FASB Parent: Five Is More than Seven

Contending that the standard setter can do more with less, the Financial Accounting Foundation votes to cut the board and give the chairman more po...
Marie LeoneFebruary 26, 2008

In a controversial vote, the Financial Accounting Standards Board’s governing body has approved the reduction of FASB from seven to five members as of July 1.

In a closed-door session on Tuesday afternoon, at least 11 of the 13 members of the Financial Accounting Foundation’s board of trustees—the minimum needed to enact a bylaw change—approved the reduction, which had not been incorporated into FASB’s recently approved 2008 budget. Overall, the trustees “voted to approve major changes to the oversight, structure, and operations” of FAF, FASB, and the Governmental Accounting Standards Board, in the words of a FAF press release. The organization would not provide further details of how the trustees voted.

Another of the most debated changes approved by the trustees will vest the FASB chairman, currently Bob Herz, with the authority, “following appropriate consultation,” to set the board’s agenda, project plans, and priority of project plans. Currently projects are added to or, in rare cases, dropped from the agenda via a full board vote.

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FAF has claimed that the reduction of the board’s size would result in more efficient standard-setting. Previous proposals to shrink FASB, however, emphasized the cost-cutting benefits. In any event, the move will have the effect of slicing two salaries from the standard-setter’s payroll. As an indication, the annual salary of Herz—the only member form whom compensation is publicly available from tax filings—was $615,000 in 2006. The Securities and Exchange Commission turned down raises for FASB members in 2007. Recently, the SEC okayed 8.5 percent salary hikes for 2008, which would put Herz’s current salary at $667,275.

At a press conference following the FAF trustees’ meeting in New York, FAF trustees talked about why the they cut FASB’s board in the face of widespread opposition. The majority of comment letters FAF trustees received in recent months opposed the controversial proposal to reduce the membership of FASB. “A reduction in the size of the FASB is likely to compromise the outreach to its constituency, since there will be fewer members shouldering an ever increasing workload,” wrote the CFA Institute Centre, a research and policy organization.

Concerning the trustees’ decision procecss, FAF chairman Robert Denham told reporters that “this is not a question of counting comments. It’s considering comments.”

Chief among the trustees’ considerations was making the move toward a melding of U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. “We took action very much with an eye toward convergence,” Denham said.

Timothy Flynn, chairman and chief executive of KPMG and a FAF trustee, said that to bring in new members during the convergence process “might slow the process down.” The terms of two current FASB members, George Batavick and Donald Young, expire this year.

Some commenters urged the trustees “to wait until we had a clear path and timetable for convergence,” said Denham. “That suggests that we should be passive. We believe we should be an active participant and work to create the path.”

The trustees also broadened their current requirement that FASB members have investment experience. The relevant bylaw will now read: “The Members of the FASB shall in judgment of the Trustees, have knowledge of 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.