How well does the FASB consider the consequences of its work?

• Author: Beresford, Dennis R.
• Position: Financial Accounting Standards Board

How well does the FASB consider the consequences of its work?

The chairman of the FASB responds to criticism that the Board pays too little attention to the economic and social consequences of accounting standards, that it has promulgated too many hard-to-implement standards in too short a period of time, and that it adds too many unnecessary projects to its agenda. Ever since the Financial Accounting Standards Board (FASB) was established more than 15 years ago, the Board has been under intense pressure from the corporate community to pay greater attention to the potential impact of its standards on preparers of financial information. In the early years, this concern generally was limited to implementation costs of standards as compared to the perceived benefits to users. The emphasis of these concerns seemed to be on the impact of the standards on particular companies or industries. However, there always was an implication that a presumed adverse effect on a particular industry could have a negative effect on the entire economy.

In recent years, these types of charges have escalated. The term "cost-benefit" has been overshadowed by the much broader term "economic consequences." Lately, a still broader term, "social consequences," has been used. For example, in a recent survey of Business Roundtable members, "81 percent of the respondents believe that public policy issues should be considered when [accounting] standards are developed." However, I doubt that those respondents would be quite as comfortable with that position if they examined its implications.

Throughout its history, the Board has been keenly aware of the cost-benefit equation. The problem is that reliable information on costs and benefits is extremely rare, and nobody yet knows how to obtain it consistently. The best that the Board can do is to make informed judgments based on what it can learn about the extent that companies may be affected by any proposed standard.

Any discussion of the costs and benefits of accounting standards is tricky and unsatisfying. This is because the measurable costs are borne by the preparers of financial information, while the unmeasureable benefits, by and large, accrue to the economic system as a whole in the form of reliable, relevant, and comparable information on which economic decisions can be based with confidence. For example, as financial statement preparers, banks, among others, sometimes incur significant costs to comply with accounting standards. But they also receive significant benefits from having relevant and reliable financial information available to them as lenders.

What is the "public interest"?

Perhaps our critics have done us a service by elevating the discussion of accounting standards into the realm of "social consequences" and "public policy." On its face, this may seem to be a much more difficult issue for standard setters to respond to that evaluating economic consequences or "merely" comparing implementation costs to perceived benefits. But I don't think it is. To raise the issue of social consequences is to pose the question of what is the public interest.

Upon careful analysis, one must conclude that the public interest is nothing less than an optimal balancing of all the particular interests in any given issue, a kind of algebraic sum of all the interests that are able to make themselves heard in the public arena. Those interests include political...