Congress: FASB in Its Bonnet?

Bills before Congress would change standard-setter's funding mechanism, restrict autonomy. Plus, Cannibalizing Andersen, and did Tyco tart up its takeover targets?


Representatives of the Financial Accounting Standards Board say they support two bills recently introduced in Congress that include provisions concerning FASB. But members of the standards-setting board are worried that a number of the provisions could harm FASB’s independence.

“We appreciate the commitment to supporting and strengthening FASB’s independence embodied in the proposed legislation, but we caution Congress that any legislation mandating particular actions or procedures by FASB can compromise the very independence that the legislation seeks to enhance,” said Edmund L. Jenkins, chairman of FASB, in a statement.

The Investor Confidence in Public Accounting Act, introduced on March 7, would require the Securities and Exchange Commission to recognize generally accepted accounting principles established by FASB—if certain qualifications are met. One of those qualifications: that FASB be funded solely by fees assessed against each issuer and revenues collected from the sale of materials and publications produced by that body—and not by corporate contributions. The bill would also require that FASB submit an annual report to Congress and other parties.

As you recall, the IASC Foundation, which represents the rival international accounting standards board, came under fire last month when it was learned that the group had solicited a donation from Enron Corp. According to published reports, the IASC was looking for a $500,000 donation from the Houston trading company. Former Fed chairman Paul Volcker—and chairman of the IASC Foundation Trustees—said the international accounting standards group was sent a memo by David Duncan, then Andersen’s lead engagement partner for Enron. In that memo, Volcker says former Enron chief accountant Richard Causey was interested in determining what kind of influence a donation to the IASC would buy Enron. Ultimately, Enron agreed to give about half the sum the IASC wanted. Enron never responded to an invoice, however. Something must have happened.

The Truth and Accountability in Accounting Act, introduced on March 14, would require that the SEC conduct an annual review of “unresolved accounting standards issues” and issue a report to Congress and FASB describing those issues. It would also require that FASB submit a response to the SEC’s review. That response would be sent to both the commission and Congress.

“We appreciate the sponsors’ support of, and commitment to, private-sector accounting standard setting,” said Jenkins. “And, while we are confident that FASB’s current funding structure has not impaired our independence, we do support the Investor Act’s provisions creating a fee-based source of funding for the FASB.”

Maybe so. But Jenkins seemed concerned that government funding might have strings attached. For FASB “to accept government-collected fees as a replacement of the current private-sector contributions to the not-for-profit Financial Accounting Foundation that has historically funded the FASB,” noted Jenkins, “such fee-based funding must be free of substantive conditions, adequate in amount, and not subject to the type of Congressional or executive branch review that invites interference with the technical decisions and independence of the FASB.” Exhale.

Responding to other provisions of the bills, Jenkins cautioned: “Even limited and well-intentioned provisions like those contained in the Investor Act and the Accounting Act could compromise the independence of the FASB and the transparency of information that investors receive. The greater the involvement of Congress and the executive branch in the activities of the FASB, the greater the potential for harmful political pressures on the standard-setting process.”

Jenkins concluded: “As shown in the past, those pressures inhibit objective, neutral and timely resolution of important financial reporting issues. Resolution of accounting issues in an independent manner is essential to maintaining and enhancing the highest quality accounting standards in the world.”

Actually, given the recent parade of financial scandals and corporate restatements, it’s unclear where U.S. accounting standards rank at this point.

Rendering Andersen

Management at Big Five accounting firm Deloitte Touche Tohmatsu is mulling whether to buy Arthur Andersen’s U.S. tax and consulting businesses. This, according to Tuesday’s online version of the Wall Street Journal.

Reportedly, Deloitte management is not interested in Andersen’s U.S. auditing businesses, however. That’s hardly surprising. The unit has seen many of its key clients flee in the wake of the Justice Department’s indictment of Andersen last week. To date, Andersen has been dumped as auditor by 46 of its largest publicly traded clients. According to industry watchdog Bowman’s, those defections have cost the foundering accounting firm about $200 million in fees.

As reported yesterday, rival Big Fiver KPMG is considering buying all of Andersen’s businesses outside the United States. According to the Journal, managers of 13 Andersen accounting affiliates in Asia have already endorsed a merger with KPMG.

In yet another published report, managers at PricewaterhouseCoopers’s Taiwan operation said they are still interested in merging or cooperating with Andersen’s local operations. And according to Dow Jones Newswires, a spokeswoman for KPMG’s China joint venture said she can’t speak about current negotiations over a possible merger with Andersen China.

AICPA: POB “Helpful”

The American Institute of Certified Public Accountants (AICPA) said the Public Oversight Board (POB) played a role in helping to improve the quality of audits of publicly traded companies. Noted AICPA: “We are heartened that the professional staff of the POB, under the oversight of the SEC, is going to continue to exercise a constructive role protecting the public interest while completing the reviews of auditor independence systems.”

What that role is remains to be seen. As you recall, SEC chairman Harvey Pitt plans to disband the POB, which was created by the SEC in 1977 to monitor accounting ethics. Pitt intends to replace the POB with the Public Accountability Board (PAB), which supposedly will be more independent of the accounting profession. Although the five-member POB is made up of nonaccounting professionals, Pitt contends that its objectivity is compromised because the AICPA funds the $5.2 million operation.

“Regulation by the private sector but not by the [accounting] profession” is how Pitt describes the PAB’s mission. That, however, also describes the POB. The difference between them, presumably, would be in the PAB’s funding, but Pitt hasn’t specified how the money will be raised. Suggestions range from a National Association of Security Dealers—like structure, funded through member dues and penalty fines, to a fee-based system similar to bank examinations.

Tyco Dresses for Success

Did management at Tyco International instruct companies it was about to acquire to pay as many bills as they could before their deals were completed? This is what Wall Street skeptics have been charging for several years.

Their reasoning: Tyco management would then be able to make the company’s earnings and cash flow look good during the first quarter after a deal went through. Executives at Tyco have repeatedly disputed this allegation.

But it appears managers at Raychem Corp., which Tyco bought in August 1999, actually took action to accelerate certain payments—at Tyco’s request. Or at least that’s the claim of the Wall Street Journal, citing internal E-mails at Raychem.

According to the Journal, Lars Larsen, then Raychem’s treasurer, sent an E-mail to finance department employees at the time of the acquisition. In that message, Larsen reportedly said, “Tyco would like to maximize cash outflow from Raychem before the acquisition closes.”

A few days later, Larsen reportedly sent another E-mail, saying that at “Tyco’s request” Raychem was planning to pay all bills due to suppliers “whether they are due or not.” He added that Raychem “agreed to do this, even though we will be spending money for no tangible benefit either to Raychem or Tyco.”

By Larsen’s reckoning, these transactions would eat up between $55 million and $60 million of cash. He also calculated it would cost an extra $125,000 in interest because Raychem would be paying some bills that weren’t yet due. The Journal added that the memo was copied to two Tyco executives.

Tyco executive vice president J. Brad McGee denied the charges in the story. He insisted the payments discussed in the E-mails were investigated by the SEC in 1999 and 2000 as part of a more comprehensive examination of Tyco’s accounting. The commission ended its investigation in mid-2000, however, taking no action.


Program note: On Monday, associate editor Jennifer Caplan takes a look at what’s behind Tyco’s recent decision to break up the company. Tyco management says the restructuring’s all about maximizing shareholder value. But some Tyco-watchers claim the bold move is more about accountants than shareholders.

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