The CPA Journal

Most of us outside of Norwalk (where FASB is based) can only speculate about the shortcomings of the board’s previous organizational structure, but I believe this reorganization and other changes will rejuvenate FASB, sharpen its focus, and boost its productivity. In general, though, it is more important for the board to work smarter, and with the right set of priorities, than for it to shorten comment periods or move faster.

Accountants, auditors, and FASB are in the doghouse of public opinion and in Congress’s crosshairs. Every day we read about lax (to put it mildly) audits, problems with the application of accounting standards, and a continuing river of restated financial results.

High Quality and Transparency

We are continually told that what is needed are “high-quality accounting standards that provide comparable, transparent, relevant, and reliable financial information.” These words represent a high-minded concept that may not be translatable into accounting standards. The phrase high-quality is subjective, and the idea of transparency has never been defined in FASB’s concepts statements. These terms are broad abstractions, used interchangeably for relevant, reliable, and representationally faithful—terms that have been part of our accounting conceptual framework for more than two decades and that indeed continue to be objectives worthy of our discussion.

Priorities

Critics say FASB has failed to write accounting standards on a number of key issues, such as off-balance sheet entities. In my view, however, this charge is only partly true. For example, a review of the available record and history of accounting for special purpose entities (SPE), reminds one that the SEC, not FASB, wrote the accounting rules in this area. Emerging Issues Task Force (EITF) Topic D-14, Transactions Involving Special-Purpose Entities (1990), outlined the SEC’s requirements on the accounting for these entities, and said, “The SEC staff is considering the issuance of a Staff Accounting Bulletin [SAB] setting forth guidelines on the accounting for transactions involving SPEs and until such time would consider transactions on a case-by-case basis. The SEC Observer emphasized that the SEC staff views the issue of SPEs to be primarily a consolidation issue.”

Clearly, the SEC staff essentially wrote the SPE rules in Topic D-14, and over the past dozen years the SEC reviewed and “policed” the subsequent developments in this area. But because the SEC was never proactive enough to issue an SAB on SPEs, it in fact fostered the use of off-balance sheet entities. So if there is any criticism generated by Enron (and all those other companies with off-balance sheet debt, such as entities entering into synthetic leases), the SEC must share the blame with FASB. Nevertheless, FASB was complicit in the lack of guidance in this area when it issued two exposure drafts on Consolidated Financial Statements: Purpose and Policy (the first issued in 1995, and reissued in 1999), which were both woefully deficient in dealing with the accounting and consolidation issues involved with SPEs.

Not everyone has agreed with the board’s priorities, but with the benefit of hindsight, I believe the direction and the agenda were for the most part correct for the times.

Do I agree with every accounting standard? No, but running the cost of options through the income statement was very unpopular and politically charged when FASB issued SFAS 123, and I hope that the compromise standard will be fixed soon.

Do I agree with all of SFASs 141, Business Combinations, and 142, Goodwill and Other Intangible Assets? Definitely not. Here, the board believes it came up with a great principle-based approach, but practitioners know that these standards are very difficult to implement. In addition to implementation and auditability issues, some accountants view the new business combination standard results as a “part purchase, part pooling” redux (and a return to the “bad old days” of the 1960s. For other criticism, see Ronald Murray’s letter to the editor on page 20 of the January 2002 CPA Journal).

Complexity

FASB’s critics say that the board’s standards should not be “cookbooks” (e.g., SFASs 13, 87, 123, 133, and 140), they should be more “principle-based”— that is, more like international accounting standards (IAS). This, the argument goes, enables preparers and auditors to exercise their judgment in applying standards to particular circumstances, as opposed to merely following detailed rules.

The SEC is also supporting this push toward principle-based standards, saying that while not all transactions will be recorded the same way, similar transactions will not be recorded in materially different ways. This, of course, is pure speculation. When we talk about principle-based standards, is it enough to say that we as accountants and auditors will follow FASB’s conceptual framework, follow the GAAP and GAAS hierarchy, always account for transactions in accordance with their economic substance, and “do the right thing” in resolving thorny accounting and audit issues? Is accounting for complex transactions by analogy the answer?
Yes, we need to continually reassess and work on the conceptual framework. Regrettably, the reality is that we need more guidance, not less. In actual practice the so-called cookbook rules do not (and cannot possibly) answer all the implementation questions that practitioners face in the real world.

I know this is not a currently popular view, but I support FASB’s continuing to issue standards that are of sufficient detail that 80% of the real world cases will be addressed by the standard (Pareto’s Accounting Rule), along with principle-based guidance. If we have only principle-based standards we will end up in an accounting version of Babel, where everyone has a different answer for the exact same transaction. In a principle-based world only the largest firms, which have the money and manpower to research and interpret these broad principles, will be able to apply them to actual transactions and events and get consistent answers.

Another criticism over the years is that the standards are too complicated. I reject the idea that the standards are too theoretical and too complex. If anything, they are not consistently theoretical. A short list would include the accounting theory behind parts of SFASs 15, 87, 52, and 106. Hopefully, the board will soon fix these and other inconsistencies.

And while I’m at it, I reject the idea of standards overload as well, especially when I compare the meager accounting and auditing literature to that of my tax practitioner brethren.

Other Projects

There has been a call to modernize the financial reporting system and move from a system of reporting past transactions to accounting for or disclosing all obligations (both executed and unexecuted, contractual and conditional), recording all intellectual property and other intangibles, and reflecting the fair value of all assets and liabilities in the financial statements.

These are great objectives, but other, more mundane matters, deserve attention today: the timeliness of financial information, capturing the economic substance of events and transactions, the accounting for take-or-pay contracts, better guidance about the assumptions used in accounting for pension plans (most notably the discount rate and the return on assets), and the recording of revenues.

Verifiability and Auditability

Audit failures due to insufficient audit evidence and skepticism, the misapplication of GAAP, the failure to adjust the audit program for inherent risks and off-line transactions, and problems with related parties are among many of the issues that are outside the scope of FASB. These problems with the audit process need to be addressed by the ASB and fixed at the audit firm and auditor level. Perhaps auditors need more intensive training, and need to be supported by a meaningful firm system that requires auditors to consult with the firm’s in-house quality control professionals, who will make decisions based on GAAP and GAAS and not based on “business” pressures, and then follow their advice.

The issue with the board is that many of the accounting standards produce results that are very subjective and are not always verifiable, or even auditable. Auditability was never a major consideration in the past, but shouldn’t it be?

With a harsh spotlight shining on the FASB and the standards-setting process, and with the recent organizational changes, I am optimistic that the board will recapture its reputation, and, yes, prove that it is still relevant. People who are looking for a scapegoat will find a way to beat the FASB dog, but I have high hopes for the future, and we in the accounting profession cannot afford to have the board let us down.

Robert N. Waxman, CPA, is a partner of Corporate Finance Advisory, New York City, and chair of the NYSSCPA Global Accounting and Auditing Committee., is a partner of Corporate Finance Advisory, New York City, and chair of the NYSSCPA Global Accounting and Auditing Committee.