Former FASB Board Members Weigh In On FAF Proposal To Restructure FASB

February 1, 2008

FEI Summary

In December, 2007, the Financial Accounting Foundation (FAF) which oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) released for public comment a proposal entitled:  “Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB.”

The comment deadline on the FAF proposal is February 10.  A summary of the 11 proposals is available here. 

Among the more controversial proposals are FAF’s recommendation to reduce the size of the FASB board from seven members to five, and to move authority for FASB’s agenda-setting decisions from the board to the chair.   

FASB has received 12 comment letters so far (as of Feb.1), including some from former FASB chairmen and board members, which we have highlighted below. These highlights are provided for information purposes and may not necessarily be representative of the full universe of comments FASB will receive by the comment deadline. Typically, many comment letters are filed on or about a comment deadline on standard-setting and regulatory proposals (particularly when the comment period falls largely around year-end, as this particular one did.)

Here are some highlights of comment letters filed by former FASB board members:

Former FASB chairman Dennis Beresford. (Currently chairing of a number of audit committees, Beresford is a member of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), and is a part time lecturer at the University of Georgia):

The proposal to strengthen and enhance the governance and oversight activities of the FAF Trustees “is, by far, the most important proposal and I strongly support it,” said Beresford, adding, “I urge the FAF to reestablish an ongoing Oversight Committee.” Chief among the duties of such an oversight committee which are not being adequately addressed now, said Beresford, should be:  “Overseeing the standard-setting process, protecting its independence, and educating the public about accounting standards.”  Importantly, he added, “To be clear, FAF oversight means that it should review what the FASB has done and is doing, and it does not mean that the Trustees should conduct those activities themselves.” He continued, “[A]s noted in the proposal, it is critically important that Trustees do not insert themselves into substantive deliberations on technical matters.” He also observed, “Oversight vs. interference may be a fine line in some cases but an effective standard-setting process demands appropriate oversight.”

Additionally, Beresford noted:  “One of the most important things the Trustees should be actively overseeing at present is the move toward internationalization of accounting standards.” He noted a four point test for what makes a good, principles based standard espoused by IASB Chairman Sir David Tweedie in testimony before the Senate Banking committee in November, 2007 included that the standard be written in plain English, that it is capable of being explained in a minute or so, that it makes intuitive sense, and that management believes it helps them understand and describe the underlying economic activity. Reflecting on Tweedie’s four point test, Beresford stated: “Frankly, I think these are excellent tests for accounting standards and the FASB's work would be more generally supported if these tests were actually met. However,” he added, “even though FASB Chairman Bob Herz testified at the same hearing and apparently did not disagree with Mr. Tweedie's comments, I suspect that the FASB does not officially endorse these tests. Clearly, for example, recent standards 141R (Business Combinations) and 160 (Noncontrolling Interests) could not meet most of the tests enumerated by Mr. Tweedie. This is the type of thing that the Trustees need to be aware of and to question as part of an effective oversight program.” 

Regarding the proposed reduction in the size of the board from seven members to five, Beresford said he agreed it would result in the board being more ‘efficient,’ although the FAF’s suggestion that a smaller board would also be more ‘effective,’ he said, was ‘in the eyes of the beholder.’ Therefore, he states that although he supports the proposed reduction, “this change means that the appointment process will become even more critical as a poor choice for the Board will have much greater consequences in the future,” and suggests if the FAF decides to reduce the size of the board, that they should ‘formally commit to reevaluate the new approach after two or three years.”

And, regarding composition of the board, Beresford “suggest[s] that the Trustees reconsider whether it is necessary to always have one FASB Board member with a primary background in academe.” He adds, “Auditors, preparers, and users are the constituencies that have the major stakes in the outcome of the standard setting process and there should always be at least one person from each of those backgrounds, in my view.” Beresford suggested further,  “While it probably is important to have a reasonable amount of academic experience on the FASB's professional staff, I don't think it has to be directly represented on the Board itself. My suggestion is to revise the proposal to state that three of the FASB Board members should come from auditor, preparer, and user backgrounds with the remaining two seats for the best qualified individuals regardless of background. One of these at-large seats might well be filled by an academic but this doesn't need to be a requirement, in my view.”

