Download Levels of authority in accounting standard setting

Chapter 8: FASB, Present and Future
•
At the present time some situations have significant effects on the operations of the FASB as
discussed below:
Criticisms in the Financial Media
•
The financial media or the press can publish reports about the accounting standards prepared
by the FASB.
•
The effect is positive when the reports comment on the standards favourably and help users
understand financial accounting and reporting so that they can make rational decisions.
•
The effect is negative if the reports published by the media criticize the FASB.
• FAF Contributions
• As previously mentioned statement preparers (firms) make contributions to the
FAF who then forwards these funds to the FASB.
• One way to measure the level of satisfaction with the FASB is to look at these
contributions and see if they decrease if the FASB issues unpopular SFAS’s.
General Accounting Office Study
• In a report written by the General Accounting Office it was stated:
• Although the accounting profession has made improvements in financial reporting
and auditing, major problems have not been solved.
• The FASB includes users in the standard-setting process but their representation and
participation are lower than other groups.
• The SEC should work with the FASB to resolve problems about the Board's efficiency
and timeliness.
Congressional Interference
• For some controversial SFAS’s on topics such as stock options, derivatives and
mergers and acquisitions, the Congress has introduced laws that show how it
has bypassed the FASB directly.
SEC Activity
• Even though the SEC has delegated the standard-setting authority to the FASB, this
hasn't stopped SEC individuals like the chief accountant or the chairman from
bypassing the FASB.
• For example the SEC chairperson decided to create the Independence Standards
Board (ISB) because he was dissatisfied with the auditing of firms that were
expanding in new areas. This board established rules and regulations to improve the
independence of auditors of public companies.
• This move implies that if the SEC can create new bodies to solve problems it can do the
same for accounting standards issued by the FASB.
• Generally, the SEC has been reluctant to do this unless absolutely necessary.
The International Accounting Standards Committee (IASC)
• The International Accounting Standards Committee (IASC) was founded in 1973
by the leading professional accounting bodies in nine nations: Australia, Canada,
France, Germany, Japan, Mexico, The Netherlands, the United Kingdom and
Ireland.
• The objective of the IASC was was to prepare a Conceptual Framework and
International Accounting Standards (IAS) that firms should follow when preparing
financial statements.
The Structure of the International Accounting Standards’ Setting Body
• The IASB structure is similar to that of the US.
1. The standard setting procedure is governed by a group of members who appoint the
IASB members, evaluate the administrative procedures of the IASB and raise funds.
2. The IASB consists of fourteen individuals (twelve full-time) who have knowledge of
financial accounting and reporting problems and produce accounting standards.
3. A Standards’ Advisory Council was created to provide the IASB with current
information of what is happening with reference to financial reporting.
4. A Standing Interpretations Committee of twelve members is also part of the new
structure. This committee is designed to interpret the application of IAS’s.
The International Organization of Security Commissions (IOSCO).
• The IOSCO is an association of securities and exchange regulatory agencies.
• Each nation has its own set of accounting standards (national GAAP) for the
preparation of accounting reports.
• In May 2000 IOSCO recommended that all member countries allow firms that issue
shares cross border to use IASB standards to prepare their financial statements.
• However IOSCO simply made a recommendation to member regulators who must
decide for themselves.
International Listings on the New York Stock Exchange
• The New York Stock Exchange (NYSE) is the world's largest stock market and many
foreign firms want to be listed so that they can issue shares and raise American
capital.
• Foreign firms prefer to prepare their financial reports using their own accounting
standards because the US GAAP is more strict.
• But many US regulators and investors are afraid to rely on foreign accounting
standards for investment decisions.
• For example, a German firm about to be listed on the NYSE agreed to prepare books
under the US GAAP. The results were interesting because under German GAAP the
firm reported a net income but under U.S. GAAP that net income became a net loss.
• US firms are concerned that they will be required to follow the more strict US
standards while foreign firms will follow their national GAAP or IASB standards,
yet both firms will compete for the same capital.
• Even though the SEC chairperson does not agree, the NYSE has allowed the use
of foreign GAAP or IAS as away to increase its foreign listings.
The Final Question: Whose Standards?
• The FASB has responded to these pressures by:
1. Taking into account the IAS when completing its own projects.
2. Working with the IASB to set international accounting standards on selected topics.
3. Considering the use of IASB standards if they are judged to be better than US
GAAP.
4. Influencing the IASB to adopt US standards that are judged to be better than
international GAAP.
5. Allowing firms to choose between US or IAS standards when they are considered
equal.
6. Continuing its efforts to encourage comparability between financial statements of
US and foreign firms in the US capital market.
Domestic Competition
• In addition to international competition from the IASB, other bodies compete with
the FASB.
Emerging Issues Task Force – EITF
• The EITF was originally created to help the FASB identify and find solutions to
emergency accounting problems.
• The EITF GAAP is developed in a much quicker manner than the FASB and it has
substantial public and the SEC support as well.
• So instead of acting in a supporting role to the FASB, the EITF may have developed
into a standard-setting body.
Accounting Standards Executive Committee - AcSEC
• This committee was formed by the AICPA in order to give its opinion on accounting
and reporting issues.
• The AcSEC issues Statements of Position (SOP’s) that give extra guidance to financial
statement preparers.
• At some stage there was a concern as to whether the AcSEC had become an
accounting standard-setting body.
• The issue was resolved in 1992 when the AICPA identified SOP’s as a basis for GAAP.
The FASB must approve all new SOP’s. The result is a cooperation between the FASB
and AcSEC rather than a conflict.
Levels of authority in accounting standard setting
• In the United States there are three levels of authority in standard setting, private
and public. These levels are discussed nest.
Authority Level One
• At the highest level of authority is the US Congress which could be the only source of
accounting standards.
• The Congress has established the SEC and gave it legal authority to set accounting
standards.
• The Congress can withdraw this authority from both the SEC and the FASB.
Authority Level Two
• At the next level is the SEC. It does not exercise its authority but it has delegated it
to the FASB.
Authority Level Three
• The third level consists of private bodies that operate as public bodies such as the
FASB.
Advantages of the FASB for the SEC
• The current standard-setting arrangement provides some excellent advantages for
the SEC and these follow:
1. The FASB has been successful in setting accounting standards.
2. Although the FASB issues accounting standards, the SEC is still in control. It can easily
influence the agenda of the FASB, participate in the FASB process and influence the
standard-setting.
3. The FASB protects the SEC. Many of the criticisms directed at the FASB would have
been focused on the SEC if there were no FASB.
4. The FASB protects the SEC. Many of the criticisms directed at the FASB would have
been focused on the SEC if there were no FASB.
5. The SEC does not have to fund the accounting standard setting. The FASB is funded by
the private sector at no cost to the government.
6. Through the FASB, the SEC has access to advice that it could not afford to obtain
elsewhere.