by Paul B.W. Miller and Paul R. Bahnson
As we see it, Enron is causing financial reporting problems to receive some long-needed public attention.
Federal lawmakers on Capitol Hill have already brought forth numerous proposals for fixing things, including one by Billy Tauzin, chairman of the House Energy and Commerce committee that is aimed at increasing the FASB’s independence.
Obviously, skepticism is in order when reacting to any proposed legislation because it has about as much chance of becoming law as an extended forecast has of accurately foretelling next month’s weather. Nevertheless, proposals like his offer a glimpse of prevailing political winds and other climate conditions in Washington.
We want to look a bit more closely at Tauzin’s proposal because it would use federally monitored funding to replace FASB’s current revenue streams. Presently, about two-thirds of the board’s funds come from selling publications and one-third from contributions, virtually none of which come from financial statement users.
Tauzin proposes levying fees on accounting firms and companies that would be collected by the U.S. Treasury and then forwarded to FASB, all under the presumption that doing so would insulate the standard-setting process against political pressure.
FASB’s funding has always been problematic to us. (This column first addressed this issue back in 1998.) While contributions are smaller in amount than publication sales, they are still substantial. Further, we wonder how many of the sales are contributions in disguise. Whatever they’re called, dependence on donations leads to two negative results.
First, donors naturally expect the board to pay special attention to their interests, certainly more than the interests of those who don’t make any "gifts." If there is any doubt, consider these words uttered to Paul Miller by a trustee when FAF was selecting a new FASB chair in the 1980s: "Don’t you think it’s time the people who pay the bills get their way?" We state, in no uncertain terms, that this quid pro quo expectation is just as wrong now as it was then.
Second, it’s only natural to expect that FASB would respond in some way to the donors. Even if they don’t (and we find no evidence that they ever have), the process and its output are tainted by the lingering perception that they might. Thus, we believe that the board would be more effective if it wasn’t dependent on contributions.
In addition, we are deeply troubled by FASB’s dependence on publication sales. Specifically, we think its pronouncements should be essentially free for the asking, at least through Internet distribution channels, with pricing for hard copies sufficient only to cover costs. Why? Because the board’s purpose is to enhance the flow of useful information from corporations to its users. We find unacceptable irony in the fact that investors can get annual reports and 10-Ks for free but have to pay to get the standards that they need to interpret those documents.
As another argument, FASB standards and publications essentially define legal constraints on practice; therefore, they are part of the public record and must be readily accessible. Perhaps when FASB was created in the days before the Internet, charging for documents was much less a problem. People were accustomed to paying for information because it was available only in printed form.
Now that documents of all kinds are only a click away, FASB’s practice of selling standards is totally anachronistic. However, dependence on this revenue stream forces the FAF to cling to its copyrights, and the public either has to buy the documents, pirate them or go to a library. (We even had to pay the FAF a permission fee to reprint brief excerpts from pronouncements in our upcoming book.)
Therefore, we laud Tauzin for going after FASB’s reliance on contributions; however, we have huge reservations about his scheme. First, any cash flow from the government has strings attached, and Congress will surely try to pull them as if FASB is a puppet.
And an April 2002 Wall Street Journal article shows that the tugging has already started because Tauzin’s bill includes a requirement that FASB ensure that its rules are "clear so that there is no question about compliance" and that financial reports are "comprehensible."
What nonsense!
This slap to FASB’s face is nothing short of uninformed and misguided. While we often disagree with specific board decisions, we would never fault its people for insincerity or laziness in trying to produce comprehensible standards. Certainly FASB cannot be responsible for the actions of corporate accountants and auditors in actually producing financial reports. What is Tauzin thinking? He can’t seriously want to convert the board into an enforcement agency.
This sort of claptrap shows the general unsuitability of federal funding for FASB, even if all the Treasury Dept. is doing is laundering the cash. The risk is especially high when we consider the already demonstrated propensity for Congress to meddle in politically hot accounting issues like stock options and auditor independence. Because the members’ positions are shaped by PAC contributions, they seldom even understand the issues - and never come down on the side of full disclosure.
So, if these alternatives are so bad, what could be better? We’ll go back to what we suggested in 1998, drawing on a suggestion from our colleague Rod Redding, now at Elon University: create a permanent endowment to provide operating funds for FASB.
Assuming, say, an annual budget of $20 million and a 5 percent annual return, the endowment would need to be around $400 million. And, just where would that kind of money come from?
First, we think that it should come from financial statement users to minimize the handcuffs and strings. Second, we think that it can come right from the capital markets, specifically the NYSE, AMEX and NASDAQ. Suppose that their members would agree to a short-term "tax" of one-tenth of one cent per share traded, split half and half between the buyer and the seller. On a transaction involving 1,000 shares, each party would be taxed only fifty cents.
Even if the share value was just $1 (the NSYE average is $31), the tax would be totally negligible. However, on any given day, these exchanges have a combined volume of something like 3 billion shares, and the total tax would be about $3 million. If the tax were put into effect for 133 business days (about half a year), it would produce the target of $400 million.
The tax might even be spread over several years, like every Monday for 133 weeks, or some such thing. Put all that money into a conservatively managed fund, and the standard-setting process would be totally independent of auditors and managers. If there were to be any influence on the board, it would come from loyalty to investors and doesn’t that make a lot of sense? A pipe dream? Perhaps, but not a bad one.
We now write directly to the FAF’s trustees: think anew about the current situation and see if we’re off-base in our criticisms. Then think about the alternatives - the status quo, federally laundered money or total independence. Then, get busy looking into the possibilities. We think that this sort of arrangement would change everything, and for the better. We invite you to show us where we’re wrong.
