Putting Standard-Setters to the Test

An SEC advisory committee will recommend that FASB's performance be measured.
Marie LeoneJuly 11, 2008

The effort by the Financial Accounting Standards Board to cut complexity out of the standard-setting process might be thrust into high gear come August. That’s when a Securities and Exchange Commission advisory committee will issue its recommendations for improving the financial-reporting system in the United States, which includes the concept of developing performance metrics to assess FASB’s ability to set standards in a timely and effective manner.

The Committee on Improvements to Financial Reporting (CIFR), led by Robert Pozen, met on Friday to work out the wording and concepts contained within its 180-page draft report, which is slated for release next month. In the report, the committee calls for metrics that measure, among other things, whether FASB is efficient and effective at handling cost-benefit analyses, field visits, and field testing, as well as at evaluating public comment.

The draft report says FASB and its parent organization, the Financial Accounting Foundation, “are best positioned” to decide which performance metrics would be appropriate to implement. Further, the draft asserts that “active monitoring of such metrics” would not compromise FASB’s independence, but rather are aimed at improving accountability associated with “the process of standard-setting.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The CIFR also talked about forming a new FASB advisory group to respond to current economic and market issues. Dubbed the Financial Reporting Forum, the group would create a formal venue to cull opinions and advice from FASB, the SEC, and the Public Company Accounting Oversight Board, as well as from preparers, auditors, and investors. Currently FASB’s Financial Accounting Standards Advisory Council serves a similar purpose by bringing together financial-statement users and preparers, but the group does not have direct input from regulators.

One of the advantages the new Forum would have over the FASAC is that it would have the flexibility to meet “at the spur of a moment” to deal with timely issues, said David Stillwell, a CIFR member and CFO of Morgan Stanley. Further, the Forum would “avoid adding granularity or specificity” to the process so they could “respond to issues of the day,” concluded Pozen. It is unclear, however, whether the FASAC would survive if the new group was created.

FASB chairman Robert Herz, who attended the meeting as an observer, told the committee that a formal advisory group that included regulators would work better than the board’s current “patchwork” system of polling regulators and constituents and factoring in comment-letter responses. A “more organized mechanism” like the Forum would also help FASB weed out issues that investors “don’t care about,” opined Herz. And without naming names, he also suggested that the SEC look overseas for examples of accounting advisory models that work well with standard-setters.

The final CIFR report will also contain recommendations calling for formal postadoption reviews of new “significant” standards. The review would be a way of addressing interpretive questions and reducing diversity in practice when applying the standards. What’s more, the committee would like to see the SEC and FASB conduct periodic assessments of existing accounting standards and attendant disclosure requirements to keep the rules current.

Michael Cook, a CIFR member and the former chairman and CEO of Deloitte & Touche, liked the idea of a “sunset review” for existing standards. “Some of our most voluminous standards are old,” he said, noting that he didn’t want the release of a new standard to be the only thing to prompt FASB and the SEC to test a rule’s relevancy.

4 Powerful Communication Strategies for Your Next Board Meeting