FASB Braces for Fight
March 22, 2004 (TheDeal.com) — The body that sets standards for the accounting industry is primed to do battle with Capitol Hill.
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The Financial Accounting Standards Board within weeks will release proposed rules requiring companies to expense stock options in their financial statements, and assorted lawmakers are mobilizing to thwart them.
The fight, which has flared in the wake of the accounting scandals that racked Corporate America in recent years, is, in fact, an old one. FASB and legislators have skirmished since the 1970s, when members of Congress, mostly from oil-producing states, pressured the accounting board and the Securities and Exchange Commission to ease standards for financial reporting in the oil industry.
Indeed, many observers accuse lawmakers of serving the interests of corporate constituents on accounting rules at the expense of investors.
"A few members of Congress appear to be running interference for various businesses," says J. Edward Ketz, an accounting professor at Pennsylvania State University's Smeal College of Business. "These are members from districts with a lot of high-tech firms; California comes to mind or those politicians who have received a lot of campaign contributions from high-tech firms."
Part of the problem is that FASB, an ostensibly private organization, is funded by and reports to the SEC, which itself answers to Congress. And if Congress is unhappy with an FASB standard, it can pass a law directing the SEC to ignore it.
"By and large FASB would be better off if Congress just stayed out of the rulemaking process," says Dennis Beresford, a former FASB chairman and now an accounting professor at the University of Georgia.
Lawmakers also tried to bring FASB to heel 10 years ago. Moving to block FASB from issuing a standard requiring companies to recognize the cost of employee stock options on their balance sheets, Sen. Joe Lieberman, D-Conn., sponsored a bill that threatened to strip FASB of its mandate. He also introduced a resolution that attacked the proposal as dangerous to American entrepreneurs. Although the bill was rejected, the resolution passed 88-9 and effectively killed the rule.
FASB also came under congressional pressure in the late 1990s regarding new rules for derivatives and accounting for mergers and acquisitions.
The latter issue, which ultimately eliminated pooling-of-interest accounting, spawned legislation strikingly similar to that aimed at halting FASB's stock option standard.
Pressure from lawmakers forced FASB to compromise. Pooling was ultimately eliminated over objections from legislators that the move would have dire economic consequences.
While expressing his respect for FASB, Rep. Richard Baker, chairman of the House subcommittee on capital markets, says that no one is above congressional review. "I do not subscribe to the school that FASB can do no wrong," he says.
This time, however, the board may have better luck. The bookkeeping fiascos at Enron Corp. and WorldCom Inc., as well as the role of stock options in skyrocketing executive compensation, are driving reform. Even without guidance from FASB, nearly 500 U.S. companies have already begun, or are planning, to expense stock options, according to a recent Bear, Stearns & Co. report.
During a House Financial Services subcommittee hearing on stock option legislation in June, FASB chairman Robert Herz said interference from lawmakers "would send a clear and unmistakable 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."
To drive his message home, Herz also pointed out that congressional efforts to block FASB would be "inconsistent with the language and intent" of the Sarbanes-Oxley Act of 2002, which includes measures to ensure the group's independence.
More important are the shifting political tides. Rep. Paul Kanjorski, D-Pa., says it is a mistake for lawmakers to undermine FASB's independence. He also linked Congress' actions a decade ago in halting expensing rules to the "financial storm" that swept Wall Street in recent years.
"Deciding what should be accounted for and how it should be accounted is the job of the Financial Accounting Standards Board, not the Congress," says Kanjorski, ranking Democrat on the House Capital Markets Subcommittee.
Still, FASB has an uphill battle as opponents to the proposed standard marshal their forces. The American Electronics Association, the nation's largest high-tech trade group, plans to fly business leaders from around the country on March 31 to lobby Congress to adopt proposed legislation that would override the FASB rule.
"What we're trying to do is stop FASB," says John Palfoutas, a domestic policy and congressional affairs lobbyist for AeA who is organizing the "Fly-In."
Of these measures, the Stock Option Reform Act, introduced last year by Reps. Baker, R-La., and Anna Eshoo, D-Calif., most directly threatens FASB's plan. The legislation directs the SEC only to require better disclosure of stock options. It also would test the rule for three years, and during this period the SEC would not recognize FASB's stock option accounting standard.
Sens. Mike Enzi, R-Wyo., and Harry M. Reid, D-Nev., are offering a companion bill that would require companies to expense options for their top five executives. Options for lower-ranked employees would not be booked.
In late January Rep. Cliff Stearns, R-Fla., who chairs the House subcommittee that is investigating the Freddie Mac accounting scandal, said he will introduce a bill that would change Generally Accepted Accounting Principles to require companies to adopt fair-value methods of accounting for financial assets.
"I believe legislation is needed to encourage FASB to more quickly reform the system, as well as provide principles to guide FASB in promulgating those accounting standards," Stearns says.
But accounting experts argue that any move by Congress to draft alternative accounting legislation would undermine the rulemaking process and sap investor confidence.
"Congress should keep out of the accounting principles debate because most members of Congress are not schooled in accounting as an information science or as a behavior catalyst or as an economic measurement," said Mark E. Haskins, a professor of business administration at the Darden School of Graduate Business Administration in Virginia.
-- Donna Block in Washington
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