Is “Independent Standards Setting” a Sacred Cow?

I’m starting to think it is.

I’ve been spending some time the last couple of days digging deep into fair value accounting, and I’m struck by how unnecessarily absurd the whole exercise turned into.  Read my comments here.

Today I came across an old article from 2007 in the CPA Journal, which is published by the New York Society.  (In my mind, it’s one of the best publications for serious accountants out there.)  The article is about fair value accounting.  Here’s an observation that ring true to me.

Though SFAS 157 raises significant unresolved issues for the “how” of valuation, the gaps in the “why” of FASB’s fair value measurement are perhaps even more striking. SFAS 157’s preamble seems to take pains to disassociate it from anything beyond improving measurement methods.

Fair value proponents, the authors are certain, consider further codification of fair value practices as essential to the transition to a full fair-value accounting system. But without a more forthright description of policy goals, how can one assess how well SFAS 157 furthers these objectives? By refusing explicitly to link the how of fair value measurement and the why of the fair value accounting vision, the standards setters evade a needed debate.

And then there’s the observation about the FASB’s arrogant attitude.

Comment letters from industry also expressed considerable frustration with FASB’s apparent disregard of dissenting views on the desirability of further moves toward fair value reporting. Noting the strong reservations expressed in response to previous FASB reports on fair value, Microsoft goes on to say:

We hope you can understand our frustration when the basis for conclusions … indicates that “Users of financial statements generally have agreed that fair value information is relevant,” but provides no evidence to support that statement, does not discuss whether fair value information is more relevant, or provides any kind of explanation for the qualifier “generally.”

FASB’s dismissive attitude toward fair value skeptics is clearly on display in several of its articles and essays.

We want independent standards setters because we want to insulate accounting standards from the irrational tugs and pressures of the political process.  We don’t want to cook the books by allowing those with a partisan political interest to achieve desired results by manipulating the accounting rules.  That’s the thinking behind independence.

But “independence” does not mean “isolation.”  It does not mean become completely unhinged from broader public policy goals or the legitimate concerns of the preparer community.  That is what I fear has happened here.

It’s been a long time since I’ve spent had to look so closely at the accounting standards, and my overall impression is that the FASB’s mission is largely academic.  It’s like they’re trying to create a hypothetically perfect universe in which they can comfortably reside and everyone else be damned.

I’m not quite ready to issue an apology to my friend Congressman Perlmutte–I still think his proposed amendment is flawed (subject for a later column).  But I am challenging the knee-jerk reaction that I and others have had about defending the status quo.  The FASB has alienated a lot of their constituents over the years, which is the price they are paying for pursuing hypothetically pure but practically unworkable standards.  This is unfortunate because at a time when they need all the friends they can get, there might not be that many to be found.

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