GAAP and IFRS

Spare FASB from the Ax, Alums Say

Critics blast a plan to cut the board's membership from seven to five.
Sarah JohnsonFebruary 8, 2008

A proposal to reduce the number of people sitting on the Financial Accounting Standards Board has hit a nerve with its alumni and other accounting experts.

The writers of most of the letters sent to the Financial Accounting Foundation, FASB’s parent organization, 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.

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Many letters also expressed dismay that under the FAF proposal, the FASB chairman would be able to set the board’s agenda on his or her own. Currently projects are added to or, in rare cases, dropped from the agenda via a full board vote. Former FASB member James Leisenring said that a more empowered chairman (currently Robert Herz) wouldn’t improve the board’s effectiveness and could in fact hinder its ability to recruit new members.

In late December, the FAF recommended several changes in its own composition, as well as in that of the boards it oversees: FASB and the Government Accounting Standards Board. Its proposal, released for public comment until February 10, is intended to make FASB better able to respond quickly to the boatload of changes going on in the global marketplace.

But critics of the proposal believe that the pace of change and FASB’s lengthy agenda are the very reasons that the board shouldn’t be reduced to five members. “Reduction in the size of the board will only make the selection decision [of new board members] more critical and inadvertent error in selection far more consequential than it has with a larger board,” wrote Leisenring, who also sits on the International Accounting Standards Board, which has 11 members and has spent the past five years attempting to meld its rules with FASB’s.

Added Dennis Chookaszian, chairman of the Financial Accounting Standards Advisory Council: “Decreasing its size could decrease its ability to be nimble (as the skills of fewer people would be directly contributing to the decision-making process).”

To be sure, some of those who wrote in, including former FASB members Dennis Beresford and Ed Trott, said five members could do just as good a job at standard-setting as seven. The board is often slow to create rules because of frequent disagreements, which could be reduced with a smaller board, suggested Beresford, now an accounting professor at the University of Georgia. “Things should move somewhat faster with a smaller number of FASB board members,” he wrote.

Besides deliberating on generally accepted accounting principles, FASB members also spend much of their time communicating their activities publicly and educating their constituents — activities Herz has admitted would have to be reduced if the FAF approves this proposal.

Last year the seven board members participated in a total of about 200 speaking events. “We would have to reduce some of that direct engagement with some folks,” said Herz during last month’s meeting of the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting. “There are always trade-offs.”

Instead of concentrating on the number of members, the FAF should consider the interests of the people working with FASB, suggested the commentators. The CFA Institute recommended that the staff bring in more investor representatives. The staff is largely made up of people who have worked in the audit industry and have experience preparing financials.

Current board member and investor representative Donald Young shares that view. “I don’t see any arguments for why this board should be smaller,” he told CFO.com in December. “A better way to go would be to try a more aggressive representation of investors and fundamentally increase investor representation on the board.” The FASB board historically includes one member with an investor background, one academic, and five members with backgrounds as auditors or financial-statement preparers.