FASB Calls for a Cultural Change

Executives who use accounting-motivated transactions to prop up financial results are among the obstacles to a principles-based approach, says Robert Herz, the board's chairman.

Herz hopes that by the end of the year, a panel representing all the constituents will be convened to address the shift to principles-based accounting. He doesn’t think the panel should work under the auspices of FASB, though, because the board already has enough on its plate. The SEC might be a better place to start, he says.

Still, hurdles remain enormous. For example, the four issues named in the SEC’s off-balance-sheet report each has a group of stakeholders rooting for the status quo, says David Sherman, professor of accounting at Northeastern University and a former accounting fellow in the SEC’s Division of Corporate Finance. For example, accounting rules related to synthetic leases and derivatives have spawned entire industries, he notes.

In the past, bright-line rules have been used as an excuse for companies to invoke stern cost-cutting measures, Sherman contends. Witness the 1993 release of SFAS 106 (Employer’s Accounting for Postretirement Benefits Other Than Pensions), which put retiree medical expenses on the balance sheet. Many companies used the fact that the expenses had to be recognized as a justification to cut retiree benefits.

Another obstacle is uncertainty, says Keith Bishop, an attorney at Buchalter Nemer and the former commissioner of corporations for the state of California. Any kind of business unknown increases costs, and bright-line standards eliminate such unknowns, he adds. So he doesn’t expect a rush to a principles-based system any time soon.

“Everyone is in favor of simplification,” muses former FASB chairman Dennis Beresford, who’s now an accounting professor at the University of Georgia. But he adds that “everyone also wants rules—just in case.” One thing FASB could do is refuse to respond to “nit-picking” requests from companies and auditors for more guidance, says Beresford.

FASB is doing just that, according to Herz. “We say no a lot,” he says, noting that the board gets daily requests from companies and auditors asking for new rules or exceptions to existing ones. One strong example of FASB’s new just-say-no policy is its refusal to give specific guidance on ownership percentages of variable-interest entities under FIN 46, which concerns the consolidation of off-balance-sheet transactions.

Overall, the shift to principles-based accounting is a behavioral issue, according to Bill Bosco, a member of the Equipment Leasing Association’s financial accounting committee. Bosco contends that the mindset of professionals preparing and using financial statements has to change before such a system is adopted. The focus, he argues, has to be on economic substance, rather than on “how to get around the rules.”


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