PERCEPTIONS OF CHIEF FINANCIAL OFFICERS CONCERNING FASB

By John E. McEnroe and Stanley Martens

FASB has been criticized by various parties almost since its inception more than 25 years ago. However, it has operated under an especially intense climate of scrutiny and criticism during the last five years. Such controversial accounting issues as accounting for stock options and derivatives have engendered fierce opposition to the accounting standards proposed by FASB. As a result, the threat of government intervention in the establishment of accounting principles has increased. For example, Rep. Richard H. Baker (R-LA) has introduced the Financial Accounting Fairness Act of 1998, which calls for judicial review of FASB statements. Furthermore, Sen. Lauch Faircloth (R-NC) has also introduced a bill, The Accurate Accounting Standards Certification Act of 1997, which, in many circumstances, essentially absolves banks from any FASB statement on derivatives.

Given this contentious climate, we sought to solicit the perceptions of individuals who are both knowledgeable of the accounting principles promulgated by FASB and whose organizations are affected by their requirements--the chief financial officers (CFOs) of the 500 largest U.S. companies. This population represents a wide range of industries, from financial services to industrial organizations, and as a result, the views expressed are not limited to a particular business sector.

Our mailing of 500 questionnaires to the CFOs of our target group resulted in 105 usable responses. The possible responses to most of the statements on the questionnaire consisted of a six-point scale ranging from "very strongly agree" to "very strongly disagree." We aggregated the responses depicted in our tables into two categories: "agree" (consisting of "agree," "strongly agree," and "very strongly agree") and "do not agree" (consisting of "uncertain," "strongly disagree" and "very strongly disagree").

General Issues

First, as the results in Table 1 indicate, it is apparent that CFOs have an acute interest in FASB pronouncements; more than 90% of the respondents stated that they receive the exposure drafts (EDs) of proposed FASB standards and that this has been the practice for the past five years (statements 1 and 2). Statement 3 indicates that the CFOs believe it is important that accounting standards be promulgated by a body in the private sector. When asked why they felt that way, the largest number (33) of those responding stated that FASB members are either more knowledgeable, objective, or open-minded, than other parties such as the SEC. The second most frequent reason cited (23) for their response was that a private sector rule-making body can be independent and avoid political processes, while the third (9) was the advantage of the due process system that FASB employs.

Statement 4 indicated overwhelming agreement that a formal set of accounting standards is necessary for both publicly traded and privately held firms. The results associated with Statement 5 are interesting, for, despite all the complaints in the media regarding FASB standards, 77% of the respondents indicated that their firms in general, as well as other similar firms, support FASB's output. When they do not support an accounting standard, the only reason cited by a majority of CFOs (54.5%) was that there are too many accounting standards already.

It is hard to determine how much weight to give this reasoning, since a high percentage of the CFOs were generally supportive of FASB standards. The result concerning standards overload seems partially contradicted by another: A small (51%) majority think that there is a backlog of current problems that FASB should address. Of 40 items mentioned by the CFOs as needing attention, the areas most frequently listed were business combinations (17), derivatives (7), international issues (6), and accounting for financial instruments.

Organizational Pressure and Influences

The statements listed in Table 2 relate to pressures and influences impacting the work of FASB. Seventy-four percent of the respondents did not agree with the position (Statement 1) that in setting its agenda, FASB evaluates all suggestions equally, and that it is free from undue influence by certain outside organizations. Of the 49 respondents who cited organizations that might exert an undue influence on the FASB agenda, 34 (almost 70%) mentioned the SEC. Other parties listed by several respondents were the Big Five (15), the Association for Investment Management and Research (AIMR) (5), and the AICPA (5).

Statement 2 is somewhat similar to Statement 1; however, it pertains to the exposure draft stage. A little over half of the respondents (56.7%) did not agree that FASB evaluates all comments on exposure drafts equally. Of the 41 organizations mentioned as having a better chance than others of having their comments integrated into the final accounting standard, the SEC was again cited most frequently (20), followed by the Big Five (9), the AIMR (4), the AICPA (3), and financial analysts (2). Even Alan Greenspan was mentioned by one respondent.

Approximately 85% of the CFOs believe that FASB formulates proposed accounting standards for the benefit of user groups such as security analysts, bank lending officers, portfolio managers, and ratings agencies (Statement 3). Not inconsistent with this is the result for Statement 4: Approximately 64% of the CFOs do not agree that FASB considers compliance cost to companies as well as benefits to user groups. Apparently, a substantial majority of the CFOs question the mission statement of FASB in which it is explicitly stated that the board will only issue standards when the expected benefits exceed the perceived costs.

Promulgation Issues

Table 3 displays the issues involving the promulgation process. Almost 86% of the CFOs agreed that FASB is thorough in researching relevant issues (Statement 1), and approximately 85% do not agree that exposure drafts are too technical to allow for meaningful commentary (Statement 3). An overwhelming majority (about 97%) of the CFOs approve of the supermajority rule that no standard can be passed without a 5-2 vote (Statement 5), and 73% approve of the current composition of FASB: three individuals from public accounting, two from corporations, one from the securities industry, and one from academia (Statement 6). Perhaps the respondents feel that user groups are not over-represented on the board, and that the supermajority rule would tend to make the passage of a standard supported by a special interest more difficult. Of the 26 CFOs who preferred an alternative composition of the board, 14 called for more representatives from corporations.

A large majority (approximately 71%) would like to see the issuance of more discussion memoranda (Statement 2). Discussion memoranda raise issues instead of stating conclusions about them as in exposure drafts. Given the previously discussed results about the perception of outside influence, perhaps the respondents feel that more discussion memoranda would open FASB up to a greater variety of opinions and proposed solutions.

Statement 4 concerns volatility of reported earnings. It is clear that a number of FASB Statements of Financial Accounting Standards contain provisions to facilitate income smoothing. Two examples are the standards on investments and on pension costs. The standards on investments allow for the marking to market of available-for-sale securities to bypass earnings, while the standards on pension costs contain a number of income-smoothing devices. Even though such income-smoothing devices are present in FASB standards, a substantial majority of CFOs (approximately 77%) do not agree that FASB is careful to avoid formulating proposed standards which would increase the volatility of reported income. Perhaps the respondents do not feel that FASB has gone far enough in income-smoothing
provisions. *

John E. McEnroe is the Amoco Professor of Accounting and Stanley Martens is an associate professor, both at DePaul University, Chicago.