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NOVEMBER 20, 2006
Generally Improvable Accounting Principles In the age-old quest to figure out how much companies are really worth, investors are usually at a costly disadvantage to the executives who craft corporate financial statements. But now the Financial Accounting Standards Board, the seven-member body charged with writing Generally Accepted Accounting Principles (GAAP) and setting the rules on how companies can count their profit, cash flow, and net worth, is trying to make the game more fair. Over the years FASB has taken a lot of criticism for allowing executives too much leeway to exaggerate their results. Now some key members are acknowledging what critics have said all along: The board is influenced too much by corporations and auditors and not enough by investors. They say that once a week, on average, executives from various industry trade associations arrive at FASB's Norwalk (Conn.) headquarters to press for changes to GAAP that suit their own particular needs. For example, a committee from Financial Executives International (FEI), a major group of corporate financial officers and controllers, meets with the board every quarter. "And we hear from the auditing firms every day," says FASB Chairman Robert H. Herz. By contrast, investors infrequently make their opinions known. "We have a hard time hearing from [them]," says Donald M. Young, another board member. Now Young, with the encouragement of Herz, is reaching out. He's enlisting the best financial statement analysts and the biggest institutional investors to tell the board how GAAP should be changed. He's revamping an eclectic User Advisory Council, building up a trust of on-call experts at the largest fund management companies, and assembling a committee of investor-friendly CPAs, including the outspoken Lynn E. Turner, a former chief accountant at the Securities & Exchange Commission, and Jack Ciesielski, publisher of The Analyst's Accounting Observer and a sharp critic of the many numbers games executives play. "We've decided to go out and grab [investors] by the neck and drag them into the process," says Young. One reason for FASB's new approach might be a change in its funding sources. Critics have long contended that FASB's corporation-friendly attitude stemmed from the fact that its funding came mostly from auditors whose interests were aligned with their clients. The Sarbanes-Oxley Act of 2002 changed that; now FASB is funded primarily by standard fees assessed on public companies. Whether or not there was a conflict of interest, there's a long list of examples of excessive executive influence on FASB, notes Paul B.W. Miller, a professor of accounting at the University of Colorado at Colorado Springs. The pension accounting standard that severely distorted the earnings and balance sheets of large industrial corporations in the late 1990s was the legacy of strong business lobbying in the mid-1980s. Lease accounting, which keeps many obligations off balance sheets, has a similar history. And today's stock options mess was fed by executives' successful drive to portray options as free money by keeping their cost from being counted as a compensation expense. PANEL REDESIGN? Young says the time has come, too, to change the traditional mix of FASB members. Three of the seven are former auditors, and two are former executives. "That's a majority right out of the box" of people who made careers preparing and auditing financials, he says. Young, a former stock analyst, and a professor of accounting fill out the panel. One vacancy, a seat held by a former auditor, is coming up next year and should be filled by an investor, Young says. Herz, a former auditor, but one who managed investments for 2,000 partners, stops short of recommending such a change, saying good board members consider all perspectives. Young's idea has yet to gain any serious traction among the 16 trustees of the foundation that appoints the board and itself is monitored by the Securities & Exchange Commission. SEC officials declined to comment. But Young may eventually get his way. A spokeswoman for the American Institute of Certified Public Accountants, which represents auditors, says the trustees should consider appointing an investor to the next vacancy after this one. And even the president of FEI says she would support having an investor replace an auditor on the board. Change may come slowly at FASB, but it is possible.  By David Henry
BW MALL
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