SEC Used Budget to Strong-arm FASB

The SEC held up approval of FASB's budget for four-and-a-half months until the accounting standards-setter agreed to give the regulator more say over the appointment of FASB members.

Speaking at a conference two years ago, Robert Herz, chairman of the Financial Accounting Standards Board, lavishly praised the comments — and personal appearance — of the preceding speaker, Scott Taub, then the Securities and Exchange Commission’s deputy chief accountant. To laughter from the audience, Herz then explained the reason for his obsequiousness: since Sarbanes-Oxley, it is the SEC’s Office of the Chief Accountant that approves the FASB budget.

Two years later, the SEC’s power to approve its budget is no longer a joking matter for FASB. This year, the Office of the Chief Accountant, now run by Conrad Hewitt, refused to sign off on FASB’s budget until its parent organization, the Financial Accounting Foundation, agreed to SEC demands for more say in the appointment of both FASB members and FAF trustees.

In a March 9 memo to the SEC, the FAF agreed to a specific time line for the SEC to review FASB and FAF candidates, and states that the SEC has the power to nominate and interview candidates. “A member of the SEC staff said we needed to make these changes before they would approve the budget,” says Frank C. Minter, vice president of FAF and former CFO of AT&T International. “[The budget] was approved very quickly after [FAF chairman] Bob Denham had signed the letter.”

At the SEC’s request, says Minter, the FASB budget for this year was submitted earlier than usual, at the end of October. Asked whether the SEC held up the approval until the FAF agreed to give the regulator a stronger role in appointments, Minter said, “They approved it at the end of March, so that will tell you.” The SEC officially certified the FASB’s budget on March 14th, three business days after the memo was signed, but about four-and-half months after the budget was submitted.

By contrast, the budget for the Public Company Accounting Oversight Board, which the SEC traditionally has approved simultaneously with FASB’s, was submitted to the SEC on November 30 and approved eight days later, on December 8.

SEC spokesman John Nester denies that the new agreement expands the SEC’s power over FASB. “There is no more say in the agreement, no more new responsibilities or areas of oversight,” he says. “The Sarbanes-Oxley Act requires us to certify the standards-setter’s capacity and capability to do their job. The certification process necessarily entails review of the standard-setter’s budget and governance.”

As CFO.com reported yesterday, the SEC also refused to approve a 2007 pay increase for FASB board members, a decision Minter says was made on February 28. Robert J. DeSantis, president and chief operating officer of the FAF, told CFO.com yesterday that the pay increases submitted last year were “an attempt to reconcile” board pay with raises in the market, and that the amounts had been determined by an independent salary survey conducted by a human resources consultant.

FAF Trustee John J. Radford told CFO.com yesterday that the SEC might have disapproved of the salary increases because they were not in line with increases at the Public Company Accounting Oversight Board. But, says Minter, “It was not double-digit increases. Most of us felt the catch-up was relatively modest.”

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