NEWS RELEASE 03/14/02
Financial Accounting Foundation Considers Changes to Streamline FASB Process; Emphasizes Need for Independent Accounting Standard SetterNorwalk, CT, March 14, 2002—The Financial Accounting Foundation (FAF), the body that oversees, appoints members and funds the activities of the Financial Accounting Standards Board (FASB) announced today that it will strengthen its commitment to a strong, transparent and rigorous system of financial accounting standards for America’s capital markets. As part of that commitment, the FAF will issue for public comment a set of proposed changes to help achieve that objective.
"FAF Trustees realize that in the minds of some investors the system of accounting standards and the audited financial statements that must comply with them are being questioned," said Manuel H. Johnson, Chairman of the FAF board. "We understand that the FAF is an essential part of the fabric of the American accounting system’s framework, and the Trustees have determined that the FAF will do everything within its power both to review and improve the procedures and policies within its official mandate and to participate, where appropriate, in the larger debate about how to strengthen all parts of that system."
The Board of Trustees met on January 17, 2002, and again on March 4, 2002, to discuss these issues and to consider how best to fulfill its responsibilities in the public interest in an evolving regulatory environment.
Changes to Streamline Process
After a review of recent events, the Trustees determined that there is a need for the FASB to be more flexible in responding to change and to increase the efficiency of its standard-setting process. By doing so, financial reporting standards would be enhanced.
The Trustees considered the need for accelerating the standard-setting process by improving the FASB’s efficiency without compromising the quality of its open due process. To meet that objective, the Trustees approved a proposal for public comment that includes the following:
- Reduction in the size of the FASB from seven to five members.
- A simple majority-voting requirement of 3-2 for the five-member board. The current board has a 5-2 supermajority requirement.
- A recommendation to the FASB that it expose proposed standards for shorter comment periods.
The Trustees will carefully consider responses to the proposal before deciding on a course of action. If approved, the proposed reduction in the size of the FASB would transition over time and be achieved through attrition. Comments also will be sought on the composition of a five-member board. The current board is composed of three members from public accounting, two from industry or the preparer community, another from the investor or user community and one from the academic community.
In reflecting on the action under consideration by the FAF to enhance the FASB’s process, Mr. Johnson remarked, "We have a responsibility to investors and we take it very seriously. The Trustees are committed to preserving the independence of private-sector standard setting and will continue to consider improvements to the process in as timely a manner as possible."
At its March 4 meeting, the Trustees also reviewed the importance of having an independent accounting standard setter. Much of that review centered on a position paper entitled "The FASB’s Role in Serving the Public, A Response to the Enron Collapse" that was prepared by FASB Chairman Edmund L. Jenkins. The paper, covering a broad range of issues, emphasizes the necessity of having an independent, private-sector accounting standard setter in maintaining efficient capital markets and is available on the FASB’s website at www.fasb.org.
Despite significant resistance from some of those affected, the FASB has made substantial improvements to financial reporting that have resulted in greater transparency of financial information. The following are a few examples drawn from the Jenkins paper:
- Requiring that reporting entities recognize liabilities for retirement benefits when those entities promise them to employees rather than when they later pay them.
- Requiring significant disclosures about the separate operating segments of an entity’s business so that investors can evaluate the differing risks in the diverse operations.
- Requiring that derivative instruments and hedging transactions be reflected in financial statements which, previously, were not reflected.
- Requiring that the acquisition of one company by another be accounted for in the same way for all entities and that the total amount paid for the acquisition be reflected in the financial statements. In the past, that was not often the case.
In commenting on current auditor reform proposals, Mr. Johnson stated, "While the Trustees are interested, concerned and highly supportive of efforts to improve the independence and effectiveness of the auditing system, the FASB has no authority or responsibility for auditing matters. And as part of the broader financial reporting system, we believe it is critical that the FASB remain an independent, private-sector organization—free from political pressure. Independence is critical to developing credible and transparent information for investors and is essential to the vibrancy of the U.S. capital markets."
Vital to the independence of a private-sector standard setter is broad-based funding support from constituents in order to avoid undue influence from any single source. In commenting on this issue, Mr. Johnson said, "Now more than ever, all of our constituents—and especially the investor community—should view this as an important opportunity to support high-quality financial reporting standards, and we strongly encourage broad participation in the contribution process." Approximately two-thirds of the FASB’s funding comes from the sale of publications and licensing agreements. The remaining one-third is from a broad base of contributors, including the public accounting profession, and the corporate, investor and academic communities.
A document seeking public comments on the proposed changes will be issued on or about March 18, 2002, and will also be available on the FASB’s website at www.fasb.org. The comment period will be 30 days and all responses received in that time frame will be considered by the Trustees at their next regular meeting scheduled for April 23, 2002.