FASB looks ahead ... to what?

Will the chairman of the Financial Accounting Standards Board arrive at next years American Institute of CPAs National Conference on Current SEC Developments by plane from FASB's headquarters in Connecticut or by taxi from Capitol Hill?

FASB Chairman Dennis R. Beresford asked his audience at the conference to consider that question as he recalled over a year of intense pressure from business, politicians and CPAs that finally persuaded the FASB to change its position on accounting for the value of employee stock options (see "FASB Revises Position on Stock Options," JofA, Feb.95, page 18). He warned the CPAs about the threat to the board's independence raised by that lobbying campaign and voiced fears that the board might find itself besieged whenever it issued pronouncements on controversial subjects.

Walter P. Schuetze, chief accountant of the Securities and Exchange Commission, agreed with the need for private-sector standard setting. "I believe the FASB acted wisely to end the controversy by requiring disclosure instead of formal recognition in expense of the value of stock options. The FASB has, in my opinion, been good for investors. I do not want the FASB legislated out of existence."

The FASB is working on another project, which may be as problematic for the board as the stock options issue--accounting for derivatives. "The critical thing now is to nail down the accounting for derivatives," said Schuetze. "As we all know, the accounting literature that exists is inconsistent and does not deal with many of the accounting issues that issuers and their auditors encounter. I think it is critical that the board move forward on the accounting issues as speedily as possible."

The case for independence

Maintaining the FASB's freedom of action will be a major concern for the board in 1995. Beresford recounted how certain members of Congress in October introduced the Accounting Standards Reform Act of 1994, which would amend federal securities law to mandate that each new accounting standard or principle, as well as every modification to an existing one, be approved by the SEC.

"At a minimum, that law would require SEC approval of FASB statements, interpretations and technical bulletins, AICPA accounting standards executive committee (AcSEC) pronouncements and emerging issues task force (EITF) consensuses as well as SEC staff accounting bulletins," he said. And "because the formal hierarchy of authoritative sources of generally accepted accounting principles includes auditing standards, textbooks and even individual company practices, the legislation could extend to them as well."

Beresford asked the attendees to consider how important private-sector standard setting is to the accounting profession and the ramifications of explicit SEC approval of accounting answers or some other form of legislated accounting.

"If interested parties found they could routinely go around the FASB by lobbying in Washington, they certainly would lobby on other issues," he said. "The SEC would become a sort of appellate accounting court. And if those parties didn't like the answer they got from the SEC, Congress could easily step in to set accounting standards. Moving the accounting standards-setting process into the political arena would likely lead to less consistency and less conceptual underpinning in accounting standards. That, to me, would be the most significant reversal of the progress the FASB has made in the past two decades."

Beresford also cautioned that eventually there would be a "strong temptation to eliminate the middleman and just have the SEC or another federal agency replace the FASB entirely. This could lead to a government takeover of auditing standards and procedures as well, especially in light of recent concerns about auditor independence and some widely publicized audit failures."

Listening to the critics

However, Beresford said the FASB needs to consider some of its critics, who complain the board is not dealing with the right issues or spends too much time on relatively unimportant issues. The following questions are relevant:

* What are the appropriate roles of the FASB, the AICPA, the EITF and the SEC in issuing accounting guidance?

* Is the board sufficiently proactive or too reactive in setting its agenda?

* Is the board involved with too many small issues because practicing CPAs are unwilling to stand firm in arguing accounting questions with their clients?

An independent review of the EITF, currently under way, should help shed light on whether the FASB is dealing with the right issues, he said.

Beresford cited conflicting viewpoints: Some say the board takes too long to make decisions, others that it doesn't take long enough; some say the board's standards are too complex and detailed, others that they don't provide enough practical guidance. And some say the board is not accountable, "but our whole due process is a system of accountability. And, the SEC certainly is another check and balance."

To those who say the board does not have a vision for future financial reporting, Beresford said that it was giving careful consideration to the report of the Jenkins committee (the AICPA special committee on financial reporting) and the Association for Investment Management and Research position paper on financial reporting in the 1990s and beyond.

Looking ahead

The FASB's mission is to improve financial reporting by issuing standards that enhance the relevance and reliability of information used in investment and credit decisions, Beresford said. It can respond to its critics; its structure and procedures can be studied and changed. It can slow down or speed up, more closely tailor its agenda in response to constituent concerns and work harder to build a consensus. But the board is not alone, he stressed.

"Those with stakes in the financial reporting process--investors, creditors, auditors, corporate managers and boards of directors--must give more than lip service to that mission. Financial reporting professionals, including all of you in this audience, must decide what kind of financial reporting system you want. Either buy into the board's mission or agree on an alternative mission for us or our successor. If you want neutrality and objectivity you have to stand up for them and for the standards they produce. We cannot give you an accounting system better than you want or deserve. And without your support, the FASB cannot succeed or survive."