Q & A: Poised for Change

By Hertz, Robert | Independent Banker, April 2005 | Go to article overview

Q & A: Poised for Change


Hertz, Robert, Independent Banker


FASB chief's outlook on accounting standards-past, present and future

In this era of Enron, WorldCom and the lingering memory of a host of other financial reporting scandals, scrutiny of accounting rules and regulations has reached an all-time high.

Independent Banker recently talked with Robert Herz, chairman of the Financial Accounting Standards Board (FASB), about the current post-Sarbanes-Oxley environment and his standards-setting organization's plans to streamline and simplify accounting standards.

Herz shared his thoughts on what's wrong with the system: "I was fairly outspoken that we had built up these massive accounting standards rules/regulations over time that had come from many different parties-not just FASB, but AICPA [American Institute of Certified Public Accountants], the EITF [Emerging Issues Task Force] and in your industry bank regulators."

He also talked about his hopes for improving that system. "I came here knowing there were too many pronouncements coming from too many bodies," he says noting FASB's work with other standard-setting bodies to stem the proliferation of rules and interpretations. He also notes that he frequently talks with bank regulators to get their opinions.

That was step one, says Herz. Step two, he calls "probably the greatest public works project in accounting history" and involves a multi-agency effort to reorganize and codify standards by topic.

Below are excerpts from that conversation.

Independent Banker: Before becoming FASB's chairman, your experience in the accounting world, including service on the EITF and Financial Instruments Task Force, would have made you well aware that FASB has many critics. Why did you want to take on the challenging, and probably often frustrating, role as chairman?

Chairman Herz: I spent almost 30 years in various capacities ... and some people came and asked me if I would be interested [in heading up FASB]. ...I thought it was a way to see if I could help the system and make a difference. I did, and still do, have a belief that our reporting system is a little over-complicated.

IB: Many have called for the demise of FASB, including some community banks. Why is it important that FASB continue to exist with its current structure?

Chairman Herz: You have to go back to the origins of the establishment of the FASB over 30 years ago. Prior to that it was basically a group within the AICPA ... and the view was ... if clients, particularly large clients, put pressure on the auditors, they would give way.

There was a study group called the Wheat Commission that said the better way to go is to have an independent, full-time board comprised of people from various backgrounds-not just accountants, but people from industry, people from the user community, academics and also people who had audit experience-develop the standards in an open, thorough and objective way that weighs the view of all the parties and tries to come to a wellreasoned [decision].

That continues to be very important. If just one group were to be setting the standards they would likely bias the standards in their own interest.

IB: ICBA believes the standard-setting body for accounting rules should remain in the private sector. What would be your concerns if Congress, or any other governmental body, gets involved in trying to direct standards?

Chairman Herz: We all like to make ourselves look good. But the reason for financial reporting is for the benefit of the people who want to make decisions and be informed about the state of the company and its performance. When you get it in the political arena, those forces will come to bear and that goal of providing good, sound, solid reporting that is honest may get skewed and biased towards other goals-whether they be the goals of that particular industry to present itself in a favorable light or a social goal that some people in Congress have or something else. …

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