The rule-making process: a time for change?

• Author: Jacobsen, John C.
• Position: Criticism of the Financial Accounting Standards Board's rule making process

The rule-making process: a time for change?

The FASB is beginning to respond to its critics, the authors write. What is now needed is some give and take from both sides. From industry's perspective, such discussion would begin with the agreement that business is both a preparer and a user of financial information and that the conceptual framework should not drive standard-setting. Rholan Larson and Dennis Beresford are sending some clear signals that the corporate community's concerns may finally be getting some attention. While that is encouraging and the changes seem to be pointing in the right direction, it may take more than mere raging incrementalism to still the legitimate criticisms.

The FASB is clearly a natural target for criticism, and has been almost from the beginning. It has been criticized for issuing "cookbook" accounting standards on the one hand and for being too broadly conceptual on the other. It has been condemned for standards that are too complex and costly to implement, and accused of a preoccupation with "conceptual purity" resulting in standards that are far removed from reality. Most recently, critics have asserted that the Board does not pay enough attention to the "social consequences" of its actions and that it has too much autonomy.

While some of the critics are new, the criticisms are not. The labels get changed, but the underlying discontent is the same. What is new is the recent ground swell of opinion within the corporate community and the public accounting profession that changes need to be made in the standard-setting process. Also new are the remedies that have been recently suggested to accomplish this.

Some in industry have even suggested that accounting standard-setting responsibility be taken away from the private sector and turned over to the Securities and Exchange Commission, or that an oversight committee be established which would have veto power over projects added to the Board's project agenda. Others have suggested less drastic action which they characterize as fine-tuning, such as the more effective use of project task forces and the need to do more field testing of the FASB's tentative conclusions on major projects.

The idea of turning accounting standard-setting over to the Securities and Exchange Commission has no appeal to the authors, nor do we think it has widespread support. Politicizing the standard-setting process would not be helpful. Similarly, establishing an oversight committee with the power to overrule Board project agenda decisions would erode its independence and weaken the credibility of the process. Neither solution is very good. But they are certainly symptomatic of the business community's growing perception that it is not being heard in Norwalk.

So the question is: are these concerns justified? And, if so, how can they be addressed without throwing the baby out with the bath water?

Several years...