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Will the SEC Renew FASB's Contract?

  • By Salome J. Tinker, CPA
  • Published: December 22, 2009

As a result of the Enron debacle that emerged in 2001 and led to the fall of Arthur Andersen, the SEC reclaimed it statutory authority to set accounting standards over public companies.  The SEC's Office of the Chief Accountant (OCA) has always been responsible for establishing and enforcing accounting and auditing policy issues in order to promote the fair presentation and credibility of financial statements used for investment decisions.  This office monitors and provides input on the guidance issued by the FASB. 

Prior to the scandal, however, the OCA, for the most part, allowed the accounting profession to be self regulated and self funded.  The majority of the funding for the two major standard setting bodies, the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA), came from the major accounting firms. 

As part of the post Enron system overhaul, the SEC abruptly halted the AICPA's standard setting efforts and delegated to the FASB the sole authority to set accounting standards for public companies.  The funding source for the FASB transferred from the accounting firms to transaction fees imposed on public company registrants.   The AICPA's role dwindled to administrating the professional certified public accountant (CPA) certification, hosting conferences and selling accounting publications.  

Now, the FASB, just less than ten years after obtaining the sole accounting rulemaking authority, once again has to defend its turf.  A new competitor, the International Accounting Standards Board (IASB), has entered a bid for the SEC's subcontract to become the accounting standard setter for public companies.  

So what's FASB's strategy?

FASB has been strategically positioning themselves as proponents for convergence of the two standards rather than adoption.  This is not shocking given the fact that if the FASB were to endorse the adoption of International Financial Reporting Standards (IFRS), where would that leave the FASB?  In the end, there can only be one rule making body under the adoption scenario. 

FASB's endorsement of convergence with IFRS achieves two objectives - First and foremost, convergence will allow FASB to continue to operate as the US standard setting body.  Secondly, convergence will allow the FASB to form an integral standard setting relationship with the IASB to set identical standards thus satisfying the requirement that there should only be one global accounting standard.       

The FASB has significantly increased their convergence efforts with the IASB.  The two standards setting bodies now meet monthly and share all exposure drafts such that both standards setting bodies can derive the same, or practically the same, standard setting outcomes.

In response to the FASB's and IASB's efforts, SEC's Chairwoman, Mary Schipiro made the following statement:

"I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."

The FASB has also increased their lobbying efforts to other major countries that are still not totally committed to IFRS adoption.  Recently the FASB met with Japan to discuss their respective strategies toward a single set of high-quality global standards.  The conversation was more focused on conversion rather than adoption.  If the FASB can convince others to converge or abandon adoption of IFRS then the FASB can support aborting the process without being portrayed negatively.

Despite the FASB's efforts to prove that convergence can work, the SEC still has not taken adoption of IFRS off the table just yet. 

The IASB has equally launched a counter attack for the US accounting rulemaking position.  Sir David Tweedie, IASB's chairman, has been meeting with various representatives from across the globe advocating for a single set of global accounting standards.  Sir Tweedie has positioned IFRS as being the accounting standards that are the most advanced toward becoming the global language for financial reporting.   He has won the endorsement of the G20 leaders who just recently met and reaffirmed their recommendation for a global set of accounting standards in light of the recent global economic downturn. 

Ultimately, the SEC will decide which course of action the US will take.  The two accounting standards are not that far apart from each other as often portrayed.  The fundamental hurdle that would have to be overcome is that US GAAP are rule based standards that are very prescriptive in nature, while IFRS are principle based standard that leave much interpretation to corporate management and their auditors.   If the US can get past this obstacle given our litigious system, the remaining accounting and logistical issues will be an easy fix.

Salome Tinker is AFP's director of accounting. She writes frequently for AFP's accounting newsletter. Contact sjtinker@afponline.org 

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