by Glenn Cheney
Norwalk, Conn. - Since its founding in 1973, the Financial Accounting Standards Board has been funded by voluntary contributions from the big accounting firms, the American Institute of CPAs, a number of corporations, smaller accounting firms and other interested organizations. Additional funding comes from subscriptions and sales of documents developed by the board.
But no more.
As the premier setter of the country’s accounting standards, the board has always strived to maintain its independence as a private-sector organization beyond the reach of corporate influence and government politics. But the board always had an Achilles heel - its funding. Audit firms and corporations, for example, if discontented with FASB standards, could, theoretically, threaten to withhold funding if standards weren’t bent to please them.
Last year, the Financial Accounting Foundation, which secures funding for FASB and the Governmental Accounting Standards Board, saw a dreadful drop in contributions earmarked for FASB. Funding plummeted from $6.6 million in 2001, to $5.3 million in 2002.
A big chunk of the cut was caused by the scandal-plagued demise of Arthur Andersen. The big firms have traditionally been the biggest contributors, each of them chipping in with equal amounts. In 2001, the Big Five donated $3.54 million. In 2002, the surviving four firms ponied up just $2.5 million.
Another $700,000 or so -about half of the net drop -failed to materialize when the AICPA decided not to make its traditional contribution of $2 per member. A spokesperson for the institute explained that FASB did not need the contribution because it had a sufficient reserve, and that provisions of the Sarbanes-Oxley Act discouraged the accounting profession from making financial contributions to the board.
Contributions from investment firms and other supporters fell by $109,000. Revenues from publications also decreased, dropping 7.7 percent, from $14.74 million in 2001 to $13.6 million in 2002. Contributions from industry and banks increased by a modest $73,000 to reach $2.1 million. No more immune to Wall Street gyrations than anyone else, the FAF saw its income from investment drop by $88,000.
The FAF also has a reserve fund of investments for “unforeseen contingencies or a prolonged business downturn.” That pretty well describes 2002, so the foundation withdrew $3.75 million over the course of the year to meet operating cash necessities. In January 2003, it withdrew another $1.75 million, and it will probably withdraw even more before the Securities and Exchange Commission establishes the fee structure and process that will fund the board in the future.
As previously reported, FASB’s new funding system is being mandated by the Sarbanes-Oxley Act. The act will require public companies to contribute a mandatory fee to support not only FASB but the Public Company Accounting Oversight Board, as well. The mandated source of funding precludes the board from accepting contributions, and the board has not accepted any since the end of 2002, thus necessitating the use of reserves.
The FAF has told the SEC that the current budget for FASB-related costs calls for about $25 million for 2003 to set the country’s standards and pursue related activities. The SEC is reviewing that budget.
The SEC and the FAF are still discussing the best way to handle sales of publications. Historically, materials have been copyrighted and managed by the FAF, with FASB-related sales benefiting FASB. Sarbanes-Oxley directs the SEC to consider whether the sale of publications compromises the board’s independence.
“The fee structure is under review at the SEC, and we have some open questions on both sides,” said FAF executive vice president Joseph S. LaGambina. “Among the questions is whether publication sales would stay with the FAF and be used to replenish our reserve fund and cover other costs.”
LaGambina sees no changes in the foundation’s investment structure. Almost all investment income is destined for the reserve fund, which, under ideal conditions, should hold funds sufficient for one year’s operations expenses.
“We’re not there yet,” he said, “but we’ll get there eventually.”
The budget and funding for the Governmental Accounting Standards Board is not affected by Sarbanes-Oxley, nor has the FAF changed its funding policy regarding that board.
“At the moment, the current plan is for GASB to continue to be funded in its current manner, though we do have some thoughts that that funding system may change in the future,” LaGambina said.
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