SEC Said No to FASB Raises

News that the SEC refused a 2007 pay increase for FASB members sheds more light on the subtle ways that the Sarbanes-Oxley Act has increased the SEC's power over FASB.

Proposed raises for the members of the Financial Accounting Standards Board were shot down by the Securities and Exchange Commission last fall, causing a stir at FASB.

CFO.com first learned of the FASB raise rejections last Friday while reporting on efforts by the SEC to formalize its role in the nomination and approval of FASB members and trustees of FASB’s parent organization, the Financial Accounting Foundation. That move raised a debate among observers and FASB members about whether the regulator was using the provisions of the Sarbanes-Oxley Act to increase its influence over FASB. The SEC’s power to approve FASB’s budget was also created by the Sarbanes-Oxley Act.

Robert J. DeSantis, president and chief operating officer of the FAF told CFO.com the pay increases submitted last year were “an attempt to reconcile” board pay with raises in the market. He says the SEC posed 40-50 questions about the FASB budget when it was submitted, but rejected only the raises.

According to DeSantis, FASB had conducted an independent salary survey that led to the FASB pay increase request. Another FAF Trustee, John J. Radford, said the salary increases were not in line with increases at the Public Company Accounting Oversight Board, and that may have had something to do with the SEC’s decision to nix the FASB raises. The SEC did not immediately return CFO.com’s request for comment.

DeSantis said the rejection of the “small” salary increases did not constitute a dispute with the SEC, adding that the FAF voted to accept the change, and the 2007 budget was certified by the regulator, as is required by Sarbox.

DeSantis said his impression was that the SEC agreed that FASB member salaries needed to be brought in line with the market, but that “2007 was not the appropriate year” to do so.

Under Sarbox, the annual budgeted expenses of the PCAOB and the FASB are funded through annual accounting support fees assessed against public companies based on their market capitalization. The process works like this: Each group prepares and approves its budget internally, and then submits its budget to the SEC. Sarbox specifically requires that the SEC approve the PCAOB’s budget. In FASB’s case, the language of the law says the SEC must “review” the support fees and the budget to make sure that the fees being assessed against corporations are consistent with what FASB is allowed to recover under Sarbox. However, the SEC can require adjustments, and until the SEC signs off, FASB cannot assess the funds from companies. (Once the SEC issues a formal order saying it is satisfied, the billing and collection for both FASB and the PCAOB is actually handled by the PCAOB.)

In 2005, the FAF generated about $30.2 million in revenues for FASB. About $20 million was raised from fees from 8,300 registered companies, while $14.1 million was raised through the sale of publications and subscriptions related to FASB information. The 2006 annual report is not yet available.

This story includes additional reporting by Sarah Johnson.

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