Criticism is nothing new to either the Financial Accounting Standards Board or the Governmental Accounting Standards Board. They get it from investors who want more information. They get it from corporations that say they already offer too much information. And recently, they've gotten it from both the Securities and Exchange Commission and from a former SEC chairman.

The imbroglio with the regulatory body came to a head in December, when the Financial Accounting Foundation presented the SEC with a list of final appointments to its own board and FASB. The lack of a heads-up led the SEC to complain that such notification was inconsistent with the spirit of a policy statement that the commission issued in 2003. In that statement, the SEC said that as part of its oversight responsibilities, FASB should give the SEC "timely notice of, and discuss with the commission" its intention to appoint new members.

That was enough to prompt the FAF to announce that it was formalizing a tradition of allowing the SEC to review, interview and express an opinion on candidates for appointment or reappointment to the foundation or FASB.

Under the arrangement, the FAF will advise the SEC's Office of the Chief Accountant of its list of candidates 45 days before a meeting to consider an appointment or re-appointment to the FASB or the FAF Board of Trustees. During that time, SEC commissioners may provide a list of alternate candidates for the foundation to consider.

In a memo sent to the SEC, the foundation formally agreed to now:

* Follow a specific timetable for notifying the commission of potential appointments and re-appointments to FASB and its own board;

* Give commissioners the opportunity to nominate their own candidates;

* Further notify the commission of finalists for any position; and,

* Allow commissioners to interview those contenders.

Both FASB and GASB declined comment, and FAF Chairman Robert E. Denham did not return calls by press time.


The rift with the regulator also came less than a month after former SEC chair Arthur Levitt fired a salvo in the form of an opinion essay on the state of FASB and GASB in The Wall Street Journal.

"[FASB and GASB] ... must be reconfigured to keep our markets healthy," Levitt wrote. "These boards have fallen captive to constituent groups, slowing their progress or even diverting their efforts to keep pace with critical issues."

Citing "intense interest-group lobbying," Levitt warned that the boards must be more independent both financially and politically. He called for the public financing of GASB and less private financing from the mostly publicly financed FASB. He also recommended that the trustees of the FAF, which names FASB and GASB members, be picked not for their representation of sectors or constituencies, but for integrity, records of service, financial knowledge, and understanding of the needs of the users of financial statements.

FAF chair Denham fired back a response citing several accomplishments as evidence that FASB had the independence needed to stand up to the pressures of special interests, and agreeing with several points that Levitt had made - most notably the need for public financing of GASB. Denham pointed out that FASB is not only dedicated to the needs of the users of financial information, but has expanded their participation in the board's due process. As proof, Denham cited FASB's unblinking stance on options expensing, despite attacks by special interest groups.

The Financial Accounting Advisory Council, which advises FASB on critical issues, discussed Levitt's call for reform, but decided not to recommend changes to the board's structure.

The ultimate objective of Levitt's recommendations was to improve the competitiveness of U.S. securities markets. He cited a number of prominent individuals who have recently "bemoaned the apparent lack of competitiveness of our nation's capital markets."

The moaning, however, has generally been over a perceived excess of inappropriate regulations. Levitt's argument calls for less interference in the standards that are the foundation of some of the regulations. "To preserve the privileged position of the U.S. capital markets, we need to re-invigorate and re-engineer the organizations responsible for setting the accounting standards upon which our market system rests," he wrote.

Levitt also cited a report issued by, among others, New York Mayor Michael Bloomberg and U.S. Senator Charles Schumer, D-N.Y., that raised alarms up and down Wall Street.

"If we do nothing within 10 years," the report said, "while we will remain a leading regional financial center, we will no longer be the financial capital of the world."

Levitt also mentioned a recent speech by Treasury Secretary Henry M. Paulson at the Capital Markets Competitiveness Conference at Georgetown University. Paulson discussed several challenges to competitiveness, and asked "whether it would be practically possible and beneficial to move toward a more principles-based regulatory system, as we see working in other parts of the world."

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