It all began somewhat innocently. The Financial Accounting Foundation, the body that is responsible for funding the operations and choosing the members of both the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB), was seeking recommendations to improve the standard setting process. Quite naturally, the Financial Executives Institute (FEI), a major representative of the financial statement preparer community, responded with recommendations directed toward improving the work of FASB. The FEI called for more involvement by FASB's constituents, greater use of task forces, a third-party group to set FASB's agenda, and a smaller number of FASB members. In the meantime, certain very visible and outspoken members of the FEI were expressing their concerns about the FASB's search for "theoretical accounting purity" instead of the practical effects of what they are trying to do. These comments and recommendations, coupled with the FASB's well-publicized retrenchment on accounting for stock-based compensation because of heat from corporate executives, seem to have led SEC chairman Arthur Levitt to examine the basic organization of FASB and its safeguards for pressures from special interest groups. In April of this year, Mr. Levitt, seeking to ensure the independence of standards setting, expressed his view in a letter to the FAF and in public statements that the trustees of the Financial Accounting Foundation should be more representative of the public interest and that nominations to the position of trustee would be subject to some sort of SEC approval.

The reaction to Mr. Levitt's letter and remarks were not well received by the financial reporting community, who regarded Mr. Levitt's views as an attack on the whole private-sector standard setting process. The FEI immediately issued a press release strongly supporting the existing make up of the FAF. FEI president Norman P. Roy said, "We believe that oversight by a balanced Financial Accounting Foundation Board of Trustees most effectively prevents domination of the process by any special interest and ensures that all constituencies are represented."

The Government Finance Officers Association's (GFOA) executive board voted to oppose the move of chairman Levitt to restructure the makeup of FAF's trustees. Presently the GFOA and the National Association of State Auditors, Comptrollers, and Treasurers nominate candidates for three of the 16-member FAF board of trustees. In meetings with GFOA and others, Levitt indicated that he did not think that the FAF trustees from state and local governments were bona fide representatives of the public interest. GFOA concluded that Levitt's plan would have the effect of reducing the representation of state and local governments on FAF's board of trustees. Hence GFOA's strong objection.

On May 20, 1996, J. Michael Cook, president of the FAF board of trustees issued a letter that "emphatically" disagreed with Levitt's position that the composition of the FAF board somehow prevented it from sufficiently supporting the FASB. Cook's letter went on to state that the strategic plan--recently completed by FASB with the intent of improving the agenda-setting process, making FASB standards easier to understand and implement, and completing projects more rapidly--should enhance the standard setting process. He also discussed the strategic initiatives of the FAF board of trustees in considering the structure of the FAF.

Cook went on to state that the FAF would proceed promptly to appoint two at-large public trustees. The two positions were open and were most recently held by officers of a major industrial corporation and a major bank. Cook stated, however, that the FAF did not think it was appropriate to eliminate any sponsoring organization from nominating individuals for election to the FAF nor to have the SEC approve, in substance, nominations to the FAF.

The Wall Street Journal reported that Levitt, in response to Cook's letter, believes the best way to retain the integrity and independence of accounting standard setting "is to have a majority of foundation trustees be truly independent." Levitt went on to suggest unilateral action by the SEC still remains a possibility.

The WSJ article also reported that Rep. John Dingell (D, Mich.) of the House commerce committee had asked Levitt for a report on the issues.