From the President’s Desk
November 2013The weeks that follow elections are a time for collective reflection, as communities take a step back before their new leaders take office to assess where they’ve been and where they are headed. Changing times, new technologies, and evolving community needs demand a fresh look at how we approach our most complex public policy issues.
The FAF and its standard-setting Boards are nonpolitical organizations. But from time to time, we too believe it is important to take a step back and consider the “big picture” themes in standard setting and how they inform our day-to-day responsibilities. For example, how do we maintain and protect the independence of the standard-setting process, while remaining cognizant of the fact that we earn our independence through accountability to our stakeholders? How should we improve our due process to ensure the right balance between thoroughness and timeliness? How can we keep U.S. GAAP relevant and responsive to ever-changing business practices and reporting environments?
A few weeks ago, we had the unique opportunity to reflect on these and other topics at our FASB@40 conference, a gathering of former FASB chairs, staff, and stakeholders held in New York City. In addition to celebrating this milestone anniversary, the conference featured panel discussions focused on the past, present, and future of standard setting, and their implications for the U.S. and global capital markets.
Given the importance of the event, we decided to make material from the conference available on our website so that all of our stakeholders could have access to the comments that were made and the issues that were discussed.
Those who attended told us that they thought the conference offered a unique “insider’s view” of the standard-setting process, of the issues that the FASB has faced in the past, and of the challenges it will address in the future. Given the importance of the event, we decided to make material from the conference available on our website so that all of our stakeholders could have access to the comments that were made and the issues that were discussed. In addition to transcripts of the panel discussions, the conference webpage features photos of the event and video interviews with the five former FASB chairs who participated.
40 Years of FASB: Featured Content
Standard-setting independence was a focus of the opening conference panel, which consisted of all five living FASB former chairs, including Don Kirk, Dennis Beresford, Ed Jenkins, Bob Herz, and Leslie Seidman. It was an appropriate 40th anniversary topic, as the FAF and the FASB were created to answer calls from the accounting profession for an independent standard-setting structure. Prior standard-setting bodies consisted of part-time executives from businesses and accounting firms whose professional interests sometimes conflicted with their objectivity in developing standards.
Don Kirk, a member of the original FASB and its chair from 1978 to 1986, pointed out that the Board’s independence—and its existence—was threatened many times during those early years. He recalled an incident during his term when “tremendous political pressure” from the oil and gas industry caused the SEC to reject the FASB’s final standard to improve oil and gas accounting, and issue a rule of its own. The FASB did not rescind its standard, and in 1978, the SEC said it would accept financial statements prepared according to either the FASB or the SEC rule. According to Don, the FASB’s willingness to stand behind its oil and gas standard helped earn the fledgling Board greater respect among U.S. policymakers.
Another threat to FASB independence resulted from its 1994 proposal to require the expensing of stock options. Opposition to the proposal prompted affected industries to lobby Congress for restraints on the FASB’s actions. Ed Jenkins, chair from 1997 to 2002, recalled how then-SEC Chair Arthur Levitt, many years later, publicly admitted that his failure to support the FASB on stock options was “the single worst decision” he had made during his tenure.
Due process is also a recurring theme in standard setting and was a frequent topic of discussion at the conference. Listening to various speakers, all of whom had played substantial roles in the FASB process, reinforced just how much our ability to fulfill our mission depends on our commitment to listen to, and communicate with, stakeholders.
This rigorous and open exchange of ideas with a broad range of stakeholders is key to developing high- quality standards. While FASB and GASB members all are very smart people with tremendous knowledge of accounting and financial reporting, they don’t know everything (With apologies to my colleagues at the FASB and the GASB!). That’s why it’s so important for all affected stakeholders—including those who prepare their companies' financial statements—to take an interest and role in the process.
The downside of due process is that it requires a lot of time. Some have criticized our process as being too slow. Some have criticized it because it doesn’t produce big changes right away.
As Tim Lucas, a former longtime FASB technical director, noted during a panel focused on the FASB process, “Accounting doesn’t lend itself to revolutionary steps.”
The technological revolution of recent years has greatly enhanced the ability of both the FASB and the GASB to collect input. Live Board webcasts, videoconferencing, and electronic feedback forms for all projects now are standard in our outreach toolkit.
It wasn’t always that way, though. FASB meetings weren’t open for public observation until 1978, and even then, the audience was limited to those who could physically attend them. FASB meetings now can be viewed on the web by stakeholders worldwide. A larger audience following the FASB’s activities has improved our process by eliciting more diverse input and, by extension, better standards. That’s why the FASB is continually evaluating and improving its outreach mechanisms. It’s also why we recently began webcasting GASB meetings, as well as the public portion of the FAF Trustee meetings.
Extensive due process, conducted in an environment free of undue political influence, sets the groundwork for the third key theme in standard setting: keeping GAAP relevant. How do we stay true to our mission in an ever-changing economic environment?
One FASB@40 discussion focused on whether the Board should base its decisions on the conceptual framework, or if they should be based on stakeholder (particularly user) input. The point was made that the conceptual framework provides a guide for keeping standards consistent, but input keeps the standards relevant to those who must apply and use them.
The themes of independence, due process, and GAAP relevance are important to our standard-setting universe. They are part of an ongoing process to develop the best financial reporting standards possible.
For example, the FASB’s active project on lease accounting is not the first time the Board has approached this issue. The present and previous leases projects have all had the same objective: to provide better information about these transactions to financial statement users. However, changing business practices have rendered older accounting models obsolete. Consequently, the FASB is working on a new model to address investor concerns that existing financial reporting methods no longer provide them with enough relevant information about an organization’s lease commitments.
Another conference topic—international convergence of accounting standards—also underlies the issue of relevance. Capital markets have become more global, highlighting the need for more comparable international accounting standards. To address that need, 11 years ago, the FASB began to work side by side with the International Accounting Standards Board (IASB) to create a common set of global accounting standards.
As the FASB and the IASB move toward completion of the convergence projects, new FASB Chairman Russ Golden outlined to conference attendees his vision of a long-term, global standard-setting environment in which the FASB, the IASB, and other major capital market standard setters co-exist and cooperate with the stated goal of issuing converged standards, while also addressing the specific needs of the capital markets for which they set standards.
The FAF and the FASB also have worked to increase the relevance of U.S. GAAP to private companies and not-for-profit organizations. These efforts are most evident in the FASB’s progress working with the Private Company Council on GAAP alternatives that increase the relevance of private company financial reporting to its users. Similarly, the FASB also is working with its not-for-profit advisory group to consider improvements to how these organizations tell their stories to contributors and other key audiences.
The themes of independence, due process, and GAAP relevance are important to our standard-setting universe. They are part of an ongoing process to develop the best financial reporting standards possible. I think Russ Golden said it best in his closing conference remarks:
As part of the great community with an interest in high-quality financial reporting, you remain the key to our ability to develop high-quality standards. I encourage you to stay involved in our process—and enjoy the transcripts, interviews, and photos on our conference webpage.
FAF President and Chief Executive Officer
Have a question or comment? Contact Terri directly at firstname.lastname@example.org.