Commentary: FASB: The Devil Is the Details

The board is drowning in fine print -- once again

The Financial Accounting Standards Board's mavens have a problem. They want to issue clear, broad principles that accountants can apply to the books of Corporate America. But they keep getting bogged down in fine print. They want to believe companies will abide by the spirit of overarching standards, but they know that finance whizzes will exploit every loophole. In September alone, FASB stumbled over three key issues. It slowed its drive to compel companies to expense stock options; it wants at least another three months to work out the details. It proposed five more amendments to rules on off-balance-sheet entities that had already been altered five times since January. And, instead of fixing pension-plan rules to stop companies from distorting earnings, it produced a stopgap proposal that would only require more disclosure.

For FASB, the devil isn't in the details -- it is the details. The board says it's hurrying to emphasize the principles in the generally accepted accounting principles, or GAAP, that U.S.-listed companies must follow. In practice, it's reverting to its bad old habits of trying to second-guess every conceivable trick that Wall Street might dream up. That's a thankless task that creates endless delays and complicated rules larded with exceptions. Board Chairman Robert H. Herz complains: "You write something with two conditions and [accounting firms] think of a third. You start getting rules begetting rules begetting rules. We are trying to avoid that at all costs."

Herz contends that FASB hasn't fallen into that trap with its amendments to its new off-balance-sheet standard, which was supposed to be a model of its slimmed-down, principles-based edicts. He says the changes are minor. But the standard, which was 66 pages long when adopted in January, will grow by about 20 pages after the tinkering. Says Lynn E. Turner, accounting professor at Colorado State University and a former chief accountant at the Securities & Exchange Commission: "It is the start of death by 1,000 cuts. People will say they haven't figured it out yet so why don't you defer it for another year."

What Herz needs to do is keep the board focused tightly on setting general principles and let another body decide how they should be applied to different situations, much as Congress defers to the courts to interpret the laws it passes.

THE PIECES ARE IN PLACE. We wouldn't have to create an accounting court. That idea was floated over 40 years ago but has gone nowhere. It would likely produce only rich lawyers -- and serious delays in deciding big issues. Happily, the mechanism for doing what's necessary is readily at hand: The SEC has given hundreds of interpretive opinions over the years. Sometimes auditors and CFOs ask for its views on how to apply GAAP to their specific situations. Sometimes the SEC spots companies violating the spirit of good accounting when it checks their financial reports.

The burden on the SEC wouldn't be all that great. At present, its decisions are mainly kept under wraps, communicated privately to the parties involved. They need to be published so that they're readily accessible as guideposts to execs and accountants. Most big auditing firms have their own collections of SEC rulings and some share the significant ones with their peers. But the decisions are too important to circulate just within a tight circle.

Herz insists that FASB is "on course" toward more principles-based accounting. But he wants to keep a tight hold on FASB's oversight of GAAP. For consistency's sake, he doesn't want to give up the option of trying to anticipate, and answer, any question that might come up about how to apply its standards to all manner of transactions. And he bristles at the idea of anyone else interpreting board's principles, even if it eases his burden.

The move to principles-based from rules-based accounting was always going to be tough -- especially in America's litigation-prone culture. But by refusing to budge when it expects other players to change their ways, FASB will prolong a difficult process.

By David Henry

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