IT'S TIME TO FREE THE FASB SEVEN
If accounting is the language of business, too many companies speak in the balance-sheet equivalent of Aramaic. Accounting standards change so slowly, they often seem relics from another era. At times, that can have dire consequences. During the 1980s, for instance, hundreds of troubled thrifts engaged in wild--and disastrous--speculation, yet their balance sheets seemed to be in the black. That's because accounting rules let S&Ls book a debt security at its purchase price, masking how much it may have dropped in value. Only belatedly did taxpayers and shareholders learn about the multibillion-dollar losses.
Many experts place the blame for the creaky pace of rule changes squarely on the obscure organization empowered by the Securities & Exchange Commission to make accounting policy: the 20-year-old Financial Accounting Standards Board. Sure, the Norwalk (Conn.) organization sometimes seems to have a ferocious bark. In 1991, it forced companies to book charges for their huge retiree health-benefits liabilities, and on Apr. 7, it voted to require them to deduct employee stock options from earnings. But FASB often takes a decade to go after the corporate ankle.
WIGGLE ROOM. The reason: FASB's board is kept on a short leash by corporate interests, which have too much influence over its funding and membership. "It's doubtful you're going to have a standards board dedicated to substantial change," says John C. Burton, former SEC chief accountant.
FASB's seven board members--usually retired accountants--began studying the stock-options and health-benefits proposals back in 1984 (table). And FASB decisions often contain loopholes. On Apr. 13, FASB finally acted--under SEC pressure--to force banks and insurers to mark their debt instruments to current market value. Bowing to these institutions, however, FASB postponed making the requirement effective until 1997. It also gave banks and insurers wiggle room: If they claim they'll hold a bond until maturity, they can carry it at its purchase price.
Much of the heat comes from FASB trustees in the Financial Accounting Federation, which appoints FASB board members and approves its spending. Its 16 trustees are drawn from companies, accounting firms, government, and academe, but Corporate America is the most influential. In particular, the Business Roundtable, a group of CEOs from the biggest U. S. corporations, has pressed its party line on trustees. The Roundtable also urges accounting firms and consultants, who feed from the corporate trough, to provide self-serving expertise to FASB. In the mid-1980s, trustees voted to award Corporate America a second FASB seat. In 1990, they upped the number of board votes needed to approve a proposal, from four votes to five--making it tougher for reform initiatives.
MAVERICK AXED. Pro-Big Business trustees often lobby FASB members aggressively. FASB Chairman Dennis R. Beresford admits this is a problem: "Sometimes, we have to educate the trustees as to what the limits of their responsibilities are." Among the more blatant moves was their 1991 refusal to reappoint C. Arthur Northrop, a former IBM treasurer. Northrop frequently voted against executives on controversial issues. Says Paul B. Miller, accounting professor at the University of Colorado: "The trustees were created to protect the board from pressure, but instead they have become the implements of pressure."
It's time to free the FASB Seven from this outside influence--beginning with their financial support. Companies and their handmaiden accounting firms provide 35% of FASB's $15 million annual budget. Critics contend that some executives have threatened to withhold support if FASB doesn't vote their way.
A good solution is to require that corporations filing documents with the SEC pay a small sum each time to create a permanent endowment for FASB. Another remedy: Shift board appointment power to the SEC. Together, these measures would make it easier to update accounting rules. And corporate reports at last would reflect current conditions, not ancient history.Dean Foust