Academic journal article Journal of Accountancy

SEC Stresses Importance of Municipal Bond Integrity

Academic journal article Journal of Accountancy

SEC Stresses Importance of Municipal Bond Integrity

Article excerpt

Arthur Levitt, chairman of the Securities and Exchange Commission, encouraged members of the Government Finance Officers Association, whom he called the custodians of public funds, to adopt internal procedures to safeguard against unanticipated risk and to control overall exposure.

Levitt told a Baltimore GFOA conference that a written and publicly available investment policy and independent oversight of performance were two important steps to help assure safe management of public funds. "Transparency would also help," Levitt said. "Ready access to trade and quote information would facilitate marking-to-market calculations and increase the accuracy of independent performance reviews." Levitt also urged city councils to review their lists of authorized investments regularly and monitor results closely. "Surprising investment gains should set off alarms as loudly as do surprising losses," he said.

Public trust

Levitt said the bankruptcy filing of Orange County, California, last December could break public trust of municipal bonds. "Some might believe a breach of promise to bondholders is inevitable." The chairman said that while corporate debt and equity markets have had to cope with broken contracts, municipal bonds have been obligated to "full faith and credit" of the issuer, even during the Depression, when all defaulted debt was repaid with interest. Levitt said a default would raise interest rates and increase the tax burden of the issuer's taxpayers. It also would threaten the confidence of individual investors who now hold 70% of outstanding municipal securities, a market worth close to $1.2 trillion.

Levitt said public trust in municipal bonds also was threatened by "pay-to-play" practices in the offering process, in which government officials believe they are entitled to special treatment by underwriters. Several jurisdictions and organizations have adopted resolutions to curb this problem, noted the chairman, but it still haunts the integrity of the municipal bond market. "It has been said trust is won with difficulty and is easily lost," said Levitt. "Municipal bonds enjoy a solid reputation today because of the valiant efforts of many in the past. My hope is that we will keep that legacy untarnished."

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RELATED ARTICLE: Official Releases

FASB Statement No. 122, page 98...SOP 95-2, page 99...auditing

interpretation, page 102...ethics interpretations, page 102

Space considerations prevent publishing here the appendices to FASB Statement No. 122. Since the appendices often are important to understanding FASB statements, readers are advised to obtain complete copies. For additional copies of FASB statements and/or information on applicable prices and discount rates, contact the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone, main office (203) 847-0700.

Statement of Financial Accounting Standards No. 122--Accounting for

Mortgage Servicing Rights

SUMMARY

This Statement amends FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. …

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