Is the SEC a Threat to FASB’s Independence?

A new agreement between the SEC and FASB gives the regulator greater say over future board candidates. Could that open a door for political interference in accounting standards?

With the holidays fast approaching at the end of 2001, Harvey Pitt, then chairman of the Securities and Exchange Commission, was presiding over a collapse in investor confidence. That fall Enron had imploded in one of the most spectacular finance scandals in memory, and it looked increasingly as though its auditor, Arthur Andersen, had been careless — or perhaps even complicit — in some of the energy company’s most questionable dealings.

In the midst of this, Pitt recalls, the Financial Accounting Foundation (FAF) informed the SEC — by phone — that it had settled on a new nominee to replace Edmund Jenkins, the outgoing chairman of the Financial Accounting Standards Board. Pitt claims he cannot recall the candidate’s name. However, it was probably G. Michael Crooch, then and now a FASB member, who confirms he was a candidate at the time. Like Jenkins, Crooch was a veteran of Arthur Andersen, and had succeeded Jenkins as head of the firm’s professional-standards group.

That was the group involved in ordering the shredding of Enron-related documents, although those instructions were issued on October 12, 2001 — more than 14 months after Crooch left Andersen for FASB in July 2000. As Pitt recalls it, however, the nominee had been involved in some way in the Enron audit. “It was a nonstarter,” he says.

Pitt balked at the FAF’s selection, and its 11th-hour phone call. “I told them this was not sufficient notice, and no way were we going to approve it,” says Pitt, who adds he sent the FAF back to the drawing board. Four months later, the FAF formally announced a new nominee, current FASB chairman Robert Herz, then a senior partner with PricewaterhouseCoopers.

Fast forward to December 11, 2006, when the FAF notified the SEC that it would reappoint Herz, and appoint or reappoint six FAF trustees, at the start of the new year. There is no evidence that the SEC objected to any of the candidates, who are all now in position. But the 19-day notice, coming just before official Washington all but shut down for the holidays, apparently prompted the SEC to demand a more formal process for vetting future FAF and FASB candidates. Earlier this week, that move raised questions in the media about whether the SEC was grabbing for more power over FASB.

Not so, says SEC spokesman John Nester. The Sarbanes-Oxley Act, he says, “requires us to certify the standard setter every year, in terms of its capacity and capability to perform in that role.”

In a two-page memo to the SEC written March 9, the FAF confirms the SEC’s new mandates, including the regulator’s time line for reviewing candidates for FASB and its parent, the FAF. In addition, the memo states that the SEC has the power to nominate candidates to FASB and the FAF, and has the right to interview candidates during the selection process. “In order for us to fulfill [our] congressional mandate,” says Nester, “we look at a number of things, including corporate governance.”

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