Who Rules Accounting?

Congress muscles in on FASB -- again.

Lest Congress forget these facts, current FASB chairman Robert H. Herz reminded members during a recent House subcommittee hearing on H.R. 1372. “The moratorium,” he proclaimed, would likely establish a “potentially dangerous precedent” and “signal that Congress is willing to intervene in the independent, objective, and open accounting standard-setting process based on factors other than the pursuit of sound and fair financial reporting.” Herz also noted that such interference would be “inconsistent with the language and intent” of the Sarbanes-Oxley Act of 2002, which includes added measures to ensure FASB’s independence. He warned Congress that unlike his predecessors, he’s “not gun-shy” about promulgating that view.

But Herz’s warnings fell on deaf ears. Eshoo agrees that Congress “should not get into writing accounting standards” and that “FASB should be able to retain its independence.” How exactly can that circle be legislatively squared? “If we are prevented from issuing what we consider to be a better and high-quality standard,” notes FASB’s Crooch, “that’s not very far from setting a standard.”

Damned Economy

Dreier and Eshoo, however, adamantly defend their efforts. “I’m not doing anything that’s counter to my constitutional obligations,” Dreier insists. Eshoo says much the same thing. “I wish there were a meeting of the minds [with FASB],” she says, “but if there isn’t, then I believe that it is absolutely appropriate. It is not interference, it is Congress exercising its responsibility relative to our nation’s economy.” She adds: “FASB has not been willing to examine anything except expensing, and economic issues be damned. I think we can do better than this.”

Dreier jests that he could — but wouldn’t — flip FASB’s claim by saying “that they’re tampering with our ability to create policies that encourage economic growth.”

But there’s reason to believe that Dreier and Eshoo are mistaken about the need to restrain the board to help the economy. Consider Netflix, an online DVD rental service that went public in May 2002 and announced this past June that it would expense options. Expensing, says CFO Barry McCarthy, provides the company with “consistency in financial reporting.” And he doesn’t expect the decision to have a negative impact on his ability to raise new capital. “In my experience,” he says, “investors increasingly distinguish between accrued expenses and real cash expenses.”

What’s more, McCarthy suggests lawmakers are being disingenuous about the intended beneficxiaries of the legislation. “Whenever you have large public companies that think their ox is going to be gored by a change in accounting principles,” he says, “there’s going to be a battle about the outcome.”

Battle-hardened FASB members aren’t taken aback by what’s happening. “Standard setting is not a popularity contest and shouldn’t be a popularity contest,” notes Jim Leisenring, who was vice chairman of FASB during the earlier debate over expensing, and one of the two members who did not succumb to congressional pressure in the final vote. Leisenring, now a member of the IASB, says, “I believe FASB made a mistake in backing down, but they did so in the context of having no support from anyone.”

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