Peeling away financial reporting issues one layer at a time

Interesting Exchanges on FASB and IASB Governance

Since my previous post on the FASB's 3 – 2 vote to finalize the investor-indifferent FSP EITF 99-20-1, I have received a number of comments regarding the extent to which board size and composition have affected financial reporting standards.

Alpha Opens

A seasoned investor professional, who chooses to remain anonymous (I will call her "Alpha"), initially wrote to suggest that I recommend a return to a seven-member board. Contrary to to the views of "Beta," who I will bring to you later in the post, she writes: "It was a swipe of a pen in a short FAF meeting that brought it [FASB size] down to 5. The same should happen to reverse it."

In response to Alpha, I suggested that in addition to reverting to seven members, I would also support a requirement that at least 5 members would have to approve a change in GAAP. But Alpha took an even harder line in responding to me, stating that a majority of board members should be those with a strong record of advocating for investors and/or having been power users of financial statements while making investment decisions. She also threw in a few lovely barbs, which I paraphrase below, at the IASB's own gerrymandering:

  • Going to 16 board members from 14 (as proposed in the constitution review document and likely to be pushed ahead) is ridiculous as is the geopolitical representation requirement – even if the IASB is setting accounting standards for the world. Instead of taking on new members who know accounting and are from certain regions, the IASB also needs a majority of strong users/investors on the board and should be selecting from the best available at all times. Geopolitical considerations could be researched by IASB staff and brought out in due process and comment letters.
  • The IASB's board of trustees should have substantial investor representation.
  • The monitoring group process being proposed would bring politics even more into the process, as opposed to providing insulation from politics.
  • In order to have global standards, we in the U.S. would have to live with huge loopholes to accommodate deeply national, cultural, legal and regulatory divergences.

Obviously, Alpha and I are members of the same choir.

Beta Bespeaks

I subscribe to a listserv for professors of accounting, AECM (, to discuss emerging technologies, pedagogy, and pretty much anything else. As I was having my correspondence with Alpha, Bob Jensen (retired professor from Trinity University) brought my blog post to the attention of the AECM:

"What recent 3-2 FASB vote riles the feathers of Tom Selling with innuendos that the banking industry and large accounting firms had too much influence on a vote that was not in the best interests of accounting transparency for investors? … What must our students think?"

Bob seems to have riled the feathers of another listserv member I will call "Beta", who at one time or another was an audit partner and partook in accounting standard setting. He also wrote a comment letter to the FASB in support of finalizing FSP EITF 99-20-1. The gist of Beta's comments concerning board composition and decision processes is as follows:

  • The FAF Trustees reduced the board size after due process and there were arguments for and against. It allows the Board to be more efficient and reach conclusions more quickly rather than the past practice of working on some issues "forever." In addition, with only five members, the present members from the user and academic community have more influence (2 of 5 votes) than they did under the old system (2 of 7 votes).
  • The voting requirement has changed several times – majority vs. super majority, and it does not make much difference. In almost all cases the Board would have acted on a final standard regardless of the voting requirement. The bare majority rule just allowed one more member to get on his/her soapbox and express a personal view that often didn't affect the overall conclusion but rather one or more of the technical details.
  • The question of whose opinions should prevail has already been thoroughly considered and agreed to by those with interest in the process. In other words, once interested parties have bought into the idea that having standards is likely to improve the quality of financial reporting and that the system for developing those standards is reasonable, then those parties should be willing to accept the results of the system. The financial markets are better served by having some accounting standards even if those standards aren't perfect (and who can judge that?).

I responded to Beta in an email to the listserv membership as follows:

  • So far, it does not appear that the Board has become more efficient after having been pared down from seven to five members.  Perhaps the most egregious case is the financial statement presentation project which I wrote about recently on my blog.  The Board could have resolved matters quickly but instead chose to combine forces with a 14-member IASB with the result being, among other things, that we still don't have a direct method statement of cash flows.  We should also be asking why the amendments to FAS 140 and FIN 46R are taking so long. And, how come a five-member board has not fixed the blatantly bad effects of pension and OPEB accounting on the income statement?
  • While it may appear that the two members from the user and academic communities have more influence, I don't believe it to be the reality.  Greater proportionate representation does not mean more influence.  The chair now exclusively controls the agenda. FSP EITF 99-20-1 provides a strong indication that he or she who controls the agenda now has a much greater influence on outcomes. I highly doubt that Bob Herz would have put this project on the agenda, and indeed on a fast track, unless he already had two other board members in his pocket.  Notwithstanding any arguments as to the quality and appropriateness of the FSP, resistance from the other board members and dissenting commenters was futile; the FSP was a done deal after that.
  • Considering the views of "those with interests in the process" is not an appropriate or necessary role of the FASB.  While there may be many stakeholders in the FASB's decisions, the only voices that should count in the FASB's deliberations are those advocating the interests of investors.  I believe the SEC has finally acknowledged this unequivocally in its recent report to Congress.  So, why do we have former auditors and preparers on the FASB?  It would seem that some believe they are there to represent the interests of auditors and preparers, but I believe they are there only to provide technical and practical perspectives. Other-than-temporary impairment accounting does not benefit investors, and the changes made to OTTI accounting by the FSP also did not benefit investors.

Gamma Ganders

Finally comes another comment from a reader of the AECM listserv, who distributed the back-and-forth emails between Bob Jensen, Beta and me among his own circle of readers. That person would be Lynn Turner, former SEC Chief Accountant, who along with Bob Jensen, makes a point of airing his views publicly, so I am happy to identify him here – and to give him the final word on the subject:

"From my vantage point as a member of ITAC, I see no change in the influence of the one investor representative on the board.  The recent 3-2 vote on the EITF 99-20 issue is a prime example where Bob Herz publicly discounted investors views.  I strongly believe, as pointed out in the recent policy of the Council for Institutional Investors, that investors are underrepresented and under served.  My sense on ITAC [Investor Technical Advisory Committee to the FASB] is that Herz and the Board give us lip service, little more.  I know a number of my fellow members feel the same." [italics supplied]

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