Former FASB board member Ed Trott: (Trott retired from the FASB board in 2007)

Trott objects to the proposed reduction in size of the FASB board from seven to five, stating: “I did not in 2002 and do not today believe that reducing the Board to five will make the FASB 'more nimble and responsive to both domestic and global demands.'

Commenting on the proposal's comparison of the FASB board (currently at seven members) to the 5 member boards of the SEC and PCAOB, Trott said, "I believe the role of an FASB Board member is very different from the role of the two other groups mentioned in the proposal. FASB Board members are directly and personally involved in developing the information needed to make Board decisions, developing alternatives to consider and writing the standards. They also spend considerable time meeting and talking with all of the FASB constituents. The demands on Board member time have increased with the convergence efforts with the IASB. Eliminating two Board members will not reduce the demands but will reduce the persons available to meet those demands." 

Additionally, Trott stated, "In my experience all Board members must make significant efforts to become effective Board members. This effort includes learning how to use an individual's experience and former position on issues without overweighing that past experience and being open to changing. It also includes learning about new financial instruments, transaction, business arrangements, valuation techniques, ways financial information is used by different types of Users, etc. Because of many factors, I believe it is not unusual that out of seven Board members, one or two are not effective Board members. It is hard to determine who, while being outstanding in their role before becoming a Board member, will become an effective Board member. I believe the current number of Board members is better than reducing the number to five.”

Former FASB board member Robert Swieringa, now teaching at Cornell University:

Like Trott, Swieringa also objects to the proposed reduction in the size of the FASB board from seven to five. He states:  “I do not believe that reducing the number of FASB Board members from seven to five would result in the FASB being "more nimble and responsive to domestic and global demands."

Swieringa noted, “The Request for Comments [on the FAF proposal]  indicates that Trustees advocating a five-member FASB observe that the SEC and PCAOB each have five members; yet, it is not clear that they are more effective, nimble, and responsive than the FASB.”  

He also observes, “The SEC has at times been in disarray when one or more of the members supporting a 3/2 majority resigned in the midst of important and controversial rule-making.” Thus, he says, “reducing the number of FASB Board members could increase the risk of the FASB being ineffective when it has less than five Board members.”

Furthermore, Swieringa notes, “Reducing the number of FASB Board members also would increase the pressure on the Board of Trustees to select very high quality FASB Board members.” And, the pressure on the board itself is severe. He notes, “The FASB has a heavy and relatively fixed workload that would need to be spread over fewer members under the proposed course of action. With fewer Board members there is less capacity to take leadership roles on projects and related activities and to engage in the interactions with constituents and others that are so important to the FASB's mission and effectiveness.”

And, “in the face of increased demands and activities as global standard-setting arrangements go through transition,” Swieringa says, “I believe that it would be unwise to reduce the number of FASB Board members.” He concludes, “I believe that the effectiveness, nimbleness, and responsiveness of the FASB are influenced more by the quality of the Board members and the complexity and likely impact of the topics and issues being deliberated than the number of FASB Board members.”

Former FASB Vice-Chairman Jim Leisenring, now a board member of the IASB:

Leisenring objects to the proposed reduction in size of the FASB board, and also objects to the proposal to place sole authority for the board’s standard-setting agenda in the hands of the FASB chair. On this second point, Leisenring notes, “The proposed change will improve neither the effectiveness nor the efficiency of the FASB. Indeed, I believe it would make attracting competent Board members much more difficult. I don't know why one would want to serve on a Board with an ostensible majority voting requirement when one Board member, in fact, would have a super-majority vote. If the Chairman disagrees with a six-to-one decision, an issue could be removed from the agenda. That would not facilitate a collegial atmosphere and would only concentrate outside political pressure on one individual to remove undesirable projects from the agenda. One only has to recall issues related to employee stock options to see how real this risk would be.”

He adds, “I am aware of no disagreement that the Board is working on the appropriate major projects. Disagreement is with the narrower issues that the Board constantly finds the need to address. That disagreement can only be resolved by cooperative decisions between all regulators and constituents. Concentrating in one person the FASB participation in that process is not a solution to stated concerns and may inhibit reaching a workable solution.“

Regarding the proposed reduction in size of the board from seven to five, Leisenring says: “It is most inopportune to propose this when pressures have increased on Board members to much more extensively deal with outside constituents. The FASB needs, if anything, more not less resources, at the Board level, to deal with the issues inherent in world-wide  convergence.”

Prepared Feb. 1, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically stated above.