CONGRESS CHALLENGES FASB'S STANDARD-SETTING STRUCTURE

Precipitated, in part, as responses to the debate about the Financial Accounting Standards Board's pending derivatives proposal, legislation has been introduced in both the House and the Senate that challenges how FASB develops accounting principles.

The Financial Accounting Fairness Act (HR 3165), introduced in February by House Banking Capital Markets and Securities Subcommittee Chair Richard Baker (R-LA), proposes that the Securities and Exchange Commission approve all FASB principles prior to their final enactment. Moreover, the Baker bill would give public companies the right to challenge FASB rules in Federal court.

Last November, citing "great concern in the banking industry," Senator Lauch Faircloth (R-NC), chairman of the Senate Banking Financial Institutions Subcommittee, introduced the Accurate Accounting Standards Certification Act (S 1560). Aimed specifically at FASB's derivatives proposal, the bill would require bank regulators to "certify to Congress that the new standards will accurately reflect bank earnings and will not impede the use of risk management tools."

Both bills challenge the very nature of how accounting principles are developed in the private sector. While Baker stated his bill provides "a legislative remedy to a flaw in the private sector process for developing accounting standards," in opposition, FASB Chairman Edmund Jenkins stressed how the private sector keeps standard setting objective, and insures that FASB is not influenced by political pressures. Jenkins further stated that the independence instilled by the current standard-setting process is one of the primary reasons that the U.S. has the world's strongest capital markets and financial reporting system.

The AICPA, in a letter opposing the Faircloth bill, cites instances of how previous legislative interference in the private sector standard-setting process produced harmful results to the public. In the savings and loan debacle, for example, the Federal Home Loan Bank Board issued regulatory accounting principles (RAP) in an attempt to prop up failing S&Ls. This RAP accounting significantly increased the cost of the largest taxpayer bailout in U.S. history.

In addition, the AICPA points out that because of threatened legislation to overturn its proposed stock options standard, FASB was forced to back off; "a standard...was transformed into pabulum," and pressures from government "greatly shook the foundation of FASB's independence." The AICPA acknowledges that although the Faircloth bill does not advocate wholesale relocation of standard setting to government, "a single significant legislative interference in the objective process followed by the FASB is a major step down a slippery slope to that very result."

The Baker bill only further slides in this direction by calling for explicit review by the SEC of any accounting proposals prior to the standards becoming generally accepted accounting principles. Regarding standards applying to banks and financial institutions subject to the authority of a Federal banking agency, this legislation requires the SEC to "consult with and consider the views of each such Federal banking agency." The AICPA also issued a letter in opposition to the Baker bill, citing similar arguments as in its letter opposing the Faircloth legislation.

The Faircloth and Baker bills show ignorance about the due process now involved in the accounting profession's standards setting. By publicly issuing pronouncements for comment and debate and holding hearings prior to issuing final principles, FASB provides forums for opposition and allows all points of views to be heard. Moreover, while the SEC does not have specific approval of FASB actions, FASB actively considers the SEC's views before issuing final rulings.

Baker's bill further threatens the independence of the current standard-setting process by allowing companies to challenge FASB rulings in Federal court. Threats of lawsuits would give the corporate world undue influence over standards setting and could clog the courts with unnecessary cases every time a particular industry--or even one specific company did not approve of a FASB pronouncement. Such judicial interference would result in accounting principles being taken out of context of the total financial reporting system and would defeat the professional nature of the due process involved in the current standards setting.