Magazine article The CPA Journal

Congress Challenges FASB's Standard-Setting Structure

Magazine article The CPA Journal

Congress Challenges FASB's Standard-Setting Structure

Article excerpt

Precipitated, in part. as responses to the debate about the Financial Accounting Standards Board's pending derivatives proposal, legislation has been introduced in both the House and the Senate that challenges how FASB develops accounting principles.

The Financial Accounting Fairness Act (HR 3165), introduced in February by House Banking Capital Markets and Securities Subcommittee Chair Richard Baker (R-LA), proposes that the Securities and Exchange Commission approve all FASB principles prior to their final enactment. Moreover, the Baker bill would give public companies the right to challenge FASB rules in Federal court.

Last November, citing "great concern in the banking industry," Senator Lauch Faircloth (R-NC), chairman of the Senate Banking Financial Institutions Subcommittee, introduced the Accurate Accounting Standards Certification At (S 1560). Aimed specifically at FASB's derivatives proposal, the bill would require bank regulators to "certify to Congress that the new standards will accurately reflect bank earnings and will not impede the use of risk management tools."

Both bills challenge the very nature of how accounting principles are developed in the private sector. While Baker stated his bill provides "a legislative remedy to a flaw in the private sector process for developing accounting standards," in opposition, FASB Chairman Edmund Jenkins stressed how the private sector keeps standard setting objective, and insures that FASB is not influenced by political pressures. Jenkins further stated that the independence instilled by the current standard-setting process is one of primary reasons that the U.S. has the world's strongest capital markets and financial reporting system.

The AICPA, in a letter opposing the Faircloth bill, cites instances of how previous legislative interference in the private sector standard-setting process produced harmful results to the public. In the savings and loan debacle, for example, the Federal Home Loan Bank Board issued regulatory accounting principles (RAP) in an attempt to prop up failing S&Ls. This RAP accounting significantly increased the cost of the largest taxpayer bailout in U.S. history.

In addition, the AICPA points out that because of threatened legislation to overturn its proposed stock options standard, FASB was forced to back off; a standard. …

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