Robert Herz, the former chairman of the Financial Accounting Standards Board, has written a new book on his experiences leading FASB, with reflections on his experiences leading the board through the financial crisis and its efforts to converge U.S. GAAP with International Financial Reporting Standards.

The book, Accounting Changes: Chronicles of Convergence, Crisis and Complexity in Financial Reporting, was published last week by the American Institute of CPAs (see Herz Pens Book on FASB Experiences). He talked last week with Accounting Today, before FASB announced the newest FASB chairman, Russell Golden, who will be succeeding Herz’s successor Leslie Seidman when her term ends on June 30 (see Russell Golden to Chair FASB).

What would you say was the biggest challenge you had to grapple with during your tenure at FASB?  Was it the financial crisis, stock option accounting, Enron, convergence?

First, as I say in the book, it was a terrific experience. It’s a great organization with terrific people. The constant challenge, I find, is really to make as many people understand the importance of sound accounting and reporting to the whole system. Inevitably there are always special interests that when you’re working on something to improve the accounting may not agree with the direction you’re heading in. If they can’t persuade the FASB, they then will often go down to the SEC and try to persuade them. That usually doesn’t get much traction, but then they may seek to do something through the political avenue. There were a few of those episodes. There was the stock option one, which was quite intense. I cover that in a whole separate chapter, why that issue was a real important one, and all the dynamics of that, and the political pressure we came under, and why it was important that in the end we were able to issue a new standard that improved the accounting. The financial crisis was challenging just because, as a lot of people said, events were evolving at such a rapid pace. The markets were in such turmoil that no one exactly had a playbook of what needed to be done, so you needed to have a lot of consultation, a lot of conferring with our constituents, with the SEC, with others. But there were things that needed to be done in the financial reporting area during that time frame because of some of the issues that arose with off-balance sheet entities and impairment of financial assets. How do you do fair value when there’s not transparent price discovery on the markets and things like that? That was a challenge from that point of view as well, and some people tried to get certain things done through political means.

Didn’t the banking interests also want changes with fair value?

With fair value, there was a sense to either delete it from the rules or suspend it, and neither we nor the SEC staff thought that was the right thing to do. On the other hand, there was guidance and some changes that did need to be put in place.

Why is there no convergence yet? That was expected to happen in 2010 or 2011, but now it’s 2013, and there are still many differences between the two sets of standards.

Well, I have a very lengthy chapter on that whole subject. It’s a complex one. The convergence effort continues. The issues that the two boards have been dealing with together are some of the most major issues in financial reporting: revenue recognition, lease accounting, financial instruments. It’s taking time, and clearly in some cases they start from different existing standards. The constituents tend to often say, “We like sticking with what we have already.” But convergence implies change. Either you converge to the other guy’s thing, or our approach was because those were major areas, we believed and the SEC believed from the study they did pursuant to Sarbanes-Oxley that that there were a number of areas where the standards should be improved, to work together to try to come up with a common better standard. That’s understandably taking a long time, and the boards are being quite careful to make sure they get something that is operational and cost effective before issuing a final standard. As I understand, they’re very close to issuing a final standard on revenue recognition, which is probably the broadest subject there is. It will be a converged standard. Effectively it will be a global accounting standard on revenue recognition, which I think will be a heck of a milestone.

Are there areas where you wish you had taken a different approach?

As I say in the book, I have a little section there on regrets, disappointments and mistakes. Clearly, as the Frank Sinatra song goes, “Regrets, I have a few.” I cited one where I don’t really fault us, but I think it’s very important. We had a joint project to improve the conceptual framework. We made some progress on that, but not as much as I would have liked. I think that’s just a really important thing that needs to be done. There are a lot of major fundamental issues that keep on coming up in standard setting and financial reporting that just need some better wrestling to ground in terms of the basic concepts. So that’s one area. The other area, in terms of more technical standards, clearly with the benefit of hindsight I wish we had gotten rid of the QSPE [qualified special purpose entity] exception in the literature when we did Interpretations Number 46 and 46R after Enron. Leading up to the financial crisis, what’s clear with the benefit of hindsight, is that there were all these novel and poorly written loans that were being packaged into mortgage and asset-backed securities, and those securities spread all over the world and then the people were using QSPE accounting and getting them off their balance sheet, and that helped fuel the growth of the shadow banking system. Once that became clear, we moved very quickly to fix that.

