Peeling away financial reporting issues one layer at a time

There’s No Process Like FASB Due Process

The feedback from my last post, The Myth of FASB Due Process…, was mixed. On the bright side, Edith Orenstein, whose comments inspired my previous post, was flattered to be “venerated,” even though we disagreed. And, accounting ethicist author, Michael Pakaluk, sent me this supportive email:

“Once again, you are exactly on the mark, although I would attribute FASB’s woes to its being insufficiently a creature of the accounting profession, as a profession, not too much so (but I do not identify the profession of accountancy with the big firms).

Clearly accounting standards, as they are professional standards, need to be determined by expertise and good professional judgment, not by democratic vote. A doctor should stand by his best professional judgment as regards medical treatment, even if 1000 non-doctors disagree. So you are right that FASB’s solicitation of comments should be construed solely as due-diligence, that is, to check whether it has overlooked crucial bits of evidence or arguments. (Stakeholder theory I believe is not the appropriate context with which to evaluate it, but rather the conception of profession in the strict sense.) The problem is, as FASB has been divorced from accountancy as a profession, its procedures have taken on something of the character of the political, not the professional, and hence ‘due process.'” [italics supplied]

And, speaking of due diligence, here is an internal email that was forwarded to me from the Institute of Chartered Financial Analsysts (ICFA), an investor group that published a prescient fair value manifesto before the latest financial crisis hit:

“There are other interesting observations to make about these form [comment] letters [on the fair value proposal]. For example, many of those sending letters don’t prepare GAAP financials. The Bank of Montgomery (approximately comment letters 350ish-400ish) sent in 40 plus letters and they don’t prepare GAAP financials – just bank call reports – as per my discussion with the bank’s cashier. This is a case for many of those smaller institutions sending in letters…call a few in Iowa and you will see this to be true. Further, some of those sending in letters did not know they sent in letters. One guy told me I had the wrong phone number. Another said it did it because the ABA told him to and still another loan officer forwarded me to the accounting department as he couldn’t explain the basis for sending in a letter.

It would be interesting to determine what due diligence was done on those sending in comment letters.”

But, Denny Beresford, former FASB chair, took me to task on the AECM listserv for my opening swipes at the manner in which changes to the Board’s composition appeared to have taken place:

“I was going to add a few of my own comments about due process and the FASB. However, after seeing your opening comments about ‘the firing of the FASB Chairman’ (nothing could possibly be farther from the truth) and the appointment of three new board members ‘who could be reliably counted on to vote as FASF chair John Brennan clearly wished them to’ (another silly contrivance), it’s obvious that your mind is already made up and wouldn’t be changed by any different perspectives. Bob Jensen’s forwarded article ‘In the Teeth of the Evidence’ notes ‘It turns out that people who have made up their minds are not receptive to information doesn’t support their beliefs,’ and your latest piece clearly demonstrates that statement. I actually enjoy reading your opinions about accounting issues but not when you couple them with such outrageous and unsupportable assertions.”

In response to Denny’s criticisms (whom like Edith, I venerate), I slightly revised my post to clarify that I was expressing personal opinions. But, since these opinions have personal connotations, I now feel compelled to explain them further.

Blogging Standards – Or Lack Thereof

I am not going to defend bloggers in general, or the lack of established standards for blogging, but this seems like a good time to tell you mine: simply to be truthful about what is on my mind.

It may be also be helpful to tell you something about what my blog is not: it is not journalism. I would expect a journalist to make a good faith attempt to represent at least two sides of an issue, and (perhaps most germane to Denny’s comments) to corroborate evidence received from one’s sources. I sometimes conduct research for a blog post, but it is much more common that I write about what I already learned or inferred from reading, studying and thinking. If I were to hold myself to the same standards as professional journalists are held to by their publishers, then my posts would take me a week to write instead of a day.

Why Do I Think As I Do?

When Denny makes his own unsupported statement that “nothing could be further from the truth” to describe Bob Herz’s departure as a firing, he implies that he knows something I don’t. He may indeed, but I don’t know what that would be; but more important, I do not believe I made unreasonable inferences regarding Herz and Brennan from the information that was available to me.

First, Herz’s resignation came as a surprise. I had absolutely no inkling that Bob’s goals were anything less than to serve out his full second term, or at minimum to shepherd the FASB through the SEC’s momentous formal decision on the status of IFRS for public companies.

Second, Bob was a staunch supporter of fair value, and his opportunity to explain his principled views at a congressional hearing did not seem to go well. Third, the vastly divergent views on financial instruments accounting between the IFRS and the FASB (and even within the FASB) were looming as the biggest impediment to convergence. Fourth, the earlier questionable decision of the FAF to shrink the FASB to five members in the face of overwhelming opposition had all the earmarks of a political power play. Fifth, the rapidity after the announcement of Bob’s resignation with which the FAF re-expanded the Board back to seven members with hardly a pretense of deliberation or valid explanation. And sixth, there was the appointment of board members with backgrounds leading to highly predictable predispositions against fair value measurement.

I, Too, Am Outraged

Notwithstanding my earlier predictions that Bob Herz’s departure (however characterized) and subsequent re-expansion of the Board would play out almost exactly as it has, the circumstantial evidence I enumerated above was adequate to convince me that devolution toward convergence was the FAF’s unstated agenda. I did not explain the reasons for those views as fully in my earlier post as I have here, because I did not regard them to be central to the theme of due process.

I don’t mind admitting that I, too, am outraged – by the politicization of much-needed financial reporting reforms – not just in regard to loan accounting, but in all the many cases where over-represented financial interests have prevailed in the name of “due process.” This, more than anything else, explains why I chose to make an exception to my practice of avoiding personal references when discussing policy matters.



  1. Reply Warren Miller, CFA, CPA March 1, 2011

    Tom, the ICFA name went the way of the Yugo some years ago; it was succeeded by AIMR (the Ass’n for Investment Management and Research). Blessedly, the AIMR name bit the dust in 2004 in favor of the CFA Institute ( The first exams were given in 1963. The grueling regimen now includes 2,700 of study materials for each of three levels of the CFA exam. Level I is given semi-annually, while Levels II and III are administered the first Saturday in June. The entire exam is in English.
    There are now about 90,000 CFA charterholders world-wide. A miniscule percentage is also CPAs, even though something over 10% of Level I candidates are typically CPAs. Only 19% of those who begin the program finish it.

  2. Reply Phil March 1, 2011

    I too enjoy reading your opinions on accounting issues and think providing those insights, and even criticisms, are viewed more constructively than provoking thoughts of not wanting to read your blog any longer due to perceived bias.
    We should all keep an open mind as more information may change our opinion.

  3. Reply Tom Selling March 1, 2011

    Warren, thanks for the correction. Way back in the early 80s I used to make pin money by grading parts of the CFA exam. It’s a first-class organization and certification.

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