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Jan 1992

A visit to the FASB. (interviews with members of the Financial Accounting Standards Board; includes related article) (Interview)

by Craig, James L.

    Abstract- Members of the Financial Accounting Standards Board (FASB) shared their views on various issues that included the improvement of the standard-setting process, the accounting principles as they relate to business and audit failures, and the consideration given to the viewpoint of private companies and small businesses as regards standard-setting. The backgrounds of FASB Chmn Dennis R. Beresford, Vice Chmn James J. Leisenring, Victor H. Brown, Robert J. Swieringa, A. Clarence Sampson, and Joseph V. Anania are also presented.

Conversations were held with each of the six Board members (the seventh Board member, Robert H. Northcutt, Jr., was appointed in October 1991 and did not participate) on a variety of topics.


CPAJ: The FASB seems to be under a great deal of criticism nowadays; some would suggest at the highest level of the Board's existence. Does that indicate a need for any fundamental changes in the way accounting standards are currently being set?

Dennis Beresford: At this time, I see no need for dramatic change. Accounting standard setting is a very practical activity and evolves as circumstances change. The Board's viability has been demonstrated in its survival for 18 years, meeting some very difficult challenges--for example, the stand-off with the SEC on oil and gas accounting, and more recently the SEC's questions on cost/benefit considerations.

The FASB is not the same organization it was 18 years ago. For example, the Emerging Issues Task Force (EITF) is now an established part of our activities, and was begun in 1984. Recent changes include more field testing, task forces, and similar feedback procedures to help test the practicality of proposals.

James Leisenring: It is important to understand that criticism levels go up and down primarily based on the Board's answer in any given pronouncement. If observers like the answer, the FASB is doing a good job. If they don't like the answer, the FASB is crazy or too underscore, you fill in the blank. Usually, if you talk directly to the critics, you find out the underlying issue that is bothering them.

When I became Director of Research at the Board, the debate and criticism of pension accounting was at least as acute as what we are experiencing today. SFAS 96 on income tax accounting was the latest explosive issue, but I think the new exposure draft (ED) has quieted most critics. Surprisingly, perhaps, the retirement benefits other than pensions statement ultimately did not receive the same level of criticism. Although few wanted the consequences of accruing, even the most strident critics couldn't find a way to argue that such costs should remain on a cash basis.

Victor Brown: An oversight committee of the Financial Accounting Foundation has recently interviewed more than 80 constituents to find out what people think of the Board and its work. Interviews have been held with preparers, users, auditors, regulators and academicians. This was an attempt to get the "customer's" view of the FASB's product and process. Early indications are that the Board is doing a reasonably good job--getting an "OK." Recognizing the nature of what we do and the diverse interests of our constituency, I would say that an "OK" is about the best to be expected. As a matter-of-fact, I'm rather pleased at the results.

Robert Swieringa: Using our experience with the new statement on accounting for other post-employment benefits, I think we are doing a better job in presenting and explaining standards than ever before.

Some say we should reduce our cycle time to get a pronouncement out. But we cannot move any faster than the world is ready, willing, and able to adapt to a new standard. We must evaluate how much improvement can be achieved. Readdressing an issue a short time after it is issued is not cost beneficial and results in a loss of credibility.

As we move into areas with the potential for significant change, the business world has to understand the issues, even buy into them, before they can be asked to apply a new standard. There are many views that need to be understood, integrated, and assimilated before anything can happen, and that process takes time.

It may be interesting to note that some of the standards that have been very carefully developed have become the language in which the subject is discussed, even outside accounting circles. For example, this is true of the pension statement. Actuaries, compensation consultants, and others talk about pensions using the terminology and conceptual framework of that statement. There is every indication that this will also be true of the OPEB statement.

Clarence Sampson: There is, in my opinion, no better way to set accounting standards. It is either the FASB or the government. Despite the occasional temptation, I have never felt that the SEC should establish accounting principles.

When I was at the SEC and an observer of the Board, we always felt that things didn't get done fast enough. The then-Board Chairman would tell me that standard setting is education first and standards second, a process that takes time. I have since learned the validity of that view.

Joseph Anania: As part of my deliberations before coming to the Board this year, I gave considerable thought to its future. In spite of all the questions that were being raised, no one seemed to have a better alternative to standard setting. If you look below the surface, the challenges did not relate to the idea of a private-sector board setting standards. Concerns were mainly whether the Board was executing as well as it might. It was in this regard that I thought my background as a client-serving partner might help in the Board's deliberations.


CPAJ: What can be done within the existing framework to help improve the standard-setting process?

