For a group not known for dramatic flair, it was a bold step.
On January 14, the Financial Accounting Standards Board (FASB) announced it was launching a new program to codify and simplify U.S. accounting literature. As part of the ambitious project, officials at FASB said the board would “seek to determine if it can issue standards that are less detailed and have few, if any, exceptions or alternatives.”
It would be hard for FASB to issue standards that are more detailed. A prime example: The board’s promulgation on derivatives accounting, otherwise known as FAS 133, has left scores of competent controllers, senior accountants, and CFOs bleary-eyed and bewildered. Indeed, FASB’s recent simplification initiative came in response to the raft of complaints the board was getting from working accountants. The recurring theme of those complaints: The quantity, complexity — and lack of easy retrieval — of U.S. accounting literature is causing a lot of confusion in CPA land.
Some observers also believe it’s turning people off to the accounting profession. “I think the FASB could play a major role in enhancing the value of accounting rule, and the number of graduates, by making sure the language is easy to understand,” says Frederick Schiff, CFO at pharmaceuticals company Bristol-Myers Squibb. “I’d go back to the framework of the 1970s rather than the detailed type of document.”
While FASB may discount such criticism, Schiff is not alone in his thinking. Consider the comments of CFOs in the Financial Accounting Standards Advisory Council 2001 survey, which actually forms the basis for FASB’s new project. “Academic studies will ultimately be performed that will probably point to numerous root causes,” noted James Parke, CFO at no less a financial light than GE Capital. “At issue is whether we are unknowingly making an important part of our accounting discipline unpalatable — thereby resulting in the best and brightest opting out for more lucrative and potentially more rewarding professions.”
The numbers tell the tale. According to research conducted by the American Institute of Certified Public Accountants (AICPA), the number of accounting degrees — both B.A. and post-graduate — declined from 1995 to 1999. In the 1999-2000 school year, the number of bachelor degrees in accounting dropped by 10 percent — a substantial decline. Even with an uptick in master’s degrees in accounting that year, there was still a 6 percent drop in the overall number of accounting degrees handed out by colleges and universities. Concedes Bea Sanders, director of academic and career development of AICPA, “We’re continuing to see a decline in the number of students who are graduating with accounting degrees.”
Anyone who’s read FASB literature has a real appreciation for the trend. Consider Statement 133, Accounting for Derivative Instruments and Hedging Activities. Available on FASB’s Web site, the statement weighs in at a mind-boggling 804 pages. Paul Volker, former SEC chairman and current chairman of the International Accounting Standards Committee’s Foundation Trustees, lampooned the standard in a speech late last year. Said Volker, “There’s not a living man who understands it all.”
And Statement 133 was 200 pages lighter when Volker made his comment. Industry watchers point out that this growing complexity of accounting standards is creating a bind for CFOs. To comply with FASB’s increasingly complex accounting standards, finance chiefs must employee highly skilled staff accountants. But it’s getting harder and harder to find good CPAs — in part, because many would-be corporate accountants are put off by increasingly complex accounting standards.
Worse, complicated regulations often lead to undetected errors among preparers and auditors of financial statements. That puts CFOs, investors — and accountants — at risk. “We would far rather have simplicity for the sake of accuracy and consistency for the sake of understandability,” says Parke, “than a theoretical pure dissertation on the accounting for certain transactions that only a handful of people can decipher and bookkeep.”
But some industry experts claim labyrinthine accounting regulations are actually good for students. Edmund Jenkins, who retires as FASB chairman later this year, believes students benefit from detailed standards because it helps them understand basic accounting principles and the theories behind those principles. “And I think that facilitates their ability to apply [the principles], whether it is in passing the C.P.A. exam or otherwise,” asserts Jenkins.
In fact, the outgoing FASB chairman isn’t convinced students find complex accounting standards off-putting at all. “We’re all aware of the decline in enrollments,” he grants. “But I think that probably has as much to do with the economy, and with the attractiveness and the salaries in the investment banking world as it does with anything else.”
Maybe. But recent horror stories about the difficulties of complying with newer accounting standards has made corporate bookkeeping look like more tedious than ever — almost hard to fathom. And while accounting will never be confused with rollerball, deciphering truly arcane financial standards is hardly anybody’s idea of scintillating — or rewarding — work.
Still, some academics don’t believe FASB’s simplification project will attract more students to accounting. “While the simplification project is much needed and a great help,” says Professor James McKeown, interim chair of the Smeal Department of Accounting at Penn State University, “I don’t believe the students at the time they make decisions of majors are aware of the complexity of all of the standards and interpretations and authoritative literature.”
Nevertheless, McKeown concedes that the graduating senior class at his department is down 30 percent this year. He also says he knows of some schools that are seeing a 50 percent drop in students graduating with accounting degrees.
AICPA’s Sanders isn’t sure that FASB’s ongoing push for simplification will change those numbers. “I think [complexity of rules] has more of an impact on people already practicing the profession,” she says. For students, she insists, “it’s always been a tough program.”
Not as tough as FASB’s program to push through its simplification agenda. In a speech at a recent Financial Executives International conference, Jenkins noted that regulators have very little tolerance for different interpretations of principle-based standards. “Until the SEC staff is prepared to accept that different companies in good faith can come up with somewhat different applications of the standards, within some reasonable range,” said Jenkins, “it will be very difficult for us to depart from the very detailed standard setting approach.”
Kim Petrone, the FASB project manager in charge of the simplification project, knows this only too well. Petrone acknowledges that wringing concessions from various groups — including preparers, auditors, and regulators — will not be easy. She says the same constituents who complain about complex standards also want more detailed information when implementing the new rules to ensure that their own specific transactions comply. “People want bright lines,” Petrone says. “They want parameters they can walk around.”
Some CFOs believe Financial Accounting Statements 141 and 142 are steps in the right direction. Part of the required goodwill impairment test in the regulation is determining the fair value of a company’s reporting units. And while FASB spends some time on the guidance of fair value in the standard, it does not go into things like the number of years to use for a discounted cash flow valuation analysis or a specific discount rate.
Bristol-Myers’ Schiff says the change is a welcome one. “There’s an opportunity to step out from where they have been,” he says, “[an opportunity] for FAS 141 and 142 to be differently organized.” He believes the two standards could actually empower independent public accounting in the nettlesome area of purchase bookkeeping. That, in turn, could “strengthen the profession of accounting, and increase the number of graduates we see in school,” he says.
Then again, it could be the same-old same old. “If FAS 141 and 142 provide a framework, they will be excellent documents,” Schiff asserts. “But if we see pages and pages of subsequent technical interpretations, these will not be successful standards.”
Petrone says the first thing FASB is doing in its simplification plan is figuring out exactly what is meant by “more general, principle-based standards.” The process involves evaluating standards and creating documents that will strip out some of the applications and details. The goal? To keep the framework simple.
For instance, under Statement 87, Employers’ Accounting for Pensions, Petrone may develop a paper that shows the statement without the “corridor,” a provision that was put in to keep earnings from being volatile. As long as losses are within a 10 percent to 20 percent corridor, a company does not have to book them, she explains. Of course, corporates would have to keep track of that corridor.
Under FASB’s simplification plan, Statement 142 may also be scrutinized. “We tried very hard to keep it at a higher level and not to get into a level of detail,” Petrone says. “It will be interesting to see what we could have taken out.”
For his part, Jenkins believes that FASB’s staff has a more direct impact in academia by making speeches and participating at conferences. This year, the board has also issued a new educational video called “Financially Correct,” which targets, among others, the academic community. The video, which tries to enthuse watchers about the importance of accounting, goes into some depth about how financial reporting supports the capital markets.
Of course, the fact that officials at the Financial Accounting Standards Board felt compelled to release such a video would seem to indicate that accounting has a serious PR problem. Even the AICPA appears to be concerned about the profession’s image. The institute just shelled out $25 million on a direct marketing campaign to better inform students of the accounting profession. Concedes Sanders, “There are a lot of misperceptions of accounting as a career.”