Is the Federal Accounting Standards Advisory Board Independent? Can the Federal Accounting Standards Advisory Board Be More Independent?

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Is the Federal Accounting Standards Advisory Board (FASAB) Independent?

FASAB was created (as its name implies) as a federal advisory board. At its inception in 1990, federal employees dominated the board and three principal sponsors - the director of the U.S. Office of Management and Budget (OMB), the Comptroller General of the United States representing the U.S. Government Accountability Office (GAO) and the Secretary of the Treasury - initially retained the power to veto financial reporting policies recommended by the board. In part, this structure was designed to resolve constitutional issues concerning the prerogatives of the executive and legislative branches of the federal government. While public members could participate and potentially influence the outcomes via collegial, reasoned arguments, the federal government retained the final say over federal financial reporting requirements. One result of this structure was that (in at least one case), the board did not include certain solutions to an issue in a standard because it knew those solutions would lead to a veto of the standard by one of the principals. For example, OMB was openly opposed to explicitly disclosing and labeling a closed group dollar amount for Social Insurance. As a result, that option was not seriously considered as part of what became SFFAS 17. This sort of self-censorship was a natural result of the structure of the board and its processes. FASAB operated under this structure for over nine years.

In addition to the ability of the principal sponsoring federal agencies to veto policies at FASAB, the U.S. Department of Defense (DoD) was also able to exercise near-veto power with respect to a variety of issues relating to financial reporting for specialized defense situations. For example, for a number of years DoD repeatedly opposed depreciation of what the FASAB described as National Defense Property Plant and Equipment. As a result, FASAB did not produce a standard requiring depreciation for such items. Only when a new head of DoD with a stronger business orientation arrived did DoD change its view; and only then did FASAB produce a standard that required depreciation of many DoD weapons-related assets. This deference of the board to DoD seemed to be due to the fact that the DoD appeared to have many powerful allies in Congress who might be willing to provide financial reporting exemptions for DoD or bring into question the continuing role of FASAB in issuing financial reporting standards. Thus, federal members' interests clearly dominated FASAB proceedings through the late 1990s; by design, FASAB was not independent of the federal government financial report preparers.

In 1999, FASAB sought and received designation from the American Institute of Certified Public Accountants (AICPA) as the generally accepted accounting principles (GAAP) standards-setter for the federal government (Rule 203 status). One of the major concerns of the AICPA in reaching this endorsement was the real and perceived independence of FASAB. To try to accommodate those concerns, FASAB was eventually restructured to have a majority of public members, at six, and four federal members. Although veto power was retained by OMB and GAO, the AICPA indicated that if the veto power was ever used it would most likely rescind the FASAB's status as GAAP standards-setter. The AICPA also said that it would periodically review FASAB to see if GAAP status should be retained. The last review was in 2004; the next review is scheduled to begin in late 2009 and be completed by May 2010.

Although no explicit veto by a FASAB principal has occurred in the period since FASAB received Rule 203 status, other indications of impaired independence are evident. The federal government continues to dominate FASAB by threats of veto, selection of board members and budget control/ oversight management. This domination constitutes a continuing threat to the independence of FASAB. …