The explosion of accounting standards.

• Author: Beresford, Dennis R.

Financial Executives Institute (FEI) announced, in an April 11, 1972 letter to the American Institute of Certified Public Accountants (AICPA) Board of Directors, that it agreed with the concept embodied in the Wheat Report on the establishment of the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB) and supporting organizations. The Report was prepared by an AICPA study group that was formed to review how accounting principles should be established. Chaired by the former Securities and Exchange Commission (SEC) Commissioner Francis Wheat, it became known as the "Wheat Committee."

At that time, standards had been formulated by the Accounting Standards Board (APB). "Procedures devised at the end of the 1950s for formulating financial accounting standards were probably appropriate at that time and have brought about notable improvements in financial reporting during the APB's 12-year history," read the opening of the Wheat Report. It went on to say that "the time has come for a change."

On the proposed new board, then-Chairman of FEI C. M. Allen noted in a May 4, 1972 speech the progress FEI had made in being recognized as the "spokesman for management in the financial community." He said, "It is entirely possible that the Wheat Committee might not have been appointed even, had it not been for the continued growth of FEI's influence in speaking out on accounting principles."

Charles C. Hornsbostel, FEI president, noted the importance of appointing men of extremely high caliber to the new standard-setting board and urged financial executives to study the complete Report. "The successful implementation of these recommendations will affect the future of financial reporting for many years to come," he said. "Every financial executive should be sure he is fully aware of all the ramifications of these proposed new organizations."

Also, as reported in FEI Bulletin, May 1972, he noted that industry would likely be called upon for financial support. "If we are to have a voice in the future of financial reporting, we must be willing to pay our way. When approached, your company should pledge at least your fair share of the funds that will be needed."

Commenting on the documents for establishing the new board, (FEI Bulletin, July 1972), FEI stated that the "implementation of the Wheat recommendations could mark 'the beginning of a significant and creative era in the formulation of improved accounting and financial reporting standards.'" FEI added that "it is essential that all those concerned in the process be dedicated to the purposes and the spirit of the Report ... There can be no success unless all participants are imbued with the determination that the recommendations of the Report be carried out fully ... [and] in a manner which will build public confidence in the endeavors of the new organizations."

Launched with this FEI support, the FASB has been doing its job since 1973, and is constantly changing as the business and financial environment around it changes. What follows are opinions from the chairs of the U.S. and international standard-setting bodies, and a former two-term FASB chair, who discuss what's top-of-mind in the 21st century.

--Ellen M. Heffes

* The FASB'S Accomplishments Since Its Founding

With the Financial Accounting Standards Board (FASB) now about one-third of a century old, it has outlasted any predecessor accounting standard-setting body. In trying to judge its accomplishments, first consider the expectations for FASB when it was started and the major concerns about the new system. Speeches by Leonard Savoie, then executive director of the AICPA, and a presentation by Reginald Jones, then chairman of the board of General Electric Co., hold keys to the early issues.

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Savoie and Jones each expressed cautious optimism about the new board and its structure. Savoie observed that the structure involved "responsibility without authority." He questioned whether FASB could actually be independent of the Securities and Exchange Commission (SEC) or whether it would become explicitly subservient to the commission, and he worried whether other interested parties would truly be supportive. In 1973, he said: "By their actions and attitudes, businessmen and professional accountants seem to be saying, 'We want accounting rules to be set in the private sector, only if we agree with the rules.'"

Jones had similar concerns as to whether the business community would support FASB, but argued that it would be in its best interests to do so. "We must recognize that with its first decision the new board is going to gore somebody's ox--and that will be the time for us to pull together--not to splinter apart," he said.

Given those early concerns, perhaps the board's major accomplishment is that it has survived thus far. In reality, however, FASB has a long list of accomplishments. Among them, according to this author, and not necessarily in order of importance, are:

* It has been able to achieve reasonable independence and has not become subservient to the SEC, the business community or the accounting profession.

* It has dealt with most of the major accounting issues that were identified as such when it began, and has not shied from controversy.

* It has established an exhaustive set of due-process operating procedures that continue to evolve as needs arise.

* It communicates well, so that all interested parties are informed and are encouraged to participate.

* It has made great strides in internationalizing financial reporting.

What follows is some detail about each point.

Independence: Savoie's concern about responsibility without authority may well be seen as a fundamental weakness of the current system. But it's also a strength, since the board can succeed only if others allow it to, and that forbearance depends on perceived satisfactory performance. Thus, the board's activities are constantly being "market tested," rather than it having a mandate that it must succeed.

In a sense, the board must create its own independence, and the crucial point is striking the right balance. If the SEC lost confidence in it, vital support would evaporate; if the board is seen as merely doing the bidding of the SEC or even the accounting firms, then other important support would be lost--notably that of the business community.

While FASB has no direct legal or other authority, actions taken early in its life by the AICPA and SEC provided considerable support. Just as FASB was beginning operations in 1973, the AICPA adopted Rule 203 of its Rules of Conduct, which requires auditors expressing opinions on financial statements in conformity with generally accepted accounting principles (GAAP) to ensure that those statements comply with all applicable FASB pronouncements.

That December, the SEC issued Accounting Series...