A committee of the nation’s top financial regulators could adjust accounting rules as economic conditions warrant under a bill from Rep. Ed Perlmutter, D-Colo., and Rep. Frank Lucas, R-Okla.

The proposed legislation tries to tackle one of the thorniest debates in the credit crisis: Are existing accounting rules making the recession worse than it would otherwise be?

Fair-value accounting requires that companies value the securities and other marketable assets they hold at market prices.

But, critics argue, when buyers disappear, as they have done with many types of debt instruments, market prices get distorted.

That causes banks to write down the value of their holdings, reducing the amount of capital they have available to make loans, accelerating the downturn.

"We shouldn’t have to mark down assets that we have no intention of selling," said Bob Davis, market president of First Community Bank of Lafayette, who along with other bankers strongly supports the bill.

Perlmutter said the goal of the legislation is to give regulators more flexibility in dealing with accounting standards in different economic cycles.

The bill would create a Federal Accounting Oversight Board made up of the chief executives of the Federal Reserve, Treasury, FDIC, Securities and Exchange Commission and Public Company Accounting Oversight Board.

"It gives regulators their best discretion as to how these accounting standards work on the ground, to make sure they don’t create unintended consequences," Perl mutter said.

And as the bill is now written, companies would still have to disclose what their assets are worth under fair-value rules, he said.

Supporters of the existing system argue that tampering with the accounting rules just because times are difficult erodes rather than builds investor confidence.

University of Denver accounting and law professor Kevin O’Brien said he worries that the committee could politicize how accounting rules are applied and complicate efforts to bring U.S. accounting standards in line with international ones by 2014.

The U.S. House Financial Services Committee holds a hearing on so-called "mark- to-market" accounting Thursday.

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