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

We submitted the following letter to the Financial Accounting Foundation.

Dear Trustees,

We are responding to your request for comments on your proposed restructuring of the financial accounting standards board to have five members, a 3-2 voting rule and shorter comment periods.

We believe that these changes may be hasty reactions to a stale criticism from the Securities and Exchange Commission chairman that the standard-setting process takes too long. Before acting, you should ask, "In what sense is it too long?" Is it "too long" merely to fit Mr. Pitt’s sense of what’s long enough or is he possibly trying to make the board a scapegoat to divert attention from his own difficult situation?

In any case, we are convinced that FASB’s structure has little, if anything, to do with the length of the process. Indeed, we observe other more significant causes for the delays that you should first address and resolve before doing anything else. Specifically, we see problems in the way that financial reporting issues are (1) framed, (2) debated and (3) resolved.


Clearly, the process is driven in both direction and speed by the way in which key questions are expressed. The FASB is basically forced to start by asking, "What can we force managers to do?" For example, the project that led to SFAS 123 was clearly a test of the board’s power to shove options expense onto the income statement. The basic question addressed in the SFAS 141 project was whether the board could require preparers to give up poolings.

This approach is a regrettable artifact of standard-setting history that has diverted the process away from solving problems to compelling managers into reporting what they don’t want to report. Ironically, many preparers resist progress because they still mistakenly believe that they can engineer higher security prices and lower capital costs through finagled financial images that don’t reveal the whole truth.

Until this prevalent but misguided mindset is changed, there can be no real hope for a shorter process. It is inevitably slow and arduous work to coerce people into doing things they don’t want to do, even when it is for their own good.

Therefore, we urge the FAF to postpone any restructuring until it has guided FASB and its staff to implement a new paradigm that elevates to first priority the board’s fundamental task of discovering information that will help financial statement users make better decisions. This profound change would allow the board to use a carrot instead of a stick to help managers pursue their goals of higher stock prices and lower capital costs.

By uncovering routes to more useful information, the board will lead them to their desired outcomes instead of vainly browbeating them into going where they don’t want to go.


Under the existing paradigm, most of the process is consumed during the debate stage by formal meetings and informal communications with constituents. This phase is virtually always unproductive because FASB ends up fending off irrational attacks on its integrity, collective intelligence and motives.

For example, the FEI publicly asserted, in 1996, that "the pronouncements of the board reflect an implicit anti-business bias in that they do not recognize business reality and are not responsive to the valid concerns that business has raised." We all know that claims like these simply aren’t true, yet the board wastes immense time trying to dispel them.

Over and over, some preparers become offensive and put the board on the defensive. In turn, the board backpedals and whittles away on its proposals to make them palatable for these opponents to progress. Unfortunately, the information becomes less related to users’ needs. Everyone surely knows and must acknowledge that the vast bulk of the time that is consumed on projects involves responding to these complaints and other non-cooperative assaults. That fact simply won’t change if all you do is change the board’s size, voting rule and comment period.

Therefore, we suggest that you use your influence to also guide leaders of constituent groups to understand that the board’s sole objective is to produce financial statements that more completely inform capital markets, while making it clear that it does not exist to enable managers to paint false pictures with the statements.

Because stockholders and managers are obviously much better off when the markets have more information and face less uncertainty about their companies, these preparers may eventually come to understand that their attacks on the board are counterproductive for everyone, including themselves. This educational effort should also be directed to members of Congress who send threatening letters parroting preparers’ weak arguments.

This practice is rooted in the indefensible premise that it is both feasible and ethical to control the contents of public reports with the goal of misleading efficient capital markets into making suboptimal decisions. Despite this obvious error, FASB and its staff have not withstood the pressure.

It is clear to us that your proposed structural changes will not accomplish anything until this misguided political interference is rendered ineffective by education and persuasion.

Resolutions. FASB’s final standards are inevitably shaped by the flawed earlier steps in the process; however, a significant amount of time is wasted in negotiating the tens, if not hundreds, of compromises that occur during a project’s life. These concessions occur between board members, between staff members, between board and staff members and between the FASB and its constituent groups, mostly preparers and auditors. Inevitably, this lost effort eats up months and years, all while moving the standard further away from meeting users’ needs and promoting more efficient capital markets.

While the restructuring might lead to fewer compromises between board members, that change will not materially reduce the total number of compromises. What you need to accomplish first is the paradigm shift to focus on the users. Then, the process can be applied to figuring out how to actually produce useful information instead of wasting time on unsound political moves that don’t enhance the financial statements.


To summarize, you should not undertake reform without a legitimate reason, and responding to criticism from a besieged regulator strikes us as an unsuitable impetus. If the process does need shortening, the surest way to get there is a precedent-shattering reform of board and constituent attitudes. It must be done in such a way that it will be executed in a cooperative environment that is focused on the common goal of making the markets more efficient instead of the disparate conflicting (and fallaciously self-serving) ends that are pursued in today’s contentious milieu.

We simply do not see any point in implementing your structural modifications without first transforming the standard-setting ecosystem.

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