FAF Issues Proposal to 'Streamline' FASB | AccountingWEB

FAF Issues Proposal to 'Streamline' FASB

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As expected, the Financial Accounting Foundation (FAF) issued a request for comments on proposed changes designed to streamline the standard-setting process of the Financial Accounting Standards Board (FASB). The Foundation is requesting comments on a reduction in the size of the FASB from 7 to 5 members, a change to a simple majority voting requirement of 3-2, and a recommendation to expose proposed standards for a shorter period of time. Comments are also requested on the composition of the five-member board.

Open Questions

FAF's proposal is intended to address post-Enron criticism of the accounting standard-setting process. But it leaves many questions unanswered, including the following.

  • How will it improve FASB's independence? Many have challenged FASB's independence over the years, though the term has taken on different meanings over time. The recent Enron-related criticism seems most clearly directed at FASB's funding and what some see as the resulting fact that the Big Five firms were able to persuade FASB to delay the setting of standards for special purpose entities.

  • How will it speed the standard-setting process? Over a decade ago, when the current 5-2 supermajority became effective, many argued it would have no effect on the speed of the standard-setting process because the same level of research and debate would be needed, regardless of the vote. At the time, the reasons given for switching were to halt eroding support from the business community. Preparers were not willing to support a process that allowed standards to be admitted into generally-accepted accounting principles after they had "squeaked by" by one vote.

  • How will it affect the problem of standards overload? Standards overload is a key concern among accountants today. A survey by PricewaterhouseCooopers and Financial Executives International shows an overwhelming consensus that today's reporting standards have become too complex, too difficult, and/or too costly to implement. Will a simple majority make this issue more or less difficult to resolve?

If it ain't broke...

In assessing the need for change, you may wish to refer to the list of reasons why the supermajority was reinstated in 1991 after experimenting with a simple majority. The reasons included the following:

  1. A supermajority vote will improve acceptability of the FASB standards by improving the process of consensus building. The way to a higher affirmative vote is through a more persuasive case for change.
  2. A supermajority vote will not erode the board's effectiveness because that is principally dependent on the caliber of those serving the board, not on the voting requirement.
  3. A supermajority vote will make up for the lack of recourse to FASB's decisions. The FASB is like a legislature, an executive and a judiciary all encompassed in one body. A little more consensus in voting is not too much protection to ask in exchange for such broad and far-reaching authority.
  4. A supermajority vote will not slow down the standard-setting process. The average standard takes six to ten years to complete. Any increment added by a 5-2 voting requirement will not slow the process in a detrimental way.
  5. A supermajority will help provide stability when simplifying the literature. There are over 100 FASB standards in place, plus a large number of pronouncements by other bodies. It is likely that the bulk of the board's future projects will deal with the need to revise existing standards.

Comments are due by April 17, 2002.

-Rosemary Schlank

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