Is the FASB Antibusiness?

By: John Kulibaba
Bridgewater State College

"Tell FASB to keep their hands off the American Dream" (Warsh, 37).

"U.S. entrepreneurial stalwarts are to be sacrificed on the altar by FASB" (Harvard Business Review, 28).

By reading these two quotes, a reader would probably assume that FASB is some militant, antibusiness and anti-American group that is determined to destroy U.S. businesses, the American Dream, and even "Mom and Apple Pie". However, this is not the case. The Financial Accounting Standards Board (known as the FASB) does not want to destroy any business or crush any dream. The FASB sets the accounting standards for businesses in the United States. Its mission is stated as:

"Establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information" (Beresford, A13).


However, many business people think otherwise. They feel that the FASB and the accounting principles that it sets reflect an implicit antibusiness bias. Business people believe FASB is unresponsive to business concerns and is not in touch with business reality (Lowenstein, C1).

The FASB was created in 1973 to address the problems of independence that existed in its predecessor, the Accounting Principles Board (APB). Problems had also existed with the timeliness of solving accounting problems and the structure of the board, which was composed entirely of members from the American Institute of Certified Public Accountants (AICPA) and all of whom were volunteers (Clark and Schroedor, 8). Critics of the APB's board also believed that the lack of independence stemmed from the fact the members had full-time responsibilities at other businesses. The FASB's board members were full-time members and it was composed of seven members from various backgrounds. At the inception of the FASB, three members were from public accounting, two from private industry, and one each from academia and government (Adler, Delaney, Epstein, and Foran, 2). The FASB was not required to designate seats on the board to any organization. They believed that by including members from other organizations, the FASB would be able to respond to accounting issues impartially by hearing how certain issues affected certain users.

Even with this new accounting board, business has complained once again. Business people have said that the FASB is too slow in making decisions about accounting issues. Also, they have said that financial reporting has not kept up the economics of business in the world today (WWW, "Comments on FASB"). Another complaint by many businesses is the cost/benefit effects of FASB rulings. Many accounting principles and rulings are very expensive to implement. The benefits to the users by presenting all the required information is not worth the cost of presenting. The information shown does not affect users or is too confusing and detailed for users to understand. Therefore, business should not be hindered by a slow-acting and bloated board. To fix this problem, the business people have looked to the Financial Executives Institute (FEI) to help propose a solution.

The FEI consists of over 14,000 members who are corporate financial executives in businesses in the United States. The FEI has sent two letters to the Financial Accounting Foundation (FAF), the parent association of the FASB, listing the recommendations that would make the FASB more responsive to business situations and accounting issues associated with them. The FEI has recommended that the board of the FASB be shrunk down to five members, from seven, but assign two seats on the board to business members. Also, the board should be part-time and the members should serve shorter terms. The board would require four "yes" votes for a measure to pass, as compared to the current five votes needed to pass any proposal (Berton, B12). This way, businesses could have a say in the accounting principles that could affect the way they prepare their financial statements.

This is a step in the wrong direction. The APB was criticized for its lack of independence. By letting businesses "massage" their numbers in their financial statements, the figures could not be relied on. In the Statement of Financial Accounting Concepts #1, one of the three objectives is:

1. To provide information that is useful in making business and economic decisions, with the emphasis on external users' needs because these users lack the authority to obtain the financial information they want and need from an enterprise. Users must rely on management to provide the information to them (Adler, Delaney, Epstein, and Foran, 22).


If users are relying on management to provide the necessary financial information and management has a strong say in how that information is presented, then how can users rely on that information? Neutrality is a quality of accounting information, according to the Statement of Financial Accounting Concepts #2, which states that accounting alternatives should be free from bias toward a predetermined result (Clark and Schroedor, 23). If the information is biased in any way, it is not useful to users. If business has an influential position in setting accounting principles, the FASB would not have the independence or the ability to make unbiased accounting rules that would be beneficial to users notwithstanding that they might affect a company's financial reporting in a very negative way.

Another characteristic of accounting information that would be affected is the comparability between industries. Comparability, according to the Statement of Financial Accounting Concepts #2, is another qualitative characteristic of accounting information that states that information should be able to be compared with other accounting information from other enterprises or information from the same enterprise in prior years (Clark and Schroedor, 23). If businesses are able to manipulate their own reporting practices, little comparability will exist in many industries and users will not be able to determine which business is doing well or poorly compared to similar businesses or their own business in past years.

Yet the businesses do have a valid argument when it comes to the cost/benefit restraint. According to the Statement of Financial Accounting Concepts #2, the cost/benefit restraint affects the accounting information. These costs are borne by the presenter of the information but they can be indirectly passed down to users through decreased profits. They incur great costs to present information to the many users of the financial statements. But users will also ignore information that is not relevant to them yet the company is required to present it. Why should businesses be required to present information that will be excluded by users when they examine the financial statements?

With this flaw in the cost/benefit restraint, it does not mean that the business world should be allowed to get "control" of the FASB. The FASB exists to give users useful information about companies' transactions and how they are recorded. The FASB is not interested in influencing behavior toward achieving social, economic or public policy goals (Breseford, A13).

One supporter of the FASB is Arthur Levitt, chairman of the Securities and Exchange Commission (SEC). He believes that the FASB should be "free from heavy pressures from business in setting unbiased, beneficial accounting principles" (Berton, B6). Also, Levitt does want FASB to remain a private sector group without any congressional interference; if the government, specifically the acts of Congress through the SEC, became involved in the rule setting affairs of the FASB, the credibility of the FASB and the process of creating accounting principles would be harmed greatly. The government could easily take away the authority of FASB pronouncements by writing accounting standards into Federal securities law (Beresford, A13). Levitt believes strongly in neutrality of the FASB and its current process of rule-making. He has admitted to the long arduous process of public hearings that drag out the rule-making process but he believes in strengthening the FASB to make its rulings proceed more quickly (Berton, B6).

The chairman of the FASB, Dennis Beresford, is another strong believer in the need for neutrality in the rule-making procedures and composition of the FASB. He is quoted as saying:

"Truth in accounting means telling it like it is, without bias or intent to encourage any particular mode of behavior by the user of the information" (Beresford, A13).


This is a perfect definition of neutrality when compared to the definition given in the Statement of Financial Accounting Concepts #2. Beresford stresses that the role of accounting is not for influencing economic and social policy. The FASB exists to help provide users of financial statements with the information they need to make decisions about businesses.

What all this arguing about whether the FASB is antibusiness or not can be boiled down to one word -- profit. If the FASB comes out with a ruling that adversely affects the "bottom line," businesses say that the FASB is making poor accounting principles. For example, the decision to make employers accrue liabilities for Postretirement Benefits Other Than Pensions (under SFAS 106), employers were outraged because this liability would cut corporate profits by billions of dollars (Clark and Schroedor, 556). They also argued that these postretirement benefits were hard to estimate and should not be accrued. However, the FASB felt that it would be best to estimate this expense now because employees were earning these benefits by working in the present. Therefore, according to the matching principle of accounting, the expense should be matched with the revenue derived from the employees, for a fair representation of income. Also, the large controversy on expensing stock options was another sore subject to many businesses because the expense would again cut deeply into earnings. Many companies, including start-up firms and high-tech firms, have said that they would not be able to encourage investment in their companies if they could not use stock options to pay talented and experienced managers (Berton, B1). Yet FASB requires that this expense of stock options must be disclosed, starting in 1997, to reveal to investors how much executives were given stock options as compensation.

If the FASB comes out with a ruling that boosts a company's earnings, companies are all for it. For example, when the FASB considered changing the rule on the value of servicing home loans by changing the way the servicing of home loans is accounted for (as an asset instead of a liability), many banks applauded this decision (this ruling is known as SFAS 122, Accounting for Mortgage Servicing Rights) (Carlton, B3; Adler, Delaney, Epstein, and Foran, 806). This example shows how the bottom line is the real agitator of many companies. They do not want their bottom line to be negatively affected in any way and if it is, they will feel that they are not being treated right.

The urge to boost or manipulate profits is not the way to decide on how to form accounting principles. If business is able to get a strong control on how the FASB decides on what will be accounting principles, any information provided by businesses will be biased. Neutrality is the reason why business should not have a strong say in the FASB. The FASB exists to help provide useful information to users of financial statements. If the information in the financial statements can be manipulated and is not neutral, its comparability and its usefulness to decision makers and users would be compromised. No matter how much cost would be saved, it would not be worth it because the usefulness of the information would be destroyed. Accounting principles and the FASB exist primarily for the users of the financial statements. Business feels that by FASB putting the needs of users before the needs of business it is anti-business. However, the FASB is really "pro-user". And business should be happy about this. Why? Because the FASB is "pro-user," therefore it is pro-business. After all, how do businesses attract capital into their businesses -- by showing people, through the financial statements, how well they are doing with the capital they already have. If the FASB did not exist, businesses would find it very difficult to attract capital when they could manipulate their financial data with ease. Users would not rely on their financial statements and would be reluctant to put any of their capital into it. Businesses should be thankful that a pro-business accounting group helps businesses attract the capital they need.

Works Cited

Adler, James. R., Patrick R. Delaney, Barry J. Epstein, and Michael F. Foran. GAAP 1996. New York, NY: 1996.

Beresford, Dennis R. "In Accounting, Truth Above All." Wall Street Journal 21 March 1994, A13.

Berton, Lee. "Business Group Wants Smaller FASB, More Influence on Rule-Setting Process." Wall Street Journal 8 Feb. 1996, B12.

Berton, Lee. "SEC Chairman Will Resist Any Move To Boost Business Influence on FASB." Wall Street Journal 3 Feb. 1996, B6.

Berton, Lee and Lublin, Joann S. "Executives Say Accounting Idea Is Poorly Timed." Wall Street Journal 4 Dec. 1992, B1.

Carlton, Jim. "Mortgage Bankers Seek FASB Change To Boost Profits." Wall Street Journal 2 July 1993, B3.

Clark, Myrtle and Richard G. Schroeder. Accounting Theory: Text and Readings. New York, NY: 1995.

Harvard Business Review. "Taking Account Of Stock Options (symposium)." Harvard Business Review. Jan/Feb 1994: 27-29+.

Lowenstein, Roger. "Can FASB Be Considered Antibusiness?" Wall Street Journal 21 March 1996, C1.

Warsh, David. "Could FASB Be The Villain?" Boston Globe 3 May 1994, 37.

World Wide Web. "Comments on FASB" Feb.12 1996.

 

Last Modified: April 6, 2004