Thursday, February 28, 2008




FASB Will Be Reduced to Five Members and Chair Will Set Agenda

The FASB would be reduced from seven to five members on July 1, 2008, with simple majority voting retained, under changes approved by its overseer the Financial Accounting Foundation. It is envisioned that the new five-member FASB would be composed of an auditor, a preparer, an academic, a financial statement user, and one at-large, best-qualified member.

In an effort to increase investor participation on the Board, the FAF also broadened the requirement that FASB members have investment experience. More specifically, FASB members must now have experience in investing, business, accounting education, and a concern for the investor and the public interest in matters of financial accounting and reporting. The foundation also changed FASB’s agenda-setting to a leadership process under which the FASB chair is authorized, following appropriate consultation, to set the Board’s agenda and priority of projects.

Interestingly, the reduction in FASB’s size was opposed by a number of heavyweight commenters, including former FASB member and current IASB member James Leisenring, who said that it was most inopportune to propose a reduction when pressures have increased on Board members to much more extensively deal with outside constituents. The FASB needs, if anything, more not less resources, he emphasized, to deal with the issues inherent in world-wide convergence.

Similarly, SIFMA, while recognizing the desire for a more nimble Board, opposed the reduction in size. SIFMA believes that any perceived nimbleness is outweighed by the need for well thought-out standards. The association feared that a reduction in FASB’s size could endanger the quality of discussion of new standards. Sometimes discussion of a particular issue is dominated by one or two FASB members, noted SIFMA, and a reduction in size concentrates decision making power, which in turn could lead to the perception that the new standards lacked widespread support.

Grant Thornton saw no convincing case for reducing the size of FASB. A smaller FASB is bound to be limited in the experience and expertise needed to address a range of technical accounting issues for a diverse constituency. Noting FAF’s point that a five-member Board is consistent with the operations of the SEC and PCAOB, GT pointed out that the smaller size of those bodies, and their proportionately larger staffs, is in part a function of their role as regulators of capital market activities.

While the foundation found support in comments by PricewaterhouseCoopers that a smaller board should be more nimble and operate more efficiently, Ernst & Young did not support the proposal to reduce the size of FASB. While acknowledging the need for enhancing the efficiency of FASB, E&Y said that reducing the Board could
sacrifice the quality of new standards for speed of issuance.

E&Y also had reservations about the governance aspects of centering the Board agenda in the chair. While this reform will help FASB to act with greater speed, the firm said it is equally important to achieve a consensus on new accounting standards. The ability to control the agenda is a powerful tool, reasoned E&Y, and should not be wielded by a single individual regardless of his or her talents. It is unclear what limits, if any, would be placed on the FASB chair's agenda-setting authority, but it is expected that the chair will work closely with fellow board members on all agenda-setting matters.

Echoing these concerns, Grant Thornton said that providing the FASB chair with decision making authority for the technical agenda would not contribute to the goals of an independent Board setting high quality standards. In GT’s opinion, agenda-setting should be insulated from political concerns. Giving this authority to one person could infuse political factors into selection of the chair that are not present today. James Leisenring said that agenda-setting authority should not rest with the FASB chair or any group other than the full FASB.

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