By Soyoung Ho
A group of investment analysts who are well-versed in accounting told the SEC that they are concerned that the needs of investors have been ignored by the FASB, the accounting standard-setter.
They pointed out that the mission of the FASB and its parent organization, the Financial Accounting Foundation (FAF), is to set financial reporting standards that are useful to investors, but the board has been drifting away from that objective.
“This is evidenced in their output,” the group—Alliance of Concerned Investors—wrote in a letter to SEC Chairman Jay Clayton and the four commissioners on October 26, 2020. “To address our concern, we recommend majority investor representation in the standard-setting bodies that affect investors, and we further recommend that the standard-setting bodies turn their attention to investor needs before harm is done to the capital markets.”
In addition, the alliance said an independent investor-led committee should be established to act as an accountability mechanism for the FASB and FAF.
The SEC, which regulates the capital markets, oversees the accounting board. The letter was forwarded to FASB Chairman Richard Jones, FAF Chair Kathleen Casey, PCAOB Chairman William Duhnke, and IASB Chairman Hans Hoogervorst. The commission oversees the PCAOB, which writes auditing standards for public companies. The IASB writes international accounting standards. The letter largely focuses on the FASB.
The alliance is composed of individuals who have worked in the capital markets for decades, and most were original members of the FASB’s Investors Technical Advisory Committee (ITAC), which no longer exists. Today, the board has Investor Advisory Committee (IAC).
“High-quality financial reporting is an essential element for achieving the SEC’s mission and maintaining a robust and efficient capital market,” the group said. “An inadequate and non-transparent financial reporting environment leads to the destruction of investor capital and corrodes public trust and confidence in our financial system and institutions.”
Individuals who signed the letter are: Jane Adams, a former deputy chief accountant at the SEC and a former FASB staff member; Jack Ciesielski, who ran an investment research firm R. G. Associates and wrote Analyst’s Accounting Observer; Rebecca McEnally, former director of Capital Markets Policy for the CFA Institute Centre for Financial Market Integrity; Janet Pegg, an analyst at Zion Research Group who is an IAC member; and Lynn Turner, a former SEC Chief Accountant.
In particular, they said the FASB and the FAF lack adequate investor representation. The FASB has seven board members who vote on accounting rules, but the majority do not have investor background.
“If the FAF and FASB are to be in a position to issue standards that ‘provide useful information to investors,’ the members of both entities must be in a position to know and understand what investors find useful. It is unrealistic to expect people will be in a position to express a perspective they do not have,” the letter stated. “Entities whose memberships are dominated by preparers and auditors will produce results that are predominantly reflective of preparer and auditor perspectives and priorities and not those of investors.”
They pointed to the FASB’s workplan and work product to back up their criticism. For example, they said that the board has put a lot of time working on a “simplification” project that they believe give relief to companies and their auditors.
“Indeed, the efforts of the FASB have been spent on reducing information provided to investors, thus facilitating development of an environment in which investors are less informed,” they wrote.
In the past two decades, they said the FASB worked on three major projects on revenue recognition, leases, and credit loss accounting, which were completed in the past five years. The projects were part of efforts to converge with standards issued by the IASB.
But in recent years, they said they have seen “little or no evidence of investor considerations” in the board’s output or its agenda for the future. Of the 111 Accounting Standards Updates (ASUs) issued from mid-2013 to mid-2020, they said almost one third of them were related to simplification, accounting standard codification (ASC) improvements, practical expedients, technical corrections, or implementation delays. Another 22 percent were adoptions of narrow scope changes recommended by its Emerging Issues Task Force (EITF) to address concerns of financial statement preparers.
“Ultimately, fewer than half of the ASUs issued in this period were full FASB projects,” they said. “With an annual budget approaching $40 million per year over the last seven years, we would have expected more results that addressed investors’ needs than what has been produced by the FASB during this period. ‘Simplification’ efforts and the like have not addressed investors’ needs.”
They said that investors have asked the FASB and the IASB for improvements to the cash flow statement for 33 years, but their calls have been ignored.
“Improving financial statement presentation, from both an accrual and cash flow point of view, has been a high priority of investors and yet the FASB ignores investors in order to preserve and further its ‘simplification’ agenda,” the letter said.
The SEC did not immediately respond to a request for comment.
“The FASB’s mission is to develop standards that provide investors with relevant, useful information, while also considering the costs to preparers and investors alike,” board Spokesperson Christine Klimek said in a statement. “The FASB and its technical staff focus on obtaining input from all stakeholders, including investors, at every stage of the standard-setting process. This includes soliciting investor input on what projects to add to the FASB agenda, carefully considering investor views while standards are in development, and meeting with investors after standards are issued as part of the FASB’s post-implementation reviews. As recent examples, investors’ desire for more information and transparency strongly influenced major standards on leases, credit losses, and revenue recognition.”
The alliance was also critical of the FAF for its failure to promote an independent standard-setting process.
“This ‘simplification’ domination of the FASB’s agenda over the last seven years under the oversight of the FAF exposes the FAF’s failure to promote an effective standard-setting process,” the letter noted.
For example, they said the FAF in May voted to shift post-implementation reviews (PIRs) of new accounting standards to the FASB. This was an oversight function the FAF had since 2010.
“This self-evaluation mechanism defies reasonable expectations of an objective assessment of the FASB’s work,” the letter said.
“While the FAF Board of Trustees cannot, by design, influence the FASB’s decisions, Trustees do ensure the FASB appropriately considers investor input at all times and that investors are represented both on the FAF Board of Trustees and the FASB. At present, 7 of the 18 Trustees and 2 of the 7 FASB members have deep backgrounds as investors,” Klimek said in the statement. “Moreover, the FASB employs two full-time senior investor liaisons, meets regularly with a 10-member Investor Advisory Committee, and includes investors in other important advisory groups, including the Financial Accounting Standards Advisory Council and its 9 investors who have served this year.”
This article originally appeared in the November 2, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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