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Reflections on FASB at 40

Maria L. Murphy, CPA

Every milestone birthday is a time for reflection—about the good times past, the things that might have been done differently, and the things still to be done. The “Big 4-0” is one of those major milestone birthdays, when thoughts about what is already past combine with plans for what is still ahead. FASB is no different, in this respect. At the recent FASB@40 conference, the speakers discussed the institution's journey to its 40th birthday, remembered those who helped it get there, and looked ahead to what is still to come.

A Story of Survival

Much of the recent coverage of the conference has focused on the new FASB chair, Russell G. Golden, whose first major speech, delivered at the event, presented his vision and mission for FASB. His priorities include improving efficiency, including the effectiveness of agenda setting and shorter project life cycles; reducing complexity and the cost of compliance with standards; improving communications and increasing awareness of FASB projects; and increasing collaboration and making FASB more accountable and “user friendly.”

More interesting to me were the discussions of the past threats to FASB's existence and of how it managed to survive for 40 years. All of the living former FASB chairs attended the conference and each shared memories and accomplishments. At times, board members faced political and industry pressures that threatened FASB's very existence. The strong political and industry opposition to the expensing of stock-based compensation and to the accounting for derivatives were two conflicts that we all remember.

FASB maintained independence from political interference and from the influence of those with vested interests. The conference speakers cited the issuance of the derivatives standard as an accomplishment that broke the pattern of congressional and legislative interference in standards setting. In the past, the SEC opposed certain standards outright; now, however, FASB has an ongoing relationship with the SEC staff, and the SEC is a stakeholder that provides input to FASB's process and agenda. The Sarbanes-Oxley Act provided support for FASB and maintained the board's independence and private-sector standards setting separate from the government.

The drafting of the current leasing standard demonstrates that the standards-setting process continues to be political. Nevertheless, FASB representatives indicated that they are working with Congress and trade associations, involving all interested parties in the deliberations, to make sure that the board understands their practical concerns. In my view, an independent standards setter is essential. Political input is part of the process—but it should not take over the process. FASB must ensure that any new standard will be “inclusive” and reflect the opinions of important stakeholders. Who knows better than preparers and industry experts about what information is truly useful? Investors and analysts have a different point of view from that of preparers and auditors, one that is essential to a balanced standard. The process must be welcoming to all, rather than frustrating and bureaucratic for participants. Investors, lenders, and owners need information, preparers must be able to prepare that information in a reasonable and cost-effective manner, and auditors must be able to audit it. Sounds simple, right?

Many large projects go on for years, and even FASB agrees that it takes way too long to finalize certain standards. The board's defense is that trying to address all of the issues raised throughout the process frequently results in “scope creep.” But the time involved for due process and the unintended consequences of not looking at the bigger picture must be balanced with years, even decades, of waiting for guidance in problematic areas, such as revenue recognition and consolidation.

FASB@40 also highlighted positive process changes, including performing postimplementation reviews for all major standards after adoption, to assess whether a standard accomplished its objective and its benefits outweighed its implementation costs; getting input from focused advisory groups in different industry sectors; using the Private Company Council to evaluate areas of change for both private and public companies to simplify GAAP for all; and changing FASB's own approach by breaking up larger projects and developing proposed solutions even before adding new projects to the agenda.

Learning from the Past

FASB started with a handful of staff members, no body of technical research, and—as one speaker described it—scissors, Scotch tape, and typewriters for drafting accounting standards. The board's goal was to improve financial reporting so that there would be useful information for investors, creditors, and providers of capital. Today, FASB's mission continues to be establishing and improving financial reporting standards and providing decision-useful information. While many criticize the conceptual framework, the complexity of standards, and the slow pace of due process, it was interesting for me as an attendee to step back and think about the evolution of GAAP in the United States and internationally over only 40 years.

Robert H. Herz, former FASB chair, said, “There are no new issues, just new people.” Golden also noted that the challenges of the past are similar to those faced by FASB today—and those it will face in the future. Happy Birthday, FASB—and many more.

The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.

Maria L. Murphy, CPA. Assistant Manager. Peer Review mmurphy@nysscpa.org.

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