by Paul B. W. Miller and Paul R. Bahnson

This summer, Neel Foster completed his second and final term at the Financial Accounting Standards Board, marking 10 years of service as a board member.

As the proponents of Quality Financial Reporting, we would like to acknowledge his exemplary service by designating him as our first QFR Advocate of the Year, joining Warren Buffett as a QFR award winner. Neel’s work at FASB epitomizes what QFR is all about - a steadfast commitment to improving the information made available to financial statement users.

Altogether, FASB issued 33 statements during Neel’s tenure, including major standards on stock options, derivatives, business combinations and goodwill. While we might not agree with all his votes, we never questioned his unwavering commitment to improving financial reporting practices.

One prominent example of his QFR orientation is his stand on FASB’s controversial stock options project. Both Foster and Jim Leisenring dissented to SFAS 123, because of the final standard’s concession accepting footnote disclosure of the expense in lieu of income statement recognition.

The majority’s political compromise on this point was defended in the statement with these words: “The debate on accounting for stock-based compensation unfortunately became so divisive that it threatened the board’s future working relationship with some of its constituents. Eventually the nature of the debate threatened the future of accounting standards-setting in the private sector. ... The board chose a disclosure-based solution for stock-based employee compensation to bring closure to the divisive debate on this issue - not because it believes that solution is the best way to improve financial accounting and reporting.”

In their dissent, Foster and Leisenring said that “a high level of controversy and a perceived threat to accounting standards-setting in the private sector ... are inappropriate reasons for not requiring recognition in the financial statements.” In other words, threats of harmful political consequences are no excuse for failing to do what is right.

Neel’s commitment to QFR’s high standards can also be seen in his dissent to SFAS 130 on reporting comprehensive income. He voted against the standard because it allows reporting other comprehensive income items “differently” and with “less prominence” than items appearing on the income statement. This opposition to obfuscation is well-grounded in the concepts of QFR.

Coincident with his departure from FASB, Neel left some parting comments in an article published in the June 30, 2003, issue of FASB Report, in which he addresses three “prevalent” issues that often recurred during his tenure: (1) the importance of neutral financial reporting to efficient capital markets; (2) the role of FASB in achieving high-quality, neutral financial reporting, and (3) the importance of preserving the board’s independence.

Neel’s stance on the significance of these issues and his specific views were no doubt forged in the crucible of the SFAS 123 debate, easily the most controversial project he faced and probably the single most controversial project that FASB has ever come up against. Other controversies also shaped his thinking, including the projects on impairments, derivatives, business combinations and goodwill.

Much of what Neel said in his article fits perfectly with our QFR book. For example, he succinctly describes useful financial statement information: “If financial statements are to be useful, they must report all economic activity, not selected activity, as faithfully as possible.”

He also hits the nail squarely on the head when he describes the economic incentives that are at the heart of QFR: “The costs and benefits of transactions exist whether or not they are recognized and reported in financial statements. Concealing the financial impact of certain transactions from those who use financial statements may benefit a company in the short run. However, over the longer term it will ultimately increase that company’s cost of capital to a higher level than it would have been without concealment. This is obvious if one follows the stock price consequences of some of the recent reported scandals. Moreover, on a macro basis, it can only lead to inefficient economic decisions and misallocation of resources.”

It is our QFR-based contention that the long-term best interests of companies and the economy as a whole are served when managers publish financial statements that are timely and fully transparent, for the very reasons he describes.

He also condemns the many attempts by managers, lobbyists, and others to steer FASB away from particular decisions by making dire predictions about the consequences that would result: “We often hear assertions that our standards will have adverse economic effects, such as certain industries will lose their competitiveness, resulting in lost jobs, or companies will discontinue their stock option plans. Their assertions are generally prognostications that cannot be supported by actual data. But even if they turn out to be true, if those effects resulted from the market (that is, the decision-makers) having more and better information, which in turn resulted in a redirection of capital, isn’t that the right consequence from a public policy standpoint? A Ôno’ answer to this question denies that free markets and free market forces result in the most efficient allocation resources.”

He also explains why managers so often oppose FASB proposals to change generally accepted accounting principles: “To management, an accounting standard represents a loss of control over information - that is, the loss of the ability to decide whether, when or how to present information.”

To be honest, we were somewhat apprehensive when we first learned of Neel’s appointment to FASB. We have been long-time followers of FASB activities, each of us served on FASB’s staff, and, with our colleague Rod Redding, we are authors of four editions of the market-leading (OK, only) book about FASB. Neel came to the board as a former vice president and treasurer of Compaq Computer Corp. Our experience observing FASB has been that board members who come from the preparer community are expected to continue looking at issues through preparer eyes. Certainly, an issue concerning preparation costs needs to be voiced and considered, but these expenses are clearly subordinate to meeting user needs. Nonetheless, many preparers elevate costs (and other supply-based issues) to the highest priority.

However, before we ever saw him in action, our fears were assuaged when we learned that, under his leadership, Compaq was one of the few companies that chose to report operating cash flows using the direct method. In our minds, there is no better litmus test for finding those companies (and managers) who are willing to overcome some minor preparation inconvenience to provide information that users have strongly and consistently sought.

It turned out that our revised expectations were justified and Neel proved to be an outstanding board member. He also came to be a close friend and counselor on more than one occasion. Paul Miller also can’t resist mentioning that Neel received most of his accounting education at the University of Colorado at Colorado Springs.

In closing, we have some advice for George Batavick, Neel’s replacement at FASB: You have a tough act to follow, but we have every reason to expect you to bring the same commitment to excellence that Neel displayed.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs, and Paul R. Bahnson is a professor at Boise State University. The authors’ views are not necessarily those of their institutions. Reach them at

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access