GAAP and IFRS

Can Bob Herz Make the Trains Run on Time?

The Financial Accounting Standards Board's parent outfit gives the FASB chairman more power to rule over a trimmed-down board.
Marie LeoneFebruary 27, 2008

By paring the Financial Accounting Standards Board’s membership to five from seven, keeping the voting process streamlined, and giving FASB chairman Bob Herz a whole lot more power, the Financial Accounting Foundation hopes to create a leaner and meaner standard-setting body.

By far the most controversial vote made on Tuesday by FAF was the cutting of the board, which was approved by 11 of the 13 FAF trustees. The move came during a time of speculation that as the move to converge U.S. Generally Accepted Accounting Principles with International Financial Reporting Standards gains momentum, FASB might become redundant. Indeed, ruefully referring to the effects of convergence on his job, Herz, admitted that, “as the king of GAAP, it’s like contemplating your own mortality.”

To be sure, the downsizing proposal faced overwhelming opposition during a 60-day public comment period that ended on February 10. Most of the 59 letters sent to FAF argued against reducing FASB’s membership. But “the comments were sought for reasons of transparency,” explained Ellyn Brown, a trustee and chairman of FAF’s Special Committee on Governance Review. “It was not a polling process.”

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Tuesday’s approval by FAF, the parent organization of the FASB, to cut the board membership by July 1 was “not a budgetary decision,” according to the chairman of the FAF. Rather, Robert Denham told reporters, a smaller FASB would help provide “the most efficient review and oversight” in setting accounting standards.

At a press conference following the vote, Ellyn Brown, a trustee and chairman of FAF’s Special Committee on Governance Review, told reporters that the cut doesn’t require FAF to ask any board members to step down. Rather, the terms of three FASB members will expire by July and only one will be refilled, enabling the change to occur through attrition, she said.

In a related action, the board voted to retain the FASB’s current system of simple-majority voting, rather than go to a supermajority scheme. In the case of a five-member board, requiring a supermajority (four votes) could create situations in which a single board member could stall the approval of a rule. That could hinder the efficiency FAF was striving for, foundation members reason.

Besides contracting the board and streamlining its voting process, the parent organization also gave the FASB chairman a whole lot more authority. Currently, FASB’s agenda and priorities are set by a majority vote. As of July 1, however, the chairman will set FASB’s agenda. “Consistent with the need for the FASB to be more nimble and efficient in a changing environment, the FASB will need the ability to initiate and more quickly respond to pressing issues,” the FAF trustees wrote, explaining the move.

In a fourth move involving FASB, the FAF board of trustees “[a]ffirmed the need for investor participation on the standard-setting board by broadening the current bylaw requirement that FASB members possess investment experience. The relevant bylaw will now read: “The Members of the FASB shall, in judgment of the Trustees, have knowledge of and experience in investing, accounting, finance, business, accounting education and research and a concern for the investor and the public interest in matters of investing financial accounting and reporting.” The trustees feel that the broadened language affirms “the need for investor participation” in the standard-setter’s work.

Some of FASB’s investor constituents remain skeptical, however. On Wednesday, the CFA Institute Centre for Financial Market Integrity issued a press release expressing “concerns” with the cut in the number of FASB members and the new agenda-setting powers of the chairman. “The CFA Institute Centre encourages the FAF to monitor the effectiveness of these changes to ensure that communication with its constituents is transparent and collaborative and supports the FASB’s ability to address investors’ needs,” said Georgene Palacky, director of the CFA Institute Centre’s financial reporting policy group.