FINANCIAL ACCOUNTING STANDARDS BOARD

The United States has a longstanding tradition of accounting standards being set by the private sector as opposed to the government. Although the federal government's Securities and Exchange Commission (SEC) has the legal authority to establish accounting standards for public companies, the SEC has historically looked to the private sector to set accounting standards.

The first two standard-setting organizations in the United States were the Committee on Accounting Procedure (CAP), which was established in 1938, and the Accounting Principles Board (APB), which replaced the CAP in 1959. Both organizations were committees of the American Institute of Certified Public Accountants (AICPA) and included approximately twenty representatives of the accounting profession who served on a part-time basis. Pronouncements issued by those two bodies are considered to be generally accepted accounting principles (GAAP) unless they have been specifically amended or replaced by a subsequent pronouncement.

Largely as a result of criticisms concerning the perceived lack of independence of the APB and the part-time involvement of its members, a major reconsideration of the standard-setting structure in the United States occurred in the early 1970s. This led to the creation in 1973 of a new standard-setting body designed to be independent of all other business and professional organizations. That new group was the Financial Accounting Standards Board (FASB).

The FASB is funded by revenues from the sales of its publications and by voluntary contributions, primarily from public accounting firms and corporations. The board consists of seven full-time members. The usual composition of the board is three members with extensive public accounting experience, two from a corporate background, one academic, and one financial analyst.

The three pillars on which the FASB was built are independence, openness (or sunshine), and neutrality. Although independence can never be totally assured, the FASB charter did attempt to protect the board from as much external pressure as possible. The charter gives the FASB exclusive authority to set its own agenda and establish accounting standards. Board members are insulated from external pressures by fixed five-year terms with a two-term maximum, by the requirements to end all past employment relationships, and by disclosure of and certain limitations on investments and outside activities that might create a conflict of interest.

Sunshine characterizes the open process that the board follows. It means that all its technical business is conducted in meetings that are announced in advance and are open to the public. Because the board's Rules of Procedure require a supermajority of five votes to approve the issuance of any new standard, no more than four board members can meet privately to discuss technical issues.

Neutrality means that accounting standards should be designed to provide the best possible information for economic decision making without regard to how that information may affect economic, political, or social behavior. Put another way, accounting standards should not be intentionally biased for the purpose of promoting either private special interests or government policy goals. Neutrality has been reinforced by adoption and adherence to a broad set of principles called the conceptual framework. That framework was designed to produce standards that result in neutral information that is useful in decision making.

An independent group, the Financial Accounting Foundation, oversees the activities of the FASB. It is responsible for selecting members of the FASB, raising money to fund the FASB's operations, and providing general oversight of the FASB to assure that it is performing its mission. The foundation is composed of a sixteen-member board of trustees that represent the majority of the groups interested in, or affected by, the accounting standard-setting process.

The FASB has the authority to establish GAAPs but has no authority to enforce its standards. The SEC and the AICPA are the organizations that provide the enforcement mechanism. The SEC requires compliance with FASB standards by all public companies, that is, those whose securities are traded in public markets, either on stock exchanges or over-the-counter. The AICPA requires public accounting firms that audit either public or private companies to express an opinion as to whether those companies' financial statements conform with GAAPs.

STANDARD-SETTING PROCESS

Within this overall structure, the FASB has developed an extensive structure of due process to conduct its standard-setting activities. The process usually starts by determining what financial reporting issues are sufficiently pervasive and important that they warrant consideration by the board.

The FASB has a professional staff of approximately forty-five persons; once a project is added to the agenda, staff members are assigned to begin research on the topic. On most larger projects, a task force of outside advisers is appointed; they assist in the staff's research and the board's deliberations by providing expertise, a diversity of viewpoints, and a mechanism for communication with those who may be affected by the proposed standard.

The FASB sometimes asks for written comments from constituents during the research phase through the issuance of a Discussion Memorandum. Such a document analyzes the problem in depth, delineates the issues, identifies alternative solutions, and discusses the merits of those solutions in an objective way. Alternatively, the board may issue what is known as a Preliminary Views document, which includes tentative decisions on a few basic issues and again seeks input from constituents.

After completion of initial research by the staff and consideration of comments on a Discussion Memorandum or Preliminary Views, if one of those documents is issued, the board members begin deliberating the issues in earnest. This process can take anywhere from a few months to several years, depending on the number and complexity of the issues involved as well as the strength of the convictions of individual board members. Once at least five board members agree on an overall answer, the board issues an Exposure Draft (ED) of a proposed standard for public comment. The comment period is at least ninety days.

While the ED is out for public comment, the FASB will often conduct a field test, which is designed to test the application of the proposed standard using actual financial information provided by volunteering companies.

The number of comment letters received on an ED can range from a few dozen to more than a thousand, depending on how pervasive and how controversial the proposal is. Comment letters are received primarily from corporations, large public accounting firms, government regulators, academics, and financial analysts, although any interested party is free to express his or her views. After reading the letters, the board redeliberates all the issues in the ED and any additional issues that may have arisen in the comment and field-test processes. At the end of those deliberations, the board again votes; if there is sufficient support among the board members, it issues a final Statement of Financial Accounting Standards.

The steps described above are just an overall outline of the process. Throughout a project's life, discussions are held with the FASB's advisory council, the project task force, and various other interested parties. In addition, the process does not end with the issuance of a Statement. The FASB monitors the application of a Statement to ensure that it is working as planned. Should the standard not work in practice, then the board may consider amending it to provide clarification, issuing additional interpretive guidance, or taking some other action to address problems that arise.

Most FASB projects are controversial. For example, pronouncements on topics such as accounting for employee stock options, postretirement health care benefits, and derivative financial instruments were strongly opposed by many corporations and other affected parties. The board does its best to consider the reasonable arguments expressed by all parties. But in the final analysis, the FASB endeavors to act in the public interest by issuing accounting standards that will result in the most informative and unbiased financial statements possible. Thus investors, creditors, and all others who use financial statements in making economic decisions can take comfort in the fact that the FASB puts the general public interest above any concerns of individual corporations or other self-interested parties.

Despite disagreement over some specific pronouncements, the board's various constituents remain generally supportive. They know that their views are carefully weighed during the FASB's deliberations, but they also recognize that the ultimate determinant of a new standard must be the board's judgment. As the FASB's mission statement states, "The FASB is committed to following an open orderly process for standard setting that precludes placing any particular interest above the interests of the many who rely on financial information."

COMMUNICATING WITH THE FASB

In addition to the Statements, EDs, Discussion Memoranda, and Preliminary Views documents referred to above, the FASB publishes a variety of other documents that provide guidance on financial accounting and reporting. For example, its Emerging Issues Task Force (EITF) develops consensus positions on accounting matters that demand prompt solutions. EITF materials and other FASB publications can be ordered by individual item or through a variety of subscription programs that the organization offers. Special discounts on publications are available to parties who make voluntary contributions to support the overall work of the FASB.

More information on publications or any other related matters is available from the FASB at 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116, (203)847-0700, or at http://www.fasb.org.

see also Accounting

bibliography

Miller, Paul B. W., Redding, Rodney J., and Bahnson, Paul R. (1998). The FASB: The People, the Process, and the Politics (4th ed.). Boston: Irwin/McGraw-Hill.

Van Riper, Robert (1994). Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process. Westport, CT: Quorum Books.

Dennis R. Beresford