Leisenring: I think the Board members recognize what most people say they want from standard setters: easy to follow, easy to understand standards that are straightforward and do not cause a lot of grief in compliance. At the same time, CPA firm after CPA firm, both large and small, demand more detail in the standards. Because of the complexity of some of the issues and concepts, small firms what to feel comfortable that what they are insisting from their clients is the right answer and not one that a competing firm might interpret more in the client's favor.

Another factor that contributes to complexity is the strong desire and interest on the part of some preparers of financial information to smooth the results. An accounting issue that could be relatively simple in application, such as pensions, becomes a monster with corridors and delayed recognition because of the desire to smooth out the volatility.

One of the most formidable tasks we have is to balance the legitimate demands for specificity with the need to be broader and more general.

Brown: The process involves compromise. Standards are not the result of a search for absolute truth. Considerations of practicality and relevance are also important. Each standard reflects the collective judgments of at least four Board members. As Board members reach these judgments, acceptability of the standard to constituents is a factor. There is a limited amount of change that can be made in standards at any point in time.

For example, some have suggested that the Board require market value accounting in the near future. The Board is unlikely to do that. First, you wouldn't get all Board members to agree. Even if you could, it wouldn't fly. It's too dramatic a change. Many are not convinced that the answers you get in applying market value accounting are sufficiently superior to those produced by present accounting to warrant the costs to implement.

If I have learned one thing in the eight years I have been on the Board, it is that standard setting is a matter of balance. Balance must be struck between too many and too few standards, between theory and practicality, between guidance which is too general and that which is too detailed, and between moving too fast and not fast enough. The Board's job is to make these balanced judgments.

One thing that SEAS 96 has taught us is to try to better anticipate the full consequences of a new standard and how it will play out. In retrospect, it would have been helpful to have explored further how the standard would have impacted companies in actual situations. We experienced two problems with SFAS 96: First, it was too complicated. Second, and perhaps more fundamental, it was very difficult to explain in a business context. For example, consider the non-recognition of the deferred tax assets. It was hard to explain why a company would have to accrue a cost such as OPEB that may not be paid for many years and yet not recognize the related tax asset because of the inability to anticipate the future income that would be needed to pay those benefits. In terms of accounting logic and conceptual consistency, SFAS 96 was an excellent standard. There is almost an elegance about it. But it could not withstand the stresses produced because its results were not understandable in business terms.

The lesson learned is that even the best of ideas and clarity of logic must mesh with the business environment in which the standards must function. In contrast with SFAS 96, with SFAS 106--OPEB's--we had the benefit of an extensive field test funded by the Financial Executives Institute (FEI) research arm and carried out by a large accounting firm. Some 25 companies participated at substantial out-of-pocket cost. The benefit to us was also substantial.

Another example was our ED on disclosures of market values of financial instruments. We have been able to enlist about 10 volunteers who have attempted to apply the ED to their real-life situations. We are learning about the cost of developing the information and beginning to see what the results look like. We recognize the benefit of these field tests, both formal and informal, and are always seeking to get the kind of information that such experiences can bring.

CPAJ: On the matter of business and audit failures, there are lessons to be learned. Have the accounting principles themselves failed or is it the application of principles that led to the failure of financial statements to tell the true story?

Sampson: The failure of the financial reporting process often rests in the optimistic nature of businessmen who don't want to recognize when things are starting to go bad. While it is true that accounting standards need to be amended or even changed from time to time, rarely, if ever, do you find a business or audit failure traceable directly to inadequate accounting standards.

CPAJ: It has been said of the SEC staff that they see all the bad guys trying to apply principles to their advantage. As a result, they may have a jaundiced view of the business community and its desire to do right. Does your experience at the SEC tend to shape your view of how standards should be set?

Sampson: The SEC does get to see many specific situations where accounting principles appear to be misapplied. But I recognize that those are exceptions. As a matter of fact, I believe it is very important that the Board not get hung up trying to prevent all misapplication of standards.

CPAJ: Professor William Kinney, former editor of the Accounting Review, has expressed frustration that there is no place for academicians to have an impact on the public accounting profession and standard setting. Why wouldn't the FASB be a place for academicians to have an impact?

Swieringa: We are a forum for their research. We bring people in from academia for our professional development sessions and we sponsor some research. Articles in Accounting Horizons, published by the American Accounting Association, increasingly focus on financial reporting issues. Our advisory council includes academicians William Kinney, Roman Weil, and Stephen Zeff, and they have direct access to us. The AAA sponsored a conference in December 1991 in which about 65 academics, practitioners, and industry people were scheduled to talk about doing more research in the area of financial reporting. The large firms sponsored the program and several Board members and staff participated.

