“The tie between the Board and the public accounting profession must remain strong. Public accountants must see the new Board as fulfilling the essential duty of their profession to establish and improve the standards by which their activity advances the public interest. Such a duty has long been regarded as the hallmark of a true profession.”
- March 29, 1972 Establishing Financial Accounting Standards – Report of the Study on Establishment of Accounting Principles (Wheat Report – Establishing Financial Accounting Standards)
The Financial Accounting Standards Board (FASB) replaced the Accounting Principles Board (APB) in 1973 in the hope that this version of a private sector standard setter would finally “get it right.” The Wheat Study Group’s recommendations were substantially implemented, hoping to allay concerns about the APB’s independence. No longer would the accounting standard setter consist of volunteers with full-time jobs in private practice or industry. This board would be slimmed down to seven members who would be full-time employees, selected by a Financial Accounting Foundation (FAF), the parent organization of the new structure.
The FAF consists of 14 to 18 trustees, a majority of whom must not be associated with public accounting firms. Only three are auditors. FAF functions include fund raising, appointment of members to the FASB, and reviewing the performance of the FASB. The FAF also appoints the members of the Financial Accounting Standards Advisory Council, which advises the FASB on issues related to agenda projects and possible new agenda items.(14)
The SEC had endorsed the Wheat Study Group recommendations, and in December 1973 gave the FASB its imprimatur in Accounting Series Release (ASR) No. 150. The SEC stated that, based on the evidence of private sector support for the FASB, it would continue to look to the private sector to establish and improve accounting principles.
While FASB proposals were often controversial, the FAF itself occasionally was embroiled in controversy. Following an FASB statement on stock options, the Financial Executives Institute (FEI) initiated proposals in 1996 that were seen by the SEC as an attempt to put the FAF, and thus the FASB, under preparers’ control. When the FAF seemed receptive to the FEI, SEC Chairman Arthur Levitt threatened to revoke ASR No. 150 unless a majority of the FAF trustees represented the “public interest.” In July 1996 FAF membership was reconstituted in response to the SEC, with a majority representing the public and users and with only 25% preparers.
While accounting standard setting remained in the private sector, the FASB’s establishment continued the steady erosion of the public accounting community’s influence over the process and the results. However, the accountants continued to provide substantial financial and human resources to the Board. Prior to the Sarbanes-Oxley Act of 2002 (S-Ox), FASB financing was from sales of publications and contributions, with a majority of contributions coming from public accountants, substantial amounts from preparers, but just a pittance from users. Similarly, through mid-2012, 18 of the 43 Board members and all but one chairman had come directly from public accounting firms.
S-Ox was a watershed moment for accounting standard setting by statutorily acknowledging the arrangement between the SEC and the private sector. The FASB easily met the specified criteria in S-Ox for an accounting standard setter’s work product to be recognized as generally accepted by the SEC; the SEC reaffirmed the FASB as a designated private-sector standard setter in April 2003.
S-Ox provided for funding through support fees assessed against issuers of securities.(15) While subscriptions and publications provide about one-third of FAF revenues, the substantial majority comes from support fees. This has freed the FAF from its fundraising efforts and helped further assure the Board’s independence from the preparer and audit communities. However, it raises an offsetting concern about independence from government intervention in funding and agendas.The funding change enabled the FASB to increase student and educator access to the standards through low-cost subscriptions not previously available.
(14) The FAF has similar responsibilities for the Governmental Accounting Standards Board (GASB) and Governmental Accounting Standards Advisory Council.The GASB's pronouncements relate to accounting for and presenting financial information by state and local governmental entities.
(15) Section 978 of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided for similar accounting support fees for the GASB, expected to begin in 2012.
The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.
Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.
Material used with the Society's permission should be credited to: www.sechistorical.org.