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Two Former Chairman Dispute Claims that FASB Does Not Have Enough Investor Representation

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Two former FASB chairmen in recent interviews pushed back against claims by some investor and reform groups that the accounting standard-setting board has been ignoring investor views.

In a June 7, 2021, letter to SEC Chair Gary Gensler, 34 individuals and organizations urged him to overhaul the financial reporting infrastructure, including the FASB, the audit regulatory board PCAOB, and the SEC’s Office of Chief Accountant (OCA).

In particular, they asked the commission, which oversees the two boards, to make the three entities investor-centric because they have been too lenient towards businesses and the accounting and auditing industry that serves the businesses at the expense of investors who provide the capital.

“I don’t think it [FASB] needs to be fixed,” said Robert Herz, who served as chair of the FASB from 2002 to 2010. “There’s always the question [about] whether the two standard-setting boards are operating effectively. Seems to me they are.”

The other standard setter is the GASB, which sets accounting standards for local and state governments. The letter does not mention the GASB. The Financial Accounting Foundation (FAF) is the parent organization of both the FASB and the FASB.

“People think there should be a majority of investors on the FASB; I don’t necessarily feel that’s correct,” also said Dennis Beresford, who led the FASB from 1987 to 1997.

In particular, seven of 18 trustees on the FAF and two of the seven FASB members have investor backgrounds. And investor advocates said the FASB and the FAF should be reconstituted to include a majority of investor members.

Accounting firm partners or corporate finance executives have been well represented at the FASB and the PCAOB, and partners of Big Four firms have dominated the top positions in SEC’s OCA while strong investor advocates have not been as well represented. And critics said this has been reflected on their work, especially in recent years.

As for the PCAOB, Gensler said he wants the board to go into a different direction to be more investor-centric and is seeking to fill all five voting member positions.

But for the FASB, it is an open question since the SEC does not appoint board members, even though it does have an unofficial veto power. However, in a sign that the board is listening to some criticisms, it named Jack Ciesielski, founder of investment research firm R.G. Associates, Inc., one of the 34 signers, to the FASB’s Emerging Issues Task Force (EITF) on June 28.

Others who signed the letter include Barbara Roper, director of investor protection of the Consumer Federation of America; former SEC chief accountant Lynn Turner; and Brandon Rees, Deputy Director, Corporations and Capital Markets, AFL-CIO.

Too Much Simplification Effort at FASB?

Critics of the FASB said that in recent years, there has been little investor considerations in the FASB’s output or its agenda. Of the 111 Accounting Standards Updates issued from mid-2013 to mid-2020, they said almost one third of them were related to simplification, accounting standard codification improvements, practical expedients, technical corrections, or implementation delays. Another 22 percent were adoptions of narrow scope changes recommended by its EITF to address concerns of financial statement preparers.

At the same time, investors asked the FASB for improvements to the cash flow statement for 33 years, but their calls were ignored, critics said.

However, Herz defended the FASB, citing two major agenda topics that are of interest to investors: financial performance reporting and segment reporting.

Balance of Views

But more importantly, Herz said there needs to be some balance in crafting financial reporting rules.

“It’s like the reporting system is a supply chain. The argument is, of course, the product…financial reports … are meant [for] investors who are the users. Their needs ought to come first,” he said. “But of course, in doing that, you have to get the views of everybody else, too. You have to have the people with knowledge how to supply the information, audit it, and all that.”

Beresford agreed that investor point of view is important for standard-setting but believes that the FASB is doing a good job in taking that view into consideration to set standards.

“They have a nice cross-section of people, and I think it would be a mistake to have it all be financial analysts, for example. It would be a different kind of group. It would not be financial accounting standards board. It would be kind of financial analysts group,” he said. “And I don’t think that’s really what the founders of this group intended. So, that’s not something that I would support.”

To illustrate that the FASB has been doing a good job, Beresford pointed to the board’s longevity. The FASB was established in 1973.

“So two more years, it will be 50 years old, which is very unusual. The previous ‘standard setters’ the AICPA lasted only about 10 years or so each,” he said. “So, this is by far the longest tenured accounting standard-setting body in our history and anyone’s history as far as I know. So, it really has stood the test of times so far.”

Nonetheless, Beresford said that he agreed with the critics’ other point in the letter: there should be a comprehensive review of the FAF and the FASB. He believes the review could include whether investors should get greater representation.

 

This article originally appeared in the July 29, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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