Academic journal article Accounting Horizons

Congress Looks at Accounting for Business Combinations

Academic journal article Accounting Horizons

Congress Looks at Accounting for Business Combinations

Article excerpt

"Accounting standards are too important to be left to accountants." This statement, made a few years ago by a member of Congress, reflects the increasing interest of politicians in the work of the Financial Accounting Standards Board (FASB). Congressional hearings during the first half of 2000 provide interesting insights into the influence of the political process on private sector accounting standard setting. This Commentary summarizes statements made at these hearings by members of Congress and other participants. Some of these supported the FASB, but most did not. I also describe the FASB's responses to the issues raised and speculate on the type of Congressional action that could result from these events.


Congressional involvement in the FASB's activities takes many forms. For example, during my ten years at the Board, it was common for individual members of Congress to write letters asking us to explain our actions on current projects. These requests were often prompted by constituents who believed that the FASB's position would cause them economic harm. The letter might say something like:

Attached is a letter from Mr. Jones, Chairman of Last National Bank. He states that the FASB's proposal on accounting for marketable securities will cause his bank to reduce mortgage lending and possibly even lay off a number of employees. Please inform me as to the reasons for this project and your response to Mr. Jones' concerns.

The FASB's reply generally described the status of the project and informed the writer that the alleged economic consequences were beyond the FASB's responsibility and probably unprovable anyway. In nearly all cases this satisfied the member of Congress and there was no further activity.

Sometimes, rather than sending a letter, a member of Congress requested a face-to-face meeting. Many of these were relatively cordial interchanges designed to help the Senator or Representative better understand one of the high-profile projects on the Board's agenda. Other more adversarial meetings included hints of Congressional action if the Board did not respond favorably to concerns expressed by constituents. Even with such veiled threats, however, it is extremely rare for Congress to take any further action.

Although communications from individual members of Congress are relatively routine, the next steps in the political involvement continuum-Congressional hearings--are relatively infrequent. During my tenure at the Board there were about half a dozen such hearings; only the hearings on accounting for stock options represented a serious threat to the Board's survival. The Appendix lists all of the hearings at which the FASB testified.

Congressional hearings are taken very seriously by the FASB and considerable time and effort goes into preparing for them. In addition to a formal statement addressing the matter at hand, the FASB usually submits a large number of supporting documents. For example, the March 2000 submission in connection with Senator Gramm's Senate Banking Committee hearing was more than two inches thick and contained 14 attachments. The FASB often is on the defensive because these hearings are generally convened when certain companies, industry associations, or others allege that pending FASB positions will cause serious economic harm if adopted as final accounting standards. Although parties sympathetic to the FASB position sometimes are invited to speak, the deck is often stacked in favor of the opponents. The Congressional hearings on accounting for business combinations illustrate the typical hearing process.


Senator Phil Gramm (R-TX), Chairman of the Senate Banking, Housing, and Urban Affairs Committee, held a hearing on "The Pooling Method of Accounting for Corporate Mergers" on March 2, 2000. This followed the September 1999 issuance of the FASB Exposure Draft (ED), Business Combinations and Intangible Assets. …

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