On June 26, 2002, the House Energy Committee heard testimony from the chairman of the Financial Accounting Standards Board (FASB) urging Congress to back-off, leave FASB alone, and stop trying to reform US generally accepted accounting principles (GAAP). The timing could not have been worse.

Within the next two days, two events occurred that seemed to undermine FASB's credibility and control: (1) Xerox Corporation announced a larger-than-expected restatement of revenues, leading to a squabble between two major accounting firms over whether the company's statements complied with US GAAP, and (2) The International Accounting Standards Board (IASB) announced a new work program that could upstage FASB in addressing many of the recently-announced U.S. accounting problems, including Xerox's.

Highlights of this recent chain of events:

• The Congressional hearing was held to discuss a draft of proposed legislation known as the "Financial Accounting Standards Board Act of 2002." This bill, which was sponsored by House Energy Chairman Billy Tauzin, would provide FASB with an independent legal basis for existence and move the US standard-setting process toward a principles-based approach like IASB's. It would also mandate that FASB promulgate a "primary standard" requiring adherence to certain overarching objectives, so companies could no longer comply with the letter (but not the spirit) of US accounting rules. This provision met with strong resistance. One witness said it was too vague. Another said it codifies what is already in the FASB's Concepts Statements. FASB Chairman Ed Jenkins said it would go beyond the scope of FASB's authority. Mr. Jenkins, whose term expired June 30, 2002 said the most effective way for Congress to help is to "simply permit the FASB to do its job."

• The Xerox restatement that triggered the GAAP squabble involved lease accounting. Several months ago, when Xerox settled with the Securities and Exchange Commission (SEC), the amount of its revenue adjustment was expected to be about $3 billion, but this amount was revised upward to around $6 billion based on a new audit by PricewaterhouseCoopers. The central issue is one of timing, rather than fictitious transactions. Approximately $2 billion of the revenues recorded in prior years will be reversed and recognized in future periods beginning this year. The company's former auditor, KPMG, issued a statement calling this an "opportunistic restatement" and an "astonishing about-face." The statement added, "KPMG, Xerox and PricewaterhouseCoopers had it right the first time, when the company and three separate teams from PwC all agreed with us that Xerox's lease accounting methodology was GAAP compliant."

• The new IASB work program, announced on June 27, includes projects on consolidation of special purpose entities (a key source of Enron's accounting woes), revenue recognition including research on lease accounting (the source of Xerox's accounting woes), and a new project on convergence with national standard-setters. According to the Financial Times, IASB Chairman Sir David Tweedie will meet with FASB Chairman Robert Herz this month to thrash out an IASB/FASB convergence project. The project is expected to draw on research provided by the SEC and to focus on the accounting treatment for pensions, income taxes, and revaluations. ("Scandal Assists Drive for Global Rules," June 28, 2002) The FT also reported that accounting standard setters from the US, UK and Germany will meet with IASB later this month to find a consensus treatment for accounting for SPEs. ("IASB Plans Crackdown on Abuses," June 27, 2002) By that time, if FASB keeps to the timetable reflected in former FASB Chairman Jenkins' testimony to Congress, it will have already issued its exposure draft on SPEs in early July.

-Rosemary Schlank