Downsizing FASB

The standards setter proposes shrinking the size of its board, raising a new accounting question: Is five worth more than seven?

The parent organization of the Financial Accounting Standards Board aims to shrink the size of the standard-setting organization and give more power to its chairman, according to a proposal expected to be released late Tuesday afternoon.

The Financial Accounting Foundation plans to recommend cutting FASB from seven to five members, and giving its chairman, currently Robert Herz, more power to set the agenda for rulemaking, Terri Polley, the FAF’s interim chief operating officer, told The plan was first reported by the New York Times Tuesday.

Polley told that a smaller board would be more efficient and nimble and better able to respond to changes in the global marketplace. The proposal, which will be released for public comment, puts FASB in the “best position to fulfill its current and anticipated future mission,” added Polley.

Polley would not speculate on whether FASB’s future included a merger with the International Accounting Standards Board to form a single international standard-setting body, as many observers believe it will. But she said that “the U.S. needs to participate in that debate to make sure FASB has a role . . . in the international arena.”

The plan has left other observers puzzled. “What is the problem or set of problems to which this [proposal] is the solution?” asked former FASB member Katherine Schipper, now a professor at Duke University’s Fuqua School of Business. Schipper said it was difficult to comment on a proposal that she had only read about in the Times, but said that the article, a column by Floyd Norris, raised questions about why FAF and FASB were taking this step.

According to Polley, now is an “opportune” time to reduce the number of board members. She confirmed the departure of at least one board member and term ends for two others. Michael Crooch, a former Arthur Andersen partner, is retiring on June 30, 2008, three years into his second five-year term. George Batavick, a former controller of Texaco, finishes his five-year term in next year. Donald Young, a former director and technology analyst at investment funds and banks, completes a three-year term in 2008.

But Young, who is considered the investor representative on the board, expressed reservations about the plan. “I don’t see any arguments for why this board should be smaller,” he said. “A better way to go would be to try a more aggressive representation of investors and fundamentally increase investor representation on the board.” The FASB board historically includes one member with an investor background, one academic, and five members with backgrounds as auditors or financial statement preparers.

There have been other calls recently for a larger investor voice on FASB, including by the Committee to Improve Financial Reporting, a blue-ribbon panel convened by the Securities and Exchange Commission and chaired by Robert Pozen.

Pozen told he could not comment on behalf of the entire CIFR committee, but said the committee would take a position on the proposal at its next meeting on January 11. However, in the CIFR meeting last November, the subcommittee on accounting standards listed investor involvement as first among several “central issues” that would improve standard setting. “Additional user involvement in the standard setting and regulatory processes is central to improving financial reporting.” The subcommittee noted that the perspective of users — that is, investors who use financial statements — is critical. “Additional user participation on the FAF and FASB, together with making FASB user advisory committees more effective, will help provide this perspective,” the committee wrote.


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