How about some constructive input to the FASB?

How about some constructive input to the FASB? I would like to make two points. First, although financial statement preparers have provided many useful comments on proposed accounting standards, in recent years they have devoted too much of their effort to trying to control the standard-setting process. They have done this with delaying tactics and by trying to get control of the switches and levers used to set accounting standards rather than providing constructive input on FASB proposals. Second, the input they do provide is often ineffective because it is self-serving and "shrill."

Several years ago, Art Wyatt, then an FASB member, commented that, "What we face is an entity, the FASB, that was created to be an agent of change and a broad constituency that strongly desires retention of the status quo. Thus, rarely do our initial efforts to effect change receive favorable reactions. An initial period of outrage is often followed by a strategy of delaying tactics and sometimes even threats to our survival."

The "broad constituency" Art was referring to is obviously financial statement preparers. What are some of the tactics they have used to delay the standard-setting process and gain control of its switches and levers?

In 1982, the Accounting Principles Task Force of the Business Roundtable told the FASB that it was putting things on its agenda that really don't need attention--pensions, for example. In 1983, when the task force met with the managing partners of the largest CPA firms, General Motors proposed that the FASB be replaced by a "court of appeals." Later than year, the task force proposed that the FASB check with the Roundtable before adding an item to its agenda. And, of course, Ron Mead has already told you about the Business Roundtable's proposal for an oversight committee that would, among other things, control the FASB's agenda.

What about FEI? Has it tried to gain control of the switches and levers? Yes, it has. As Ron mentioned, in 1985 FEI formed a task force to explore the role of the business community in the standard-setting process. Predictably, that group recommended more management representation. It proposed that there be two more business representatives on the Financial Accounting Foundation board of trustees, that two of the next three FASB appointments be experienced business executives, and that there be more business representation on the FASB staff.

At this point you might well ask what is wrong with this recommendation. Why shouldn't management be represented in the standard-setting process?

The issue here is the fine distinction between providing input to a decision and actually making the decision. Obviously, management should provide input. But the term "representation" implies more than this; it implies having a voice in the decision. That seems to be what management is pushing for.

The FASB is a regulatory organization. It regulates the preparation of financial statements by management. Members of the FASB are and must be responsible to the public, not to management or any other special interest group. My concern is that if the public perceives that Board members fail to represent the public interest and represent instead the interest of the group they are supposed to regulate--in other words, if the regulatees capture the regulators--Congress will get involved, and that will lead to government control of accounting standards.

Those concerns, I believe, were at the heart of Congressman John Dingell's remarks in a letter he wrote to SEC Chairman Richard Breeden earlier this year when the FAF was in the middle of considering the proposal to change the FASB voting majority from 4 to 3 to 5 to 2. He argued that the "FASB is the target of an external political pressure campaign by certain elements of the business community. This campaign seems intended to influence the substance of FASB pronouncements, as well as to actually change the FASB's voting requirements and slacken the pace of its work."

That voting requriement has now been changed, but in my opinion, that change was a mistake. It was yet another move by financial statement preparers to control the standard-setting process by slowing it down.

Let me turn now to my second criticism--that financial statement preparers have been ineffective in providing substantive input because many of their comments have been self-serving and shrill. One former FASB member told me recently that 95 percent of the comments the Board receives from financial statement preparers fall into one of three categories: don't make any changes, don't move so fast, and don't make income volatile--don't let it fluctuate.

One technique that has been used by preparers to slow down the standard-setting process is to make shrill predictions of dire economic consequences that will follow if the FASB changes its rules. One of my favorite examples of this ploy is old, which demonstrates that it has been used for years.

When the FASB was considering capitalization of leases in 1974, Robert O. Whitman, representing FEI at the public hearings, stopped just short of predicting nuclear holocaust when he claimed that the proposed changes would "conflict with the nation's goals of combatting inflation, fighting unemployment, protecting the environment, and seeking energy self-sufficiency." Like many such comments, Whitman's charges do not increase my respect for the input provided by financial statement preparers. Surely our country's problems in the areas mentioned by Whitman have nothing to do with FASB Statement 13, the rule on lease capitalization that came out of those hearings.

A 1989 FERF research study ("Due Process and Participation at the FASB," by Mezias and Chung) reached conclusions similar to mine about the ineffectiveness of financial statement preparer input to the FASB. The authors commented that financial executives "tend to . . . oppose new standards on the basis that they represent too rapid a change or excessive standard setting." They suggested that preparers "could increase the effectiveness of their statements to the FASB by emphasizing the theoretical support for their positions rather than what might be perceived as their self-interest." My reaction to that is "amen!"