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What is the role of the FAF?

What is the role of the FAF?

Trustees of the Financial Accounting Foundation oversee the standard-setting process, fund the FASB and GASB, and appoint members of the FASB. But they are now reexamining their role. They seek the views of a variety of constituents, including those of industry. The role the trustees of the Financial Accounting Foundation (FAF) play in the standard-setting process is sometimes misunderstood. Just as there are challenges to the Financial Accounting Standards Board (FASB), there are also challenges to the FAF as overseers of the process.

Let me summarize briefly what the trustees do: * In general, our responsibility is to be certain that the process of setting accounting standards is thorough, effective, and fair to all constituents. * We appoint the members of the FASB, the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC). * We arrange for the funding of the Foundation, the FASB, the FASAC, the GASB, and the GASAC. * We prepare and administer the budget of the Foundation, and approve the annual budgets of the FASB, the FASAC, the GASB, and the GASAC. * We review periodically the bylaws of the Foundation and the basic structure for establishing and improving standards of financial accounting and reporting. The responsibilities the trustees have relative to the process involve complex issues, and our role is not always easily defined or understood.

The bylaws of the Foundation specifically prohibit the trustees from having any role in the actual setting of technical standards. This includes a prohibition against using their budgetary powers to influence the agenda or other activities of the standard-setting boards.

While the SEC possesses the statutory right to set standards, it has delegated that responsibility to the FASB. Nevertheless, the SEC remains very involved in the oversight role. On the other hand, the oversight authority of the FAF is much more vaguely defined.

It's easy to say that a line of demarcation exists between FAF trustees and the standard-setting boards. However, that line can be drawn tightly or loosely, while still preserving the independence of the boards. It is my observation that the line has been drawn very tightly over the years--with the trustees bending over backwards to avoid even the appearance of anything that would suggest their involvement in the setting of technical standards.

But where the line should be drawn is not always clear. For example, the trustees have responsibility for jurisdiction between the two boards--the FASB and the GASB. (Jurisdiction deals with the types of entities which are subject to the pronouncements of each board.) When the FASB issued its Statement 93, requiring non-profit organizations to recognize depreciation in general purpose financial statements, the GASB promptly issued its Statement 8, directing that not-for-profit governmental entities should not change their current method of reporting for depreciation of capital assets. As a result, we had conflicting standards within industries, such as in academia, which includes both publicly and privately owned entities.

Since the trustees clearly have jurisdiction responsibility, it seemed appropriate for us to urge the FASB to delay the effective date of Statement 93 in order to give the Five-Year Review Committee--created to implement the review mandated by the GASB Structure Agreement--the opportunity to complete its work, including development of recommendations about proper jurisdiction. Some believed that urging deferral of the effective date of the standard was actually meddling with a technical matter. The trustees and others believed the effective date was a non-technical matter, and that it was appropriate for us to become involved.

Funding is, of course, another major responsibility of the trustees. It takes in excess of $13 million annually to fund the standard-setting process of the FASB and the GASB. About 50 percent of that comes from the sale of publications. For the other 50 percent, we depend on contributions from industry, the practicing profession, and others. In a few cases this year, companies have reduced their contributions and sent with the smaller check a letter voicing their concern about the output of the Board. While every constituent has that prerogative, I urge that the amount of each company's contribution be divorced from its reaction to a particular technical standard, or even to the overall process. Some individuals might argue that this link gives "marketplace reality." But too close a link-age can threaten the independence of the process.

The trustees also have the responsibility for appointing the members of the FASB. Despite the high quality of the men who are serving as Board members, the selection process has been the subject of criticism--ranging from having too few interviews with prospective candidates to the suggestion that we do not consider enough candidates when selecting a new Board member.

The process can be improved. To develop a good inventory of viable candidates for the Board, we need the names of worthy candidates from industry--and elsewhere. There is no need to wait for a vacancy. We have an ongoing list.

We are considering a more formal process for interaction between the trustees and individual Board members. This should prove beneficial to Board members and provide input for the Selection Committee at the time the member is considered for reappointment.

Who are the men who currently comprise the trustee board of the FAF? They are eminently qualified and of unquestioned integrity. * Four are financial executives or CEOs (or recently retired from those positions) of major U.S. corporations. They include the CFO of DuPont and vice chairman of Morgan Guaranty. * One is a well-known respected professor of accounting at a major university. * Three are CEOs of Big Eight accounting firms. * Two are CEOs (or past CEOs) of large local or regional accounting firms. * Two are senior executives of major investment banking firms. * Others are the retired chairman of a large banking institution, a state senator, a former mayor of a major U.S. city, and a state auditor. The trustees have a responsibility to act in the public interest. Anyone who suggests that trustees are representing the parochial interests of their constituent groups, rather than the public interest, is simply not well informed. Trustees do not hesitate to vote their conscience, even when they know it is contrary to the position held by leaders of their constituent group. They serve without pay and have little, if anything, to gain personally from their involvement in standard-setting. They are simply unconditional contributors to the process because they believe it is important.

Could our performance have been better?

The Business Roundtable, through its Accounting Principles Task Force, has recently expressed its views about the accounting standard-setting process. John Reed, chairman of Citicorp, who also chairs the Accounting Principles Task Force of the Business Roundtable, has summarized those concerns as: * There are too many standards. * The Board is too focused on technical considerations, vis-a-vis marketplace issues. * The Board is not listening. Hearing the views of industry is important and appropriate. After all, industry is a significant stakeholder in the process. Moreover, the cost of implementation is an appropriate concern. Indeed, implementing new measurement requirements may sometimes be more costly than could be envisioned in advance by the Board and its staff (thus our interest in improved field-testing techniques). Some executives also question whether there is an information overload--are there more disclosures than necessary or than can be comfortably digested by an informed reader of the financial statements?

To those who believe the FASB is not listening, I call your attention to the fact that the Board and its staff have been studying various suggestions for improvements in the process, ranging from greater input about the agenda to improved field-testing techniques and a change in the structure of task forces to make them more effective. In other words, the Board has been responsive. Indeed, the Board's members have been studying these issues with the help of key members of Financial Executives Institute (FEI) and representatives of major accounting firms. I am confident that meaningful improvements in the process will result.

Let me remind you that this whole process, which was structured 15 years ago in a "vacuum" by the Wheat Committee, has remained largely intact. It has worked remarkably well. But, after 15 years and in the present environment, it seems appropriate that we take time to review the process.

Thus, in July, I appointed the Advisory Group to make recommendations to the trustees about possible changes. The composition of the group is as follows: Ray Groves, a trustee and member of the American Institute of CPAs (AICPA) and chairman of Ernst & Whinney; Jack Ruffle, a trustee and member of FEI; Jack Quindlen, another trustee and member of FEI; Tom Pryor, an investment banker, member of the Wheat Committee, former trustee, and former member of FASAC; Phil Chenok, the president of the AICPA;and Ed Coulson, the chief accountant of the SEC, as a participating observer.

This group will draw on its own experience and on information developed by other groups that are studying the process. Among the subjects the Advisory Group is considering are: * Formalization of a process for trustee interaction with Board members. * The responsibility and authority vested in the trustees and whether greater accountability should be developed--while preserving the independence of the standard-setting boards. * The process for agenda-setting and agenda review. * The role of FASAC--and whether it should be a greater participant in the oversight process. * The FASB processes for using task forces and for field-testing. * The inherent weaknesses of an all-volunteer trustee board which has oversight responsibilities for a standard-setting board and its staff. On that last point, most trustees have heavy responsibilities in the business world, and there is a limit on the amount of time they can spend in discharging their responsibilities as trustees. It is thus difficult for them to become involved to an extent that might be beneficial for more effective oversight. The Advisory Group is looking at this issue.

Our objective is to enhance our ability to oversee the process without impairing the independence of the Board. Some additional degree of accountability may be in order. A large number of trustees are deeply involved not only in the Advisory Group but also with the Five-Year Review, which was mandated by the GASB Structure Agreement. Under the chairmanship of Tom Holton, former managing partner of Peat Marwick Main & Co., this committee has conducted extensive interviews about the functioning of the GASB and GASAC, their relationship to the FASB and FASAC, and to a lesser extent about the processes of the FASB. At this writing, the trustees are expected to discuss their recommendations in January and consider formal action in April.

To the future

As I complete my term as president of the FAF, I urge the continuing support of all groups involved in this important process. I am grateful for the contributions of FEI and its members. For example, many are involved in the Emerging Issues Task Force (EITF) or other task forces, and are in regular communication with the FASB and its staff. The 1985 FEI White Paper articulated well the views of FEI and made a positive impact on the process. FEI is the designated representative of industry, and I encourage cooperation with the Business Roundtable as the Institute continues in that role.

The year 1989 will be important for the standard-setting process as recommendations are presented to the trustees for action. Jack Ruffle, a former chairman of FEI, who became president of the Financial Accounting Foundation in January, will provide excellent leadership during this critical period. His contributions as a trustee have been outstanding. His wisdom and insights are always respected and valued in whatever role he plays.

In summary, the standard-setting process needs the continuing support of all of its constituents, including industry. We need to hear your formal and informal views about the issues. We also need your continuing financial support. And we need you and your CEOs to recognize that this is a process which, by its very nature, will produce some unpleasant results in search of the objective of improved financial reporting.

PHOTO : Denise and Her Child Holding a Mirror, Mary Cassatt, c. 1905
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Title Annotation:Financial Accounting Foundation
Author:Larson, Rholan E.
Publication:Financial Executive
Date:Mar 1, 1989
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