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US Securities and Exchange Commission

Group Tells SEC Chair Gensler that Accounting Standard-Setter is Ignoring Investor Views

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

A group of investment analysts who are well-versed in accounting renewed its call on the need to make changes at the FASB, the corporate accounting standard-setter. They told the SEC that they are concerned that the needs of investors have been ignored by the board.

The group—Alliance of Concerned Investors—first wrote a letter to SEC Chairman Jay Clayton and the four commissioners in October last year. Now that Gary Gensler was sworn in as chair of the commission a few days ago, they addressed their letter to the new chair and the four commissioners—Allison Herren Lee, Hester Peirce, Elad Roisman, and Caroline Crenshaw.

The SEC oversees the accounting rulemaking board.

“With the new leadership which you bring to the Commission, we believe that now is the time for a bold study, review and reconsideration of the accounting standards setting process,” the alliance wrote to the SEC on April 19, 2021, the first full day for Gensler as chair.

They said that it has been almost half a century since there has been a comprehensive review about the composition and structure of accounting standard-setting that resulted in the formation of the FASB.

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.

“As we noted in our earlier letter, the agenda of the FASB has devolved over this time to one dominated by the simplification of existing standards,” the letter stated. “Issues of importance to investors and the capital markets have languished for decades.”

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.

“Once again, the time is right for a new and comprehensive review,” they said.

Among other things, they said that the FASB is the third iteration of the accounting standard-setter. But over the last seven years, they said that the board has been in decline.

“While there were significant improvements introduced with the formation of the FASB, there were elements of incrementalism in the FASB structure that built on defects of its predecessor, specifically the dominance of auditors and corporate finance executives,” the letter said.

In particular, the FASB and its predecessor, the Accounting Principles Board, have been composed of over 70 percent of practitioners, said the letter. The alliance refers practitioners as those from auditing firms and corporate representatives.

“The FASB’s agenda and output bear similarity to its predecessor’s in its final years (lack of timeliness, simplification domination vs. improvement),” the letter said. “We believe the evaluation of the practitioner-dominated model of the last 100 years is ripe for re-evaluation and necessitates greater inclusion of investors.”

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 last year. The board did not have an updated statement.

“The FASB and its technical staff focus on obtaining input from all stakeholders, including investors, at every stage of the standard-setting process,” Klimek said. “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.”

In last year’s statement, Klimek added that while FAF trustees cannot influence the FASB’s decisions, they make sure that the board appropriately considers investor input and that investors are represented.

“At present, 7 of the 18 Trustees and 2 of the 7 FASB members have deep backgrounds as investors,” Klimek said in the statement late last year. “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.”

However, in last year’s letter, the alliance said there is “little or no evidence of investor considerations.”

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.

They said that, among other things, investors have asked the FASB 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.

 

This article originally appeared in the April 22, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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