In a controversial move greeted with considerable skepticism by accounting firms and their clients, the Financial Accounting Standards Board (FASB) has changed the voting requirement for setting accounting standards. Standards may now be set by a simple majority vote of 4 out of 7 board members. Previously, the minimum requirement was a 5-2 supermajority vote. The change will allow standards to "squeak through" and become part of generally accepted accounting principles (GAAP) by virtue of a single vote.
The major proponents of the change were FASB board members and staff. Many others affected by the decision expressed skepticism or would have clearly preferred to keep the 5-2 supermajority requirement. The main reasons for skepticism and/or opposition:
- There is no evidence that the change will speed up the standard-setting process.
- The change does little to address the real reasons for the delays in setting accounting standards.
- Adoption of the "squeak-through" feature will lead to more controversial and less widely accepted standards.
A number of skeptics suggested FASB should undertake a comprehensive study of its problems before making any changes. In an apparent response to this suggestion, other recently proposed changes seem to have been tabled or rejected. These include reducing the size of the board from 7 to 5 members and shortening the length of the comment period for exposure drafts.
Representative quotes from the comment letters, both for and against:
- On its face, it is not clear to the AICPA Board that the current supermajority 5-2 voting requirement is an impediment to timely standards. The Financial Accounting Foundation needs more study to make an informed decision. (American Institute of CPAs)
- We do not agree with the elimination of the supermajority voting requirement. Elimination would further contribute to standards that are highly controversial and impractical. (Financial Executives International Corporate Reporting Committee)
- Microsoft does not believe the current supermajority voting requirement of 5-2 has caused any significant delays in the issuance of new standards. (Microsoft)
- We recommend maintaining the current voting requirements. By providing a simple majority to establish a standard, the FASB would risk presenting guidance that does not have a clear mandate to become GAAP. (Dow Chemical Company)
- We believe a requirement for a supermajority vote to pass a final proposal is critical to ensure that proposals have a sufficient amount of broad-based support and will result in GAAP. (Merrill Lynch)
- I agree with the 1972 Wheat Committee and 1989 Structure Committee that a 5-2 supermajority vote increases acceptance and reduces controversy associated with the FASB's standards. Therefore, I believe the 5-2 vote should be retained. (Paul E. Pierson, Illinois Society of CPAs)
- The original concept behind requiring a supermajority for the approval of a new standard remains valid. One vote should not be sufficient to change standards. (Sherman L. Rosenfield CPA)
- The trustees changed the voting requirement from a majority to a supermajority during my first term as chairman. . . Frankly, it is discouraging to me that the Financial Accounting Foundation (FAF) has changed this important procedure twice in less than 30 years and is now proposing a third change. I believe periodic changes in the voting rules do more to weaken the credibility of the board and its work than does any specific requirement. . . At the time of the changes, neither I nor my fellow board members supported the change. Therefore, notwithstanding that this would represent yet another change, and that there is lack of reasoning in the proposal, I support the proposed change to a majority vote. (Dennis Beresford, former FASB Chairman)
- In my tenure as a board member on two occasions with a simple majority vote, the ability to issue a consolidation standard would have been present. The fifth vote could not be obtained. Perhaps more importantly, I think the fifth vote has caused some increase in the level of complexity in the literature because of the need for further compromise to obtain additional votes. (Jim Leisenring, former FASB board member)
- FASB's Emerging Issues Task Force (EITF) has 13 members (and effectively a supermajority of 11 is required to conclude on an issue). Nevertheless, it often reaches consensus.
- Good idea. . . we want to speed things up. . . Some say that a simple majority is good enough for the Supreme Court, it ought to be good enough for us. I think that analogy flawed because the Supreme Court has freedom to decide which issues it will consider. (Roman Weil, former member of Financial Accounting Standards Advisory Committee)
- We believe that the proposal of an accounting standard by a simple majority of a five-member board would not be indicative of an appropriate level of support to justify "general acceptance" of an accounting standard. . . Even at its current membership, the board is only half the size of the recently formed International Accounting Standards Board (which requires eight affirmative votes to issue a new standard). (Ernst & Young)
- We would hesitantly support a change to the simple majority. . . We would be less hesitant if FAF had put forth arguments that demonstrated how the quality of the standards would not be diminished under a simple majority voting structure. (Andersen)
- The need for changes goes beyond the proposed streamlining . . . Our reluctance (to endorse the change to a simple majority vote) is that we strongly believe that accounting principles should have general acceptance, and a 4 to3 vote does not instill confidence in the adoption of a new standard. (KPMG)
- The set of proposals that have been developed … do not … go to the heart of the problem. (Securities Industry Association)
- We believe the trustees should not change the process until it (the Financial Accounting Foundation) has implemented a study of all issues and problems identified by constituents. (Deloitte & Touche)
- Until the study is completed, we believe the trustees should table their current proposals. (PricewaterhouseCoopers)