Isocrates Weighs in on the FASB

Isocrates was an ancient Greek rhetorician (whatever that is) who said.

Where there are a number of laws drawn up with great exactitude, it is a proof that the city is badly administered; for the inhabitants are compelled to frame laws in great numbers as a barrier against offenses.

Sounds to me like he was referring to the FASB, no?

I can’t imagine anyone arguing that the FASB doesn’t create “laws drawn up with great exactitude,” so let’s take that as a given.  It’s the rest of this quote that’s worth talking about because it gets to what I see as the heart of the problem.

I’ve been arguing that what we want is a standards setting process that is insulated from the vagaries of the political process.  The number one problem cited is that lobbyists writing accounting rules is bad public policy because they would end up writing the rules to mask the problems of those they lobby for and to make them look stronger and more profitable than they really are.  You won’t find me arguing against that one, and in fact there are probably one or two other good reasons why politics and standards setting should not mix.

But let’s not confuse politics with public policy.  Accounting standards should not operate independently of public policy.  In fact, the “Public” is the main client for the FASB’s product.  I think even die-hard FASB supporters would have to agree to that one, right?

So how is it that the FASB has become so unmoored from the practical concerns of their constituents?  How is it that “independent” from political shenanigans came to mean “isolated” from public policy?

It’s the other half of Isocrates statement.  The excessive rules-based standards are indicative of a larger, societal problem–”the city is badly administered.”

In other words the FASB problem and its solution has to be put into a broader context, the public policy context, the financial reform context, the IFRS context.

The Perlmutter Amendment is a bad answer for many reasons, the core one being that it doesn’t address the structural issues, such as:

• How will the proposed new oversight board play out in an IFRS environment?
• What happens if Congress or members of the Board don’t like an answer that came from the IASB?  Will you work with the IASB to come to a consensus position, or will the US strike out on its own and create its own set of rules?
• If we end