Incidentally, we receive very few comment letters from academia. We have a fellowship program for academicians to work on staff, and yet presently that spot is open. And I don't see accounting academicians developing consulting arrangements in the business world to somehow combine and interact in the same way as we see in the areas of marketing or finance.

I and other Board members continue to visit campuses to talk about the FASB and financial reporting issues.





CPAJ: Some would say that standard setting is based upon and directed to the needs and concerns of investors in publicly owned corporations. Yet there are many other entities--non-public companies, not-for-profit organizations--preparing financial statements. How do Board members attempt to find out the views of non-publicly owned entities?

Sampson: We have had much contact with the Technical Issues Committee (TIC) of the Private Companies Practice Section (PCPS) to provide the view of the non-public company and we look to them for field test volunteers. We also talk to people at the Financial Accounting Standards Advisory Council (FASAC) and others in small firms to learn their views.

Smaller firms seem to be more interested in simplicity, even at the expense of earnings, than are larger companies. My guess is that if we left it to the small business community, some of the compromises that we have in our standards would not be there.

CPAJ: What assurances can you give readers that you are considering the viewpoint of the private company or the smaller business?

Leisenring: Just come and observe our meetings. We are much more mindful of their point of view than ever before. If someone wants to discuss a particular issue, we encourage calls to the staff to discuss any concerns. I welcome discussing issues with constituents. Our staff is also available to give information and discuss the issues about the projects they are working on.

CPAJ: To what extent do the responses of the technical committees of state CPA societies contribute to the process?

Beresford: It is obviously a big investment for a state CPA society, or for that matter any firm or company, to respond. Speaking before a group of the FEI in Chicago, I said that reading all the comment letters impressed me about how much effort goes into trying to help or influence the FASB. Accounting for income taxes was my first project as Chairman and I believe we had about 400 comment letters, ranging from four pages up to 20 pages long. The truth is that any one response may not have major impact. And yet, that one letter may bring an insight to a Board member. It may express an idea in a way no one else has. Or, all letters taken together can make the Board realize that communication is not occurring and that people are not convinced we have the best answer.

Nose counts of how the state society committee members feel on an issue are not that helpful. We are more interested in the reasoning and perhaps that one bit of new information. We have already developed the issues in discussion memorandums (DM) and EDs. But if a committee has more factual information, such as the cost of implementation or the benefits that bankers may perceive, the process benefits. We feel that the committee responses are particularly helpful by expressing the views of smaller accounting firms and smaller business entities that we would otherwise not hear from.

Leisenring: In general, state CPA society letters usually do a good job of explaining their thinking. They are no-doubt at a much higher level than individual practitioners normally would have the time to produce. From a local firm perspective they would complement the TIC of PCPS as the voice of the small practice environment. The better input we get from state societies, the more that segment's voice will be heard.

We generally do not hear from small firms, except when the subject directly impacts them or a significant client of theirs. On the contributions ED, a small entity problem, I would estimate we have heard from 50 local practitioners, and the Minnesota Society of CPAs participated in our public hearings.



CPAJ: Over a year ago the AICPA held a symposium on financial reporting and standard setting. Was the FASB involved in this?

Beresford: I developed the idea for such a program. There were a series of symposiums on "accounting issues of the day" beginning in the early 1960s sponsored by the AICPA, Robert Morris Associates, the FEI and other groups. I participated in the last symposium in the early 1980s. I thought it would be a good idea to bring that forum back, so I developed a prospectus which I gave to Phil Chenok at the AICPA, who together with leaders in the profession took it from there.

CPAJ: Apparently as an outgrowth to that symposium, the AICPA Special Committee on Financial Reporting was recently formed to consider and recommend changes in financial reporting. Will the FASB be a part of that?

Beresford: The formation of the committee was not necessarily an expected outcome of the symposium. Tom Rimerman, Chairman of the AICPA, had as one of the planks in his platform to make financial reporting more relevant. I believe Tom picked up on the symposium to lead into his objective. That committee might have been formed in response to Rimerman's platform even if we did not have the symposium.

CPAJ: How will the special committee impact the FASB? Do you feel threatened by it?

Beresford: We have not been asked to participate in the project except to meet with them at some point to express our views. I don't feel threatened. I do at times feel very frustrated by the inconsistencies of the AICPA committees. In general, the AICPA's committees. In general, the AICPA's input would be much more helfpul if its committees were more consistent. Sometimes on a particular issue we get conflicting responses from various AICPA committees. A letter from AccSEC will take one position, and the TIC of PCPS or even the ASB will take a different position.

Also, the make-up of the AICPA Special Committee is very diverse. There are members with views coming from both ends of the spectrum of financial reporting. One member, for example, supports simplified requirements for small business entities, and another would go much further towards fair value accounting and forward-looking information. The big question will be the group's ability to free themselves of their individual self-interests and propose something that is useful and relevant. And then the question is, how will the AICPA choose to suggest implementation of the recommendations of the task force?

CPAJ: Some practitioners have been puzzled by the reference in the proposed Statement on Auditing Standards dealing with the "meaning of present fairly in conformity with GAAP" to pronouncements that have been cleared or not cleared by the FASB. What is this all about?

Leisenring: The AICPA Board of Directors maintains that AsSEC should have the right to override an FASB objection to AICPA generated standards and guidance. So far they have never done it. By distinguishing between cleared and uncleared, the AICPA is acknowledging the possibility of it issuing a Statement of Position (SOP) even though FASB does not agree with the accounting guidance contained therein.


CPAJ: Does the FASB have sufficient resources to accomplish its objectives?

Beresford: I think so. One of my concerns is that we have been operating at a deficit in recent years. An important element of our revenue is the publications that we sell. The lower volume of pronouncements is recent years--we have been working on fewer but more important issues--combined with fewer purchases, principally by the larger firms, have had a negative impact. But we budget carefully; for example, we are holding more meetings in our own offices and therefore doing less traveling. I would say that the size of our professional staff--about 40 to 45 professionals--is about right. We are doing more now, for example with the EITF, with the same staff that we had 10 years ago. And, we are spending more time on international issues.

CPAJ: I understand that the FASB, through state CPA societies, held a seminar on the ED on income taxes. In light of the financial crunch in which you find yourselves, is that a money raiser for you?

Leisenring: Working with the FEI and IMA, we developed course materials and held seminars for the OPEB statement, all in the name of improving communication. The FASB received no compensation. We felt we could do the same, also to improve communications, for the income tax ED, but with nominal revenue benefit to the FASB. We will also be offering an OPEB course through the state societies and we have developed an OPEB video.


CPAJ: On the international side, we have all heard the complaints that our standards result in a lack of competitiveness and put our businesses at a disadvantage. How is this going to play out? Will there be harmonization?

Beresford: I'm not sure it will ever be resolved once and for all. I've heard it said that some problems are meant to be worked on and not solved. That may be the case with international standards. We are dealing with a wide variety of economic and political systems and language and currency differences. It will not be easy to reach full agreement, yet we can make progress and improve communication. It may be possible through the International Accounting Standards Committee (IASC) to agree on international GAAP as a common way of reporting by multinational companies. But there will always be a need for local standards. Like other issues involving international matters that for years have been debated without achieving uniformity, we should not feel we have failed because, for example, we can't agree on inventory valuation methods. We have a strategic plan that we developed at the suggestion of our Board of Trustees identifying specific things we plan to work on to move forward in the international arena. We will be doing our share, but don't expect miracles.


CPAJ: Do you have any closing remarks for our readers?

Beresford: I have found that no matter how we try communicate what we are doing, there is always a lack of understanding on the part of some. We appreciate the chance to tell readers what we are trying to do and what is on our minds.

To the extent accounting matters are a part of your readers' practices, they should try to be aware of what we are doing and take their turn, perhaps through a committee of a state society, in responding to proposals.

Leisenring: Readers should participate in whatever way they can without being intimidated by the process. If you have something to say, say it even if it is in a two-page letter. We made a change at the very last minute to SFAS 96 because of a late-arriving two-page letter from an academician. We really do listen.

Anania: We are all victims of our own experiences. As a Board member, I want to absorb all the information, all the history, listen to the pros and cons, listen to those that seek a practical answer, listen to the best theories, and after all that reach the best answer. Readers can help by working with clients to frame the best response to exposure documents or to new proposals and by helping to get the clients' views to the Board.

Brown: Readers should participate, criticize, and encourage, through whatever means they can.

Swieringa: The standard-setting process is designed to have people interested in a particular issue join us for the journey in dealing with that issue. There is a learnign opportunity. We would hope that those that find an issue important would somehow become engaged in the process.

Sampson: Readers can help by writing to us in response to our proposals. No one letter will necessarily sway the process. But after a Board member has read 20 or 30 letters, a trend or real sense of a problem can begin to emerge. For example, after having read the many comment letters on our contributions ED, it has become quite clear that we cannot adopt what we proposed.

CPAJ: The editors are extremely appreciative of the time spent by each Board member in discussing these issues. The visit was enlightening and it was a pleasure to see such men of distinction at work in the standard-setting process.

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