Keep Politics Out of Accounting Standard-Setting.

• Author: Kothari, S.P.

The Securities and Exchange Commission's proposed rule on climate-related disclosures would require several quantitative metrics be incorporated in the notes to firms' financial statements. We are concerned that this proposal disregards the independence of the accounting standard-setting process. It would seriously compromise the integrity of the financial statements that investors rely on to make important investment decisions.

For decades, our financial accounting system has been built on a joint responsibility system whereby an independent, expert, private-sector body produces accounting standards under the SEC's oversight. This structure was deliberately chosen after careful consideration and for good reason. While the SEC has authority under the 1933 Securities Act and the 1934 Securities Exchange Act to promulgate accounting standards, private sector standard-setting bodies have historically fulfilled this responsibility. The first of these bodies was the Committee on Accounting Procedure, established in 1939, which was succeeded by the Accounting Principles Board in 1959, and finally by the Financial Accounting Standards Board (FASB) in 1973.

FASB was formed following a recommendation from the Wheat Committee, chaired by the renowned corporate securities lawyer Francis Wheat and formed in 1971 by the American Institute of Certified Public Accountants. The committee specifically examined whether accounting standards should be set by a private sector body or the government. It concluded that standards should be set by the private sector to protect from political pressures and guard against serving the will of special interest groups instead of investors. The SEC endorsed FASB's creation and announced it would consider the board's standards as having substantial authoritative support, a position the SEC holds to this day.

FASB's structure was designed to counteract political and special interest pressures. Board members serve full-time, are appointed by Financial Accounting Foundation trustees to five-year terms, and they come from a variety of backgrounds related to the financial reporting field. Funding for FASB is provided from the private sector, not the government, and primarily comes from accounting support fees paid by public companies.

SEC oversight of FASB is a critical part of the board's...