Speaking at a conference two years ago, Robert Herz, chairman of the Financial Accounting Standards Board, lavishly praised the comments — and personal appearance — of the preceding speaker, Scott Taub, then the Securities and Exchange Commission’s deputy chief accountant. To laughter from the audience, Herz then explained the reason for his obsequiousness: since Sarbanes-Oxley, it is the SEC’s Office of the Chief Accountant that approves the FASB budget.

Two years later, the SEC’s power to approve its budget is no longer a joking matter for FASB. This year, the Office of the Chief Accountant, now run by Conrad Hewitt, 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.

In a March 9 memo to the SEC, the FAF agreed to a specific time line for the SEC to review FASB and FAF candidates, and states that the SEC has the power to nominate and interview candidates. “A member of the SEC staff said we needed to make these changes before they would approve the budget,” says Frank C. Minter, vice president of FAF and former CFO of AT&T International. “[The budget] was approved very quickly after [FAF chairman] Bob Denham had signed the letter.”

At the SEC’s request, says Minter, the FASB budget for this year was submitted earlier than usual, at the end of October. Asked whether the SEC held up the approval until the FAF agreed to give the regulator a stronger role in appointments, Minter said, “They approved it at the end of March, so that will tell you.” The SEC officially certified the FASB’s budget on March 14th, three business days after the memo was signed, but about four-and-half months after the budget was submitted.

By contrast, the budget for the Public Company Accounting Oversight Board, which the SEC traditionally has approved simultaneously with FASB’s, was submitted to the SEC on November 30 and approved eight days later, on December 8.

SEC spokesman John Nester denies 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 says. “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.”

As CFO.com reported yesterday, the SEC also refused to approve a 2007 pay increase for FASB board members, a decision Minter says was made on February 28. Robert J. DeSantis, president and chief operating officer of the FAF, told CFO.com yesterday that the pay increases submitted last year were “an attempt to reconcile” board pay with raises in the market, and that the amounts had been determined by an independent salary survey conducted by a human resources consultant.

FAF Trustee John J. Radford told CFO.com yesterday that the SEC might have disapproved of the salary increases because they were not in line with increases at the Public Company Accounting Oversight Board. But, says Minter, “It was not double-digit increases. Most of us felt the catch-up was relatively modest.”

While the refusal to grant the raises was disappointing, says Minter, “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].” Minter said board members feel that the SEC’s expanded role “is an erosion of the independence of the board.” During a recent visit to FASB’s headquarters in Norwalk, Connecticut, he says, he talked with six board members and found “signficant concern” about the SEC’s move.

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 Sarbanes-Oxley Act of 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.

That statement mentioned that the SEC should receive “timely notice” of potential appointments, but sets no specific timeline. It also confirmed that the “final determination” for overseeing, funding, and appointing members to FASB still rests in the hands of the FAF.

In contrast, the FAF’s March 9 memo, whittled down from a nine-page briefing document the SEC sent to FAF, specifically requires that the FAF give the regulator at least 30 days, and preferably 45, to review FASB and FAF candidates and their qualifications. The memo repeats the earlier declaration that the FAF makes the final decision regarding board member and trustee appointments.

“Under the new agreement, all parties know exactly what is expected of them, so everyone can discharge their responsibilities to protect investors under the Sarbanes-Oxley Act,” says Nester.

Missing from the FAF’s memo, says Minter, is the presumption that FASB and FAF members who perform well can be reappointed without being vetted again by the SEC. Minter says the SEC would not allow the FAF to include such a provision. “There is no difference now between appointments and reappointments,” says Minter. This past December, FASB chairman Herz was reappointed, as were FAF Trustees Timothy P. Flynn, chairman and chief executive of KPMG LLP, and James H. Quigley, chief executive officer of Deloitte & Touche USA LLP.

In its new agreement, the SEC “goes a great deal further [than before] in its involvement in the selection process,” argues board member Edward Trott, who is set to retire from FASB this year. In the past, the SEC “suggested” candidates, he says, but it never sought to formalize its power to nominate or interview. He says that while the SEC has always had statutory authority to set accounting standards, the regulator looked to the private sector to provide an “independent” perspective on accounting issues. Trott worries that the new formal process will open the door to more political tinkering with standard setting, either directly from the SEC or indirectly from Congress.

This story includes additional reporting by Sarah Johnson and David Katz.