by Ken Rankin

Washington - New federal legislation directing the Financial Accounting Standards Board to require accountants to meet "fundamental principles of transparency and understandability" when preparing or auditing financial statements drew stiff opposition from former FASB chairman Edmund L. Jenkins and New York University accounting professor Baruch Lev during House hearings on the plan.

Jenkins, who retired as FASB chair June 30, called the draft legislation "a clear threat to the FASB’s independence," and warned that it would compromise the Board’s ability "to produce high-quality standards" for the accounting profession.

The legislation at issue - a draft bill prepared by the House Energy and Commerce Committee late last month - would give federal recognition to FASB standards, and would require the Board to promulgate new rules requiring accountants to apply all FASB standards consistently with fundamental principles of transparency and comprehensibility.

The bill would also set a deadline for completion of a number of key accounting standards, which have been languishing at FASB for years.

In his farewell appearance before Congress as FASB chairman, Jenkins called it "inappropriate and potentially harmful to consumers and the capital markets for Congress to mandate the subject matter, the content or the timing of the Board’s technical decisions or standards."

The FASB’s "authority and expertise does not extend to auditing or ethical standards for the accounting profession," and therefore the Board "is not the appropriate organization to promulgate" new mandatory principles for transparency and comprehensibility, he told the Committee.

Jenkins also bristled at the draft bill provisions setting a timetable for completion of certain long-delayed standards setting projects on FASB’s current agenda.

"Those provisions restrict the Board’s ability to make objective and unbiased decisions on technical matters and, therefore, compromise the ability of the FASB to produce high-quality standards."

Members of the Committee, however, made it clear that they were losing patience with the snail’s pace of standards setting at the FASB - particularly with respect to key issues such as revenue recognition, mark-to-market accounting and off-balance sheet accounting - three projects which would be accelerated under the proposed legislation.

"Off-balance sheet accounting was subject to great abuse by Enron and all members (of the Committee) are united in the view that it is imperative to reform these rules," Energy and Commerce Chairman Billy Tauzin (R-La.) said during hearings on the draft legislation. Yet despite 10 years of work on this issue, the FASB has still not issued a new accounting standard addressing abusive practices associated with off-balance sheet accounting.

The Board has been even more sluggish in its effort to promulgate standards governing revenue recognition - a process that has already taken 26 years, according to FASB critics.

"In my view, 26 years is too long of a time to spend on anything except raising your children," Rep. Cliff Stearns (R-Fla.) said during the hearings.

"It’s no coincidence that investor confidence in both the markets and the financial statements of the companies is very low amidst such uncertainty," he fumed. "Until we can iron the wrinkles out of our current accounting system, investors will remain hesitant to invest and companies will struggle to access needed capital."

For his part, Jenkins said that the best way to iron out those accounting wrinkles would be for Congress to "allow the FASB to do its job."

Noting that FASB plans to issue a proposed standard on revenue recognition sometime next year, he warned that new legislation to rush the standards-setting process "would create a dangerous precedent" that may "lead to future Congressional or governmental mandates that specific accounting issues not be addressed - a clear threat to the FASB’s independence."

New York University’s Lev, also voiced opposition to the proposed FASB Act.

Noting that the Committee’s draft bill does not call for any change in the FASB’s organizational structure or operating procedures, Lev said, "I do not see how this Act will improve upon the current state of accounting standard-setting in the U.S."

Instead of mandating new responsibilities for the Board, he called on Congress to create an Accounting Standard-Setting Commission to study the FASB’s 30-year track record in establishing financial reporting standards and propose improvements in the present system.

"I strongly believe that it is crucial to condition any legislation concerning accounting standards on a clear understanding of the FASB’s record, the role current standards played in corporate, audit and financial reporting failures, and the effectiveness of alternative standard-setting mechanisms," Lev told Congress. "Once in 30 years is not too frequent to seriously study these crucial issues to investors, corporations and the nation’s welfare."

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