Whoever follows Edmund Jenkins as Financial Accounting Standards Board chairman faces a daunting task. With some blame for Enron’s failure being laid at FASB’s door, calls are coming for a severe restructuring of the board — or even its replacement.
For now, the 66-year-old Jenkins, scheduled to retire when his 5-year term ends on June 30, remains hard at work implementing changes aimed at heading off that second scenario. Among the revisions taking shape are several designed to speed the board’s reaction time when problems occur, such as reducing the board’s size from seven to five members, replacing its current supermajority voting requirement with a simple majority, flattening its organizational hierarchy, and reducing the comment period on proposals to two months from three. Critics have cited FASB’s sluggishness as a contributor to the Enron scandal, since a proposal to tighten rules governing the off-balance-sheet financing vehicles known as special-purpose entities, for example, had been under consideration long before Enron’s abuse of SPEs was exposed. In response, FASB accelerated its review of SPEs shortly after Enron filed for bankruptcy.
But some critics demand more fundamental change. One proposal, in the House of Representatives, would increase FASB’s government oversight, requiring the Securities and Exchange Commission to conduct annual reviews of unresolved accounting-standards issues. Another, in the Senate, would attempt to reduce outside influences on FASB’s rule-making. The Senate bill would replace the current structure that funds the board using voluntary contributions from financial-statement issuers and accounting firms. Instead, predetermined issuer fees would pay for FASB.
For their part, issuers complain that the complexity and specificity of FASB’s current rules encourage the very abuses they’re supposed to prevent. At a recent CFO magazine conference in New York, for instance, Pfizer Inc. CFO David Shedlarz insisted that Enron’s failure underscored the need for “a new financial reporting model.”
CFO’s interview, conducted by deputy editor Ronald Fink at the board’s Norwalk, Connecticut, headquarters, occurred on what must have been a tough day for Jenkins. Shortly before, SEC chairman Harvey Pitt had told a congressional hearing that FASB was ineffectual and unduly subject to industry and political influence.
If this was disturbing to Ed Jenkins, his demeanor didn’t show it. The white-haired, bespectacled chairman remained soft-spoken and unruffled–perhaps in anticipation of the prospect of an Arizona retirement. But while acknowledging that the board must revamp both processes and structure, he stoutly defends its recent rule-making on every front except stock options, where he concedes that FASB has succumbed to overwhelming political pressure. He points with particular pride to new rules on business combinations. And he strongly opposes any junking of U.S. generally accepted accounting principles (GAAP) in favor of something radically different.
Even so, Jenkins leaves little doubt that, at this stage of his career, he’s got things on his mind other than championing the system.
Did you ever imagine when you took this job that accounting would be the subject of heated debate in the halls of Congress?
Even more amazing, it’s on the front page of the New York Times. But it demonstrates the importance of accounting to the capital markets.