A Year of Challenge and Change for the FASB Robert H' Herz

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A Year of Challenge and Change for the
FASBRobert H. Herz
Accounting Horizons Vol. 17, No.3 September 2003

• Maribeth Leonardo
• Jennifer Menendez

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The Importance of Neutrality in Financial
Reporting

• Neutrality standards that are free from bias
  aimed toward achieving a predetermined result or
  particular political result

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The Importance of Neutrality in Financial
Reporting

• Why Neutrality is important. . .
• Precondition for honest trustworthy accounting
  information
• It affects everyone (companies,
  investors/creditors, capital markets, economy,
  society)

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The Challenges Before Us

• Why change?
• Financial reporting scandals
• What was questioned?
• FASB existence
• Standard setting in private sector
• How it was changed
• Sarbanes-Oxley Act
• Public response

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If neutrality is king, then why deal with
politicians?

• ALL constituents have a legitimate interest in
  activities
• You can never please everyone so someone will run
  to the government
• Active discussion helps to reinforce FASB ideals

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Addressing the Challenges

• Timeliness of FASB processes
• Principles-Based approach vs.
  Rules-based approach
• Extent of user involvement
• Convergence with international accounting
  standards
• Current model vs. broader business reporting model

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Improving Speed Timeliness

• Less votes needed to issue a Statement or
  Exposure Draft
• Reorganization of senior staff
• Eliminating redundant standards
• Addressing resolving more issues at public
  Board meetings
• Spending more time together as a Board

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Increasing the Involvement of Users in Standard
Setting

• Meetings with constituents
• User Advisory Council
• Mutual fund groups
• Major investment or commercial banks
• Rating agencies
• Other key user groups

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Criticisms of Rules-based approach

• Too detailed complex
• Difficult to stay current
• Check-the-box mentality
• Structuring of transactions
• Form over substance results
• Numerous exceptions

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Why the current system is the way it is

• Demand for financial reporting guidance
• Result of constituents requests
• Supply of financial reporting guidance
• Comes from many sources (FASB,
  EITF, AcSEC, AICPA, SEC)

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Potential Advantages of a Principles-Based
Approach

• Enhanced professionalism
• Easier to understand standards
• Less form over substance structuring
  opportunities
• Less exceptions, less conflicting rules
• Convergence with IASB/international standards

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Potential Disadvantages

• Untrustworthy preparers auditors
• Reduced comparability- different interpretations
• Increase in the number complexity of
  disclosures
• Harder to enforce

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Achieving International Convergence

• Why?
• Growth of cross-border investing
• Growing endorsement of international standards
• Need for US involvement
• How?
• Coinciding agendas
• Joint projects to narrow differences between US
  international standards
• Simultaneous advances in development of standards

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Implications for the Structure of U.S. Accounting
Standard Setting

• Purpose Better control consistency stay
  aligned with international standards
• Current sources of GAAP FASB, AICPA, AcSEC,
  EITF, SEC
• AcSEC, AICPA- no longer set standards
• SEC staff- refrain as much as possible from
  setting standards
• EITF- still serves an important purpose

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Beyond Financial Reporting

• Reasons for sticking with the current system
  rather than moving toward a broader corporate
  reporting system
• Not enough resources
• Not enough time
• Not in FASB jurisdiction

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Some Final Thoughts. . .

• Three strategic objectives improvement,
  simplification international convergence
• Mission establish sound, neutral standards that
  help meet the needs of investors creditors
• Two propositions
• Neutrality bedrock of the system
• Must have a systematic, thorough, open due process