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Here's to the Standards Setters: FASB Turns 40

Joanne S. Barry, CAE

FASB turned 40 this year—a significant milestone, given the organization's body of work and some of the challenges that it has faced in meeting its mission along the way, as well as the challenges it will continue to face in the future.

Overcoming Doubts

Created in 1973, FASB succeeded the AICPA's Accounting Principles Board (APB), which had produced only four statements and 31 opinions in its 14 years of operation. Understanding that investors needed better and faster results, the AICPA conducted a study of the APB's organization and operations and published its findings in Establishing Financial Accounting Standards: Report of the Study on Establishment of Accounting Principles, better known as the “Wheat Report,” named after the study group's chairman, Francis M. Wheat.

That report served as the blueprint for a new Financial Accounting Foundation (FAF), which the study group recommended should remain independent from other professional bodies and government agencies. The FAF's main charge, the Wheat Report said, would be to appoint members of the newly established FASB, which, in turn, would be in charge of establishing “financial accounting standards” instead of “accounting principles” (as the APB called them) and of raising funds for its operation.

Establishing new regulatory regimes always makes someone nervous—look at the pushback and threats to existence that the PCAOB has endured in its 12 years as a public firm watchdog—and FASB was no different. Writing in the pages of this journal in 1974, one writer predicted that FASB was “doomed to failure,” its Herculean task of establishing accounting standards while fending off conflicts of interest too great a challenge for the new board:

  • What is needed … is a group which will not knuckle under to the vested interests of client groups, which will not fiddle while Rome burns and which will act decisively to restore the public's faith in financial reporting to its once glorious heights (John K. Shank, “The Pursuit of Accounting Standards—Whither and Whence,” April 1974, p. 59).

Well, FASB is still around today, but, based upon the above definition, has it succeeded in meeting its mission, which is to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports” (http://www.fasb.org/facts/).

Resolving Conflicts

Recent history has shown that Congress has the will to try and influence, or entirely override, the wills of regulatory standards boards like FASB. The most recent example of such interference is the overwhelmingly passage in the U.S. House of Representatives of a bill that essentially forbade the PCAOB from implementing mandatory audit firm rotation. Following the 2008 financial crisis, Congress leaned on FASB to change a mark-to-market accounting rule that forced banks to write down billions of dollars in assets. FASB eventually relaxed the rule after Congress threatened to introduce legislation on the matter.

FASB's brush-ups with Congress certainly aren't new. In fact, less than five years after FASB's creation, Congress issued the Accounting Establishment report, which recommended federal government takeover of accounting standards, and in the mid-1990s, FASB made the most headlines yet when it proposed expensing stock options. This resulted in public rallies and led the U.S. Senate to pass a nonbinding resolution urging FASB to drop the project. The board moved ahead with it, but made the reporting optional until post-Enron 2004. FASB itself acknowledges this event as one that highlights the conflict between its mission to set standards that produce greater transparency for investors and those who believe financial reporting standards should achieve a particular economic effect.

As more Americans become familiar with the game of inside baseball that is regulatory maneuvering, we can expect to see more pressure from outside forces. That is not to say that all types of influence are detrimental to FASB's goals; part of the standards setting process includes exposing draft proposals for public comment, which allows FASB to hear from the CPA next door and from some of the world's biggest and most powerful corporations.

What's Next for FASB?

FASB's arrival at the 40-year milestone is no small feat—its existence and its continued ability to draw the ire of lawmakers proves that it is not just churning out standards that make corporate financial reporting easier for the Fortune 500. And we know that FASB is listening: the NYSSCPA accounting and auditing committees frequently respond to calls for public comment, and the board often modifies its proposals based upon the feedback it receives. This gives me faith that the board's accounting standards-setting process is truly administered with the best results for investors in mind.

But FASB's trials aren't over yet. Convergence with international accounting standards poses another challenge to the board, one that it hasn't encountered before. If the United States gives up U.S. GAAP for a single set of international accounting standards, where does that leave the FASB of the future? It would be a cruel twist of fate if the sidelining of FASB results not from its failure, but from its success.

Joanne S. Barry, CAE. Publisher. The CPA Journal, Executive Director & CEO, NYSSCPA, jbarry@nysscpa.org.

 
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