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Funding FASB: Public Money, Public Domain

By J. Richard Williams

Although no one can foresee the ultimate effects the Sarbanes-Oxley Act of 2002 will have on accounting standards setting, certain provisions will alter the operation of the Financial Accounting Standards Board (FASB) and its funding. To date, FASB has operated as a subsidiary of the Financial Accounting Foundation (FAF), a nonprofit organization that provides oversight and funding for FASB as well as the Governmental Accounting Standards Board (GASB). FAF’s board of trustees is comprised of members nominated by eight sponsoring organizations:

  • American Accounting Association (AAA)
  • American Institute of Certified Public Accountants (AICPA)
  • Association for Investment Management and Research (AIMR)
  • Financial Executives International (FEI)
  • Government Finance Officers Association (GFOA)
  • Institute of Management Accountants (IMA)
  • National Association of State Auditors, Comptrollers and Treasurers (NASACT)
  • Securities Industry Association (SIA).

FAF membership consists of corporations, banks, other organizations, public accounting firms, and CPAs that are members of the AICPA Accounting Research Association. Prior to the Sarbanes-Oxley Act, FASB and GASB product sales and membership contributions exceeded $6 million annually and supported operations without public or government money.

The Sarbanes-Oxley Act will provide specific funding for FASB. GASB’s funding, however, is less certain. FAF’s annual reports indicate an operating deficit of $4.3 million in 2002 and $1.1 million in 2001. FAF has incurred operating deficits for the past five years because contributions and publication sales have not kept pace with expenses, although its $18 million endowment could sustain operations for a few more years.

FASB’s 2002 and 2001 net operating revenues amounted to $17.2 and $19.9 million respectively, which included publication sales of $13.3 and $14.8 million. Direct costs of sales of $1.4 and $1.6 million and salaries of $9.3 million for both years resulted in net operating surpluses of $6.5 and $9 million respectively. During those years, GASB’s net revenues amounted to $4.1 million, direct cost of sales were $300,000, and salaries were $2.4 million, resulting in net operating surpluses of $1.4 million. FAF’s unallocated costs amounted to $12.2 million in 2002 and $11.6 million in 2001. FASB and GASB operations for both years would have reported deficits had those costs been prorated based on net revenues.

FASB as a Quasi-Governmental Agency

Since its inception in 1973, FASB has established U.S. financial accounting standards. The SEC will continue to require FASB standards to be adhered to by its registrants. The Sarbanes-Oxley Act amended the Securities Act of 1933 by requiring the standards-setting body to—

  • be organized as a private entity;
  • have, for administrative and operational purposes, a board of trustees (or equivalent body) serving in the public interest, the majority of whom are not, concurrent with their service on such board and during the two-year period preceding such service, associated persons of any registered public accounting firm;
  • be funded as provided in section 109 of the Sarbanes-Oxley Act;
    n adopt procedures to ensure prompt consideration, by majority vote of its members, of changes to accounting principles necessary to reflect emerging accounting issues and changing business practices; and
  • consider, in adopting accounting principles, the need to keep standards current in order to reflect changes in the business environment and the extent to which international convergence on high-quality accounting standards is necessary or appropriate for the protection of investors.

FASB will meet these criteria once it is supported by an accounting support fee collected from all publicly traded companies, based on market capitalization, and by sales of publications, as long as those sales do not impair the actual and perceived independence of the standards-setting body. The SEC will approve FASB’s annual budget, prohibit contributions, and require an annual audit.

As a quasi-governmental agency, FASB’s standards will have the effect of law. It remains to be seen whether FASB will become a government organization subject to the political influence of Congress as standards setting moves from the private sector.

SEC registrants had adhered to FASB’s standards while primarily supported by contributions. FASB document sales will continue to be a major source of funding, but its Statements of Financial Accounting Standards and Concepts Statements are now available at its website (www.fasb.org) free of charge, benefiting investors by:

  • enabling and encouraging transparent financial reporting;
  • facilitating the incorporation of FASB documents into accounting courses; and
  • removing a possible FASB conflict of interest by eliminating the requirement to purchase FASB publications.

As a result of Sarbanes-Oxley mandating a new regulatory structure for the accounting profession, FASB publications in the public domain will help restore confidence in financial reporting.

J. Richard Williams, PhD, CPA, is director of the Master of Accountancy Program in the School of Accountancy at Southwest Missouri State University, Springfield, Mo.

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