New FASB chief Bob Herz will walk right into a hornet’s nest of controversy when he takes over for outgoing chairman Edmund Jenkins on July 1. To start, many observers are calling into question the very existence of the Financial Accounting Standards Board, thanks to Enron’s apparent deftness at evading basic accounting principles while still remaining within the rules. What’s more, others charge that the FASB’s superiority complex is a major stumbling block to the formation of international accounting standards.
However, experts contend that Herz’s technical expertise, deep international background—including a spot on the 14-member International Accounting Standards Board—and reputation as a consensus-builder, make him just the man for the job. “Three words: a good guy,” says Jack Ciesielski, publisher of The Analysts’ Accounting Observer. Based on their work together on an AICPA SEC committee, Ciesielski emphasizes that Herz is highly respected for his technical knowledge, particularly financial instruments.
Derivatives accounting, particularly FAS 133, was one of Herz’s specialty areas during his 28-year accounting career, first at Price Waterhouse, then at Coopers & Lybrand, and finally at the merged firm. In that time, he’s been an audit partner, a senior technical partner, and, most recently, the leader for professional, technical, risk, and quality issues for North America. “He’s not a theoretician,” says Kenton Sicchitano, a former PWC global managing partner who has worked with Herz. “He’s very interested in how accounting gets used for investment and other decision-making.”
Herz on the Street
The “cornerstone” of improved accounting standards, according to Herz, is the financial performance reporting project that FASB began last October. That effort examines how to standardizing reporting methods for such popular, but ill-defined measures, as EBITDA, free cash flow, and operating cash flow.
Herz points out that the project is important because it asks a fundamental question: How can you make the income statement and statement of cash flows more useful to investors; to their assessment and predictions of future cash flows? In other words, adds Herz, the project’s aim is to “aggregate things that have like characteristics and disaggregate things that have different characteristics from a predictability point of view [as they affect revenues and cash flow].”
The new FASB chairman also says that the project will help resolve some of the controversy surrounding pro forma reporting. “Pro forma [numbers] can be useful, but if they’re not consistent from period to period, they lose credibility,” he says. “This project tries to address some of the symptoms of why people felt the need to report them.”
As a part-time member of the ISAB since last July, and a U.K.-certified accountant, Herz is likely to be a catalyst for harmonizing global accounting standards say observers. “Bob could provide the leadership needed to speed things up,” says Sicchitano. Of course, “speeding things up” in the world of FASB is still likely to take years. “It certainly helps that he knows all the key players,” says Ciesielski, “but I don’t think it’s anything that straps a rocket pack on to the convergence of IASB and FASB.”
Herz himself says he plans to take an active role in the effort, although he will resign from his IASB board post at the end of June. Unlike his predecessor, who characterized the current international standards as “incomplete,” Herz isn’t reluctant to get little help from his friends abroad. U.S., UK, and international standards “all have their good points,” he says. “I think standards that get developed internationally (through IASB) could prove to be usable in the U.S.—I see it as a two-way street.”
Whether companies should treat all stock options as an expense is one area where he’s happy to let the IASB take the lead. The IASB plans to issue an exposure draft on the subject by the end of this year, and is likely to issue a formal standard next year. It’s unlikely the FASB would take up the subject independently, he says, but the group will be monitoring the results. If the IASB were to come out with a standard that required expensing, “I personally would like to understand how users of financial statements react to that, and if it changes how they use options,” says Herz. From there, FASB could use IASB information to decide how the U.S. should proceed.
He’s also steering clear of the debate between proponents of rules-based accounting, which is used in the U.S.–and that many say drive companies to seek loopholes–and the less-specific “principles-based” standards favored by the UK and other countries. “I don’t quite see it as that much of a dichotomy,” muses Herz. “The way I think these standards should be developed is that you start with principles, but issue some rules for application to support those principles.”
Streamlining will also be top-of-mind for Herz. To that end, FASB already announced plans to speed decisions by allowing a simple majority of the seven board members to pass a measure, rather than relying on the 5-to-2 supermajority. Could this mean more rules for CFOs to deal with? Herz says no. “My approach is not to wake up every morning and say ‘where can we issue a new rule?’ But where there are areas that need addressing, we’d like to do it in a timely fashion and not let it drag on for years.”