What role should Congress be playing with accounting standards, or should they not play a role?

I think accounting standard-setting needs to be independent, but it also needs to be accountable. The standards need to be set by people who are as independent and objective as possible in a thorough process that’s open and inclusive, but standards need to be what we call neutral. They shouldn’t be biased to favor a particular type of transaction or industry or a particular company. They’re not like the tax laws where you’re trying to specifically incentivize or penalize particular things. Accountants, as best we can, are supposed to tell things like they are. I think that Congress through the SEC, and to a certain extent the trustees of the Financial Accounting Foundation, need to make sure that the accounting standard-setting process is meeting those objectives of being independent, a good process and all of that. But they should not be getting into the technical details or determining agendas or that kind of thing. That should be left up to the members of the board. I think oversight of the process is appropriate so that the body of standards is contributing to sound reporting in this country, but I don’t think trying to craft standards—and particularly standards that are purposely slanted to helping a particular industry or favoring a particular transaction—that’s not appropriate.

What do you think will happen with FASB in this new multilateral Accounting Standards Advisory Forum and the role they’ll be playing? Is the U.S. losing its influence on IFRS?

I don’t know. Clearly the rather unique partnership that we had between the IASB and the FASB, that era is coming to a close, although they are still working on these major joint standards. I think it’s understandable, given IFRS is pretty global now and the IASB has lots of constituents who want a seat at the table. My view is that the FASB is the best national standard-setter in the world. It has the most experience, the most resources and the like. My hope is that they continue to and are able to have a very active role in that new Accounting Standards Advisory Forum. Before, I talked about the need to get on with the conceptual framework improvement. The IASB has started that. They said they are very much going to look to that new Accounting Standards Advisory Forum to help in that effort. I think the U.S. can play a very key role there.

Do you have any insights into what the SEC might do now about convergence? They have a new chairman, Mary Jo White, but I don’t know if she has that much experience with accounting standards.

I have no idea. I saw a quote from [SEC commissioner] Elisse Walter the other day saying it’s still a work in progress. I don’t know. They have got a very full plate with other things, but I do think it is important they provide some greater clarity around that issue sooner rather than later.

What kinds of things are you doing now? I know about you're on the board of WebFilings and I think I heard at one of the conferences that you are teaching now and on some other boards?

I’m what you they call an executive in residence at Columbia Business School. I do some lectures, both at the business school, and a few at the law school too. I mentor some students and I help the faculty with some of the research. I’m on a number of boards of directors of both companies and not-for-profits. I’m on the board of Morgan Stanley and I’m on the board of Fannie Mae and some smaller outfits. I’m also a trustee and vice chair of the Kessler Foundation, which is the country’s largest not-for-profit in the area of medical research and grant making to people with severe disabilities. I’m on the PCAOB’s Standing Advisory Group. I’m on the Accounting Standards Oversight Council of Canada, which is the equivalent of the Financial Accounting Foundation. We oversee the accounting standards and standard-setting processes used in Canada for all the sectors including the government sector. I’m an ambassador of the International Integrated Reporting Council and I’m on the advisory council of the Sustainability Accounting Standards Board. I like doing lots of different things. It’s great.

You’re also on the board of WebFilings, which does XBRL?

WebFilings is a tremendous company. When I joined them in early 2011, they were just starting to get going. Now they’ve got well over 50 percent of the large filer market for SEC applications, and they’re now expanding into regulatory reporting, internal management reporting, reporting by mutual funds and hedge funds, and [corporate sustainability] reporting. It’s been just a terrific product and just wonderful people to work with.

It sounds like you’re staying pretty busy there. Is it busier than when you were with FASB?

As my wife says gleefully, “He’s failing retirement.” When I left the FASB, I said to myself I really wanted to broaden because for 35 years I’ve been heavily involved in accounting, auditing, financial reporting as an auditor, as a standard-setter and the like. It’s been absolutely terrific. I want to contribute to those things, but I also want some new and different things, including teaching and being on boards.

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