Continuing with his rather assertive and at times public display of the Securities and Exchange Commission’s oversight of the Financial Accounting Standards Board’s standard-setting activities, the securities regulator’s Chief Accountant Paul Munter issued another eyebrow-raising statement, urging the accounting standard-setter to continue to make suggested improvements that respond to the needs of investors, who are the main users of corporate financial statements.
“As FASB standard-setting projects move forward, we believe there are continued opportunities for improvement to the standard-setting process, and that constructive collaboration by preparers, investors, auditors, and other stakeholders, with a focus on timely solutions that meet investor financial reporting needs, is key to the development of high-quality accounting standards for the benefit of the financial reporting system, investors, and issuers,” Munter said on Feb. 14, 2023.
Munter has been unusual compared to many of the market regulator’s chief accountants in the past. He occupies arguably the most powerful accounting position in the world, and he has not been shy about publicly suggesting standard-setting priorities to the FASB to fulfill part of the SEC’s mission to protect investors. Usually, this is always done behind closed doors as there are routine contacts between the staff in the SEC’s Office of the Chief Accountant (OCA), which Munter leads, and FASB members and staff. The FASB writes accounting rules only under the auspices of the SEC. While the accounting board is independent, that does not happen in a vacuum since the SEC must make sure the $100 trillion capital markets operate smoothly and fairly with regulatory and enforcement powers.
The OCA’s public focus on the FASB in part comes as some active and vocal investor advocates have pushed the commission and the board to write rules that benefit investors towards the end of Jay Clayton’s tenure as SEC chairman. They then also pressed current SEC Chair Gary Gensler to make the FASB more responsive to investor needs. These advocates accused the board of neglecting them while being preoccupied with accounting simplification for the benefit of corporations who complained of burdensome requirements. Even the securities regulator’s Investor Advisory Committee, taking cues from these vocal investor advocates, has recommended the SEC to undertake a top-down review of the accounting standard-setting process last year for the benefit of investors. Panel members urged Munter to take a more active role in overseeing the FASB.
Early 2022 Statement Foreshadowed What to Come from SEC OCA
This renewed focus on accounting standard-setting started over a year ago.
In an unusual move at the time, Munter in February 2022 first publicly suggested certain projects that the accounting board should prioritize or drop, especially if the case has not been made that a standard-setting project would be beneficial for investors, while also keeping in mind the needs of companies, auditors and others. And he urged the FASB to accelerate its rule writing. SEC Chair Gary Gensler has also publicly urged the board to move more quickly during an event commemorating the 20th anniversary of Sarbanes-Oxley Act of 2002.
Just as SEC Chair Gensler—who promoted Munter to be the top accountant last month—has emphasized investor protection, so has Munter, and quite publicly. Munter served in acting capacity for almost two years until he was elevated to the current position, which made his active oversight of the FASB even more unusual in the past.
The FASB then over time has moved towards what the SEC OCA has been suggesting, unsurprisingly dropping, for example, a complex project on accounting for goodwill while focusing on several reprioritized projects such as disaggregation of financial reporting information, income tax disclosures and digital assets. These are all areas that investors have been pushing the FASB to do so for a while.
“As a result, we believe that the FASB’s updated agenda now better reflects a focus on investor and other stakeholder priorities in meaningful and achievable standard-setting projects,” he said, complimenting the board for the improvements made.
And at least an analyst shared the views that it is a welcome development at the FASB.
“We are cautiously optimistic about the current investor-centric agenda and would like to see investor sentiments fully represented in the final standards,” said David Gonzales, vice president-senior accounting analyst with Moody’s Investors Service who also serves as a member of the FASB’s Financial Accounting Standards Advisory Council. “Disaggregation of financial reporting information and improvements to the statement of cash flows are particularly overdue for attention from standard setters. We believe there are attainable moves toward comparability in these two areas that would immediately improve the decision usefulness and reduce complexity for investors.”
‘More Work Remains to be Done’
Today, which marks one year from his initial suggestion to the FASB—and with more gravitas with the word acting dropped from his title—Munter said that the FASB’s recent agenda reprioritization is only one step in addressing the need for quality financial accounting standards in a rapidly changing environment. Now, the FASB must act with a renewed sense of urgency and produce meaningfully revised standards in a timely manner.
“More work remains to be done—including improved collaboration across the FAF and the FASB regarding additional process improvements needed to accomplish more timely standard setting in response to investor needs,” he said. The FAF—Financial Accounting Foundation—is the parent organization of the FASB.
Focus on Achievable Results in a Timely Manner
To achieve such standard-setting goals, he suggested that the board zero in on completing well-scoped meaningful projects that can be done in a timely manner so that changes in the business environment do not overtake the standards.
“Large-scale projects that take too long to execute or that have lengthy or different implementation periods can delay the delivery to investors of decision-useful comparative information and inhibit investors’ ability to make efficient capital allocation decisions,” he said.
In the meantime, the cost-benefit analysis of the board may be shifting. In the past, some vocal investors said that the board was too focused on the cost side, and Munter wants to make sure that is not the case moving forward.
“Although we acknowledge that the costs of providing additional information to investors are a component of the FASB’s analysis of any proposed standard, standard setting should be focused on the information needs of investors, and implementation costs alone should not drive standard-setting priorities or process,” Munter said.
In conclusion, he said OCA looks forward to working with the FASB and the FAF trustees to improve the standard-setting process to deliver improved standards in a reasonable amount of time to investors.
This article originally appeared in the Feb. 15, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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