Levitt defends FASB.

"What is the Financial Accounting Standards Board's great sin?" asked Arthur Levitt, Jr., chairman of the Securities and Exchange Commission. Speaking to the Economic Club of Detroit in May, Levitt was responding to a throng of criticisms leveled by corporate executives at the accounting standard-setting process and, specifically, at the FASB. "It has asked companies to tell investors the whole truth about their financial performances including exposure from their own investments."

Levitt, who titled his speech, "CPAs and CEOs: A Relationship at Risk," reiterated his support of the FASB and the standard-setting process, and he denied public and private charges by CEOs that accounting standards were crippling the competitiveness of American business. "In an era of global securities markets, it has never been more important for the United States to have a strong and independent body standing guard over our accounting standards," said Levitt.

The chairman mentioned recent debates between corporate management and the FASB, including the 1996 recommendations by the Financial Executives Institute to reduce the size of the FASB and the 1993 debate in which CEOs argued vehemently against a FASB proposal to account for stock compensation as an expense. The most recent skirmish centers on how companies account for derivatives, according to Levitt.

"We are in a situation in which the notional amount of derivatives outstanding has reached some $70 trillion," he said. "Accounting for derivatives has simply failed to keep pace with their exponential growth." The chairman said he supported the FASB proposal that derivatives be reported at fair value. "The value of derivatives is certainly not zero, although that is how many derivatives are reported today."

Levitt said that at the center of the derivatives debate was the standard-setting process. "I consider it unthinkable to take standard setting out of the private sector; unthinkable to replace government oversight with government control; unthinkable to bring the independence, quality and fairness of accounting standards into question by politicizing the process that creates them," said Levitt.

World standards must meet the test

The chairman also spoke about the efforts of the International Accounting Standards Committee to establish a core set of accounting standards. He said the SEC supported the IASC's effort and encouraged the FASB's participation. However, Levitt requested that the IASC value the quality of the result over the speed of the process, expose and resolve differences of opinion and hold the interest of investors supreme.

"The SEC's acceptance of international standards is not a foregone conclusion," said Levitt, adding that although international harmonization was a desirable goal for the United States, "we can accept only a framework that would enhance, rather than diminish, the strength and stability of U.S. capital markets."