Recent Congressional hearings and legislative initiatives have zeroed in on the importance of increasing the independence of the Financial Accounting Standard Board (FASB) and speeding up its standard-setting process. In response, the Financial Accounting Foundation (FAF), FASB's oversight board, has announced a series of proposed changes based on a position paper on The FASB's Role in Serving the Public, A Response to the Enron Collapse written by FASB Chairman Edmund L. Jenkins.
Sunshine and Speed Bumps
FAF's proposed changes take into account FASB's desire to keep the process open, while speeding up its standards. In his paper, Chairman Jenkins wrote, "The Board understands the concerns that some, including SEC Chairman Harvey L. Pitt, have raised about the speed of our standard-setting activities." He explained that FASB is slowed by its commitment to a "fully open due process" under which standards are debated and set in public forums. Followers of FASB often refer to this as operating in the "sunshine."
To help FASB speed its standards without compromising the sunshine feature of its process, FAF is considering the following steps:
- Reducing the size of the FASB from seven to five members.
- Changing the voting requirement for approval and issuance of a new standard from the current 5-2 supermajority to a 3-2 simple majority, meaning only 3 board members would need to vote in favor of a standard before it could be approved and issued. This would streamline the process, but it would also mean that just one vote would mean the difference between approval and rejection of a new standard.
- Recommending that FASB expose its proposed standards for shorter comment periods.
If approved, the reduction in the size of the FASB would be achieved through attrition, as the terms of board members expire.
Congressmen and critics are also concerned about the board's independence. Chairman Jenkins explains, "While the FASB is an independent, private, not-for-profit organization, some observers believe it is not independent enough from the Big Five accounting firms."
A key issue is the high level of representation on the board of the Big Five. Currently, the seven-member board is composed of three members from public accounting, two from industry or the preparer community, one from the investor or user community and one from the academic community. The announcement said it is not yet clear how this should or will change, if the size of the board is reduced.
Another key issue is the influence of the Big Five on FASB's funding. Two-thirds of FASB's funding comes from the sale of publications and licensing agreements. (Critics say FASB's publications should be free.) The remainder comes from contributors, including the public accounting profession, corporations and the academic community. FAF Chairman Manuel H. Johnson said, "We strongly encourage broad participation in the contribution process." Other than this, no plans for changes in funding are mentioned in FAF's announcement.
A document seeking public comments on the proposed changes will be issued on or about March 18, 2002. It will be available on FASB's web site during the 30-day comment period. FAF will meet to discuss the responses on April 23, 2002. Download the document and take the time to think your comments through before you send them to FAF. There is a lot at stake here, and there are some tough trade-offs involved. In the final analysis, this may well come down to a choice between racing to faster standards or walking on sunshine.