Considering FASB's Critics

Article excerpt

"A staff is quickly found to beat a dog."

-William Shakespeare,

King Henry VI, part 2

Over the years, many people have criticized FASB for being subject to political and industry pressures, for squandering resources by attending to unnecessary projects, and for taking too long to finish many of them. But recently we have seen a flurry of activity directed toward reprioritizing its agenda, concentrating on pressing needs, accelerating the standards-setting process, and improving its overall efficiency.

Streamlining the Process

This past April, in an effort to make FASB "more flexible in responding to change and increase the efficiency of its standards-setting process," the Financial Accounting Foundation (FAF) trustees

* changed the number of votes needed to pass resolutions and issue a final statement from a supermajority (five to two) back to a simple majority (four to three);

* recommended shortening the comment period for exposure drafts;

* decided to keep the current size of the board at seven rather than reduce it to five;

* named Robert Herz chairman to succeed Edmund Jenkins, whose term ends June 30; and

* split the position of director of research and technical activities into three new directorships, with former director of research and technical activities Tim Lucas quitting FASB.

Most of us outside of Norwalk (where FASB is based) can only speculate about the shortcomings of the board's previous organizational structure, but I believe this reorganization and other changes will rejuvenate FASB, sharpen its focus, and boost its productivity. In general, though, it is more important for the board to work smarter, and with the right set of priorities, than for it to shorten comment periods or move faster.

Accountants, auditors, and FASB are in the doghouse of public opinion and in Congress's crosshairs. Every day we read about lax (to put it mildly) audits, problems with the application of accounting standards, and a continuing river of restated financial results.

High Quality and Transparency

We are continually told that what is needed are "high-quality accounting standards that provide comparable, transparent, relevant, and reliable financial information." These words represent a high-minded concept that may not be translatable into accounting standards.The phrase high-quality is subjective, and the idea of transparency has never been defined in FASB's concepts statements. These terms are broad abstractions, used interchangeably for relevant, reliable, and representationally faithful-terms that have been part of our accounting conceptual framework for more than two decades and that indeed continue to be objectives worthy of our discussion.

Priorities

Critics say FASB has failed to write accounting standards on a number of key issues, such as off-balance sheet entities. In my view, however, this charge is only partly true. For example, a review of the available record and history of accounting for special purpose entities (SPE), reminds one that the SEC, not FASB, wrote the accounting rules in this area. Emerging Issues Task Force (EITF) Topic D-14, Transactions Involving Special-Purpose Entities (1990), outlined the SEC's requirements on the accounting for these entities, and said, "The SEC staff is considering the issuance of a Staff Accounting Bulletin [SAB] setting forth guidelines on the accounting for transactions involving SPEs and until such time would consider transactions on a case-by-case basis. The SEC Observer emphasized that the SEC staff views the issue of SPEs to be primarily a consolidation issue."

Clearly, the SEC staff essentially wrote the SPE rules in Topic D-14, and over the past dozen years the SEC reviewed and "policed" the subsequent developments in this area. But because the SEC was never proactive enough to issue an SAB on SPEs, it in fact fostered the use of off-- balance sheet entities. …