japan were caused by unrealistic asset values based on historic cost accounting. This in turn allowed entities to borrow more than their ability to pay. To correct these problems, it was decided that an accounting system was needed to value assets in each reporting period as if it was being sold. Thus the market would dictate asset values.

In developing this system the Financial Accounting Standards Board (FASB) did not test the new standards, implement pilot programs, review the new standards to determine their effectiveness post implementation, or work with financial regulators to determine how these new accounting standards would work in conjunction with capital requirements. Furthermore, the new standards were very hazy on how to value assets when an active market disappears.

Therefore, a procyclical accounting system was created that played off of procyclical capital requirements. Furthermore, there was not clear answer on how to value assets in the absence of a market.  Not a problem in an up-market, but a tremendous problem in a down-market and an absolute disaster when markets shut down. The result? Hundreds of billions of dollars in capital destroyed.

FASB ignored calls for reform and only brought about small changes in October as a result of political pressure during the debate of the Emergency Economic Stabilization Act. During the past several months, FASB ignored the facts that the system was not working and compounding the impacts of an unrelenting financial crisis. When the SEC called for Mark to Market accounting changes in December, FASB responded that they would get to the issue at the end of this year.

Arthur Levitt is right, FASB only issued proposed changes to Mark to Market accounting as a result of Congressional action. But that is also the point. FASB, in developing a new accounting regime did not properly vet the standards, try to develop an understanding of how it would work, nor go back to look at the standard when the financial system came to a grinding halt. Rather, they were content to rest on the laurels of intellectual purity. For the business that fails, the worker who loses their job, or the investor whose portfolio becomes worthless intellectual purity doesn’t mean much.

Senator Dodd hit it right on the head during the CCMC Capital Markets Summit earlier this month—you don’t want a 51-49 Senate vote on an accounting standard. We need an independent accounting standard setting and governance structure. But with independence comes responsibility and that has been sorely lacking. For our capital markets to recover and grow, we need accounting standard setting and governance reform. We can’t afford to wait.