Former chairmen of the Securities and Exchange Commission (SEC) testified before the Senate Committee on Banking, Housing, and Urban Affairs on February 12, 2002 on the issues that have arisen as a result of the Enron collapse. A key topic was their shared frustration with the process for setting accounting principles. They urged Congress to find a way to free the Financial Accounting Standards Board (FASB) from the business pressures of constituencies and funding dilemmas. Without these pressures, says former Chairman Arthur Levitt (1993-2000), FASB can concentrate on the loftier goals of “getting the standards right and avoiding delays and compromises that ill serve investors.”
The solutions offered by former SEC Chairmen
Senator Paul Sarbanes, chairman of the Banking Committee, stressed that these issues are not a reflection of the talent and leadership at the FASB. “I think FASB Chairman Ed Jenkins has done a terrific job,” he said. “If there are shortcomings, we are all aware of why they occur.” Chairman Levitt agrees, “This well-meaning group must defend itself from many pressures including the Congressional pressure which is often applied when powerful constituents hope to undermine rules that might hurt their earnings.”
All agreed the goal should be to give the SEC enough clout to effectively oversee accounting standards, while ensuring FASB has enough independence to do its job. Three potential solutions were discussed.
- Create an independent source of funding for FASB.
The FASB is funded primarily through sales of publications and contributions raised by its oversight body, the Financial Accounting Foundation (FAF). Chairman Levitt said, “You can not imagine the problem of seeing the members of the board having to go hat-in-hand to the members of Corporate America looking for funding each year. It's crazy.” Chairman David Ruder (1987-1993), who sits on the board of the Foundation, agreed, “It was really a difficult matter to be on the board and find the body didn't have enough money to fulfill its obligations. I would like to see a fund sufficient to fund the FASB and the new audit oversight body we're talking about and to relieve the FASB from having to make money on its publications. FASB's publications ought to be free and widely available to everyone.” Potential alternative sources of funding include the stock exchanges and user fees imposed on public companies that are audited or the institutional investors and investment bankers who benefit from financial statement disclosures but contribute little to FAF.
- Diffuse the power of businesses and accounting firms.
Currently, several key constituencies (i.e., businesses and accounting firms) have a great deal of influence in selecting members of the FAF, setting priorites for FASB's projects, and determining the acceptability of FASB's standards. For example, Chairman Levitt points out that a project to set standards for special purpose entities (SPEs) came up in the 1990s, but was deferred because the accounting firms argued strenuously against its resolution at that time. He suggests the FAF, which chooses FASB's members and is composed of members who represent specific constituencies, should be restructured so that it is composed entirely of the best qualified members, not merely those representing constituent interests. “FASB has not been able to come up with a rule on SPEs that is acceptable to the business community and the profession,” added Chairman Harold Williams (1977-1981). “That acceptability should not ultimately be the determining factor.” In addition to establishing a separate source of funding, Chairman Richard Breeden (1987-1989) would give the SEC the ability to designate priority actions and set binding deadlines for FASB.
- Give SEC the power to adopt standards other than FASB's.
Chairman Breeden would also give the SEC the authority to adopt standards set by other authorities or its own staff when it finds FASB's standards are not in the best interests of investors. Chairman Levitt said this will be particularly important in the area of accounting for stock options. “I believe the greatest mistake I made in my years at the Commission,” he said, “was not encouraging the FASB to move forward with an accounting for stock options on the income statement. As a result, the International Accounting Standards Boards (IASB) is further along on this issue than the FASB today. This issue should be on the front burner.” Chairman Breeden added that he likes the “Ten Commandment” approach adopted by the IASB. Referring to FASB's detailed standards as the “cookbook” approach, Chairman Breeden said, “There is value to the cookbook in working through specific problems. But we also need some overarching principles that say when you're all done, the result had better fairly reflect what you see in reality.”