FASB’s Fee Hike Falls Short

The SEC approved FASB's funding fee, increasing its budget by 5 percent. But that's not quite enough to meet its operating budget goals.
Stephen TaubFebruary 14, 2008

The Securities and Exchange Commission approved a five percent fee hike to fund the Financial Accounting Standards Board. The securities regulator voted in favor of a $23.7 million fee on public companies to help fund the accounting standard setter for 2008, according to Dow Jones.

Even so, this falls short of FASB’s proposed $31.1 million budget for the year, the wire service noted. It pointed out that cash reserves and investment income make up the difference.

According to the report, salaries for FASB employees are estimated to increase by 4.5 percent this year, while board members will receive an 8.5 percent pay increase. SEC Chief Accountant Conrad Hewitt reportedly said FASB needs the increases to attract and retain individuals whose technical expertise makes them key candidates to be hired by private accounting firms.

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To bolster its independence, Congress ordered public company funding of FASB and the Public Company Accounting Oversight Board as part of the Sarbanes-Oxley Act. Prior to that, FASB was funded by donations from the private sector, mainly from public accounting firms. Sarbox also permits FASB to raise additional revenue by, for example, selling publications, including the voluminous generally accepted accounting principles.

Today, public companies are assessed annual accounting support fees to pay for FASB’s budget. The reason for the switch, according to the SEC, is to provide an “independent, stable source of funding, subject to review by the commission.”

Interestingly, FASB’s independence came into question last year when the SEC’s Office of the Chief Accountant, refused to sign off on FASB’s budget until its parent organization, the Financial Accounting Foundation, agreed to SEC demands for more say in the appointment of both FASB members and FAF trustees.

The power to hold more sway over nominations was outlined in a series of letters exchanged between FASB and the commission. At the time, SEC spokesman John Nester denied that the new agreement expands the SEC’s power over FASB. “There is no more say in the agreement, no more new responsibilities or areas of oversight,” he told “The Sarbanes-Oxley Act requires us to certify the standards-setter’s capacity and capability to do their job. The certification process necessarily entails review of the standard-setter’s budget and governance.”

The SEC also refused to approve a 2007 pay increase for FASB board members. While the refusal to grant the raises was disappointing, according to Frank C. Minter, vice president of FAF and former CFO of AT&T International, “my impression is that FASB board members were not as disturbed by the [pay] roll-back as they were about the letter [giving the SEC more nominating power.]”

The SEC has had oversight over accounting standard-setters and the accounting rules used in public company financial filings since the Securities Act of 1934. But it was the passage of Sarbox in 2002 that sought to ensure FASB’s independence by switching its funding source from audit firms, which had a vested interest in the accounting industry, to the SEC. In a post-Sarbox policy statement issued in 2003, the SEC emphasized “the importance of the FASB’s independence” to ensure that accounting rules are free from bias, and explained that Sarbox requires the SEC to evaluate the organizational structure, operations, and procedures of FASB and the FAF.

If FAF and the SEC ever do decide to the FASB budget, they might start with the board itself. In December, the FAF announced plans to reduce the number of FASB board members from seven to five , and give its chairman, currently Robert Herz, more power to set the agenda for rulemaking.

However this month, critics of the plan shot back in public comment letters, defending the seven-board structure. The writers of most of the letters sent to the FAF don’t believe that cutting the board’s membership would result in FASB becoming “more nimble and responsive to domestic and global demands,” as the FAF declared in December.

Now is not the time for a smaller board, some say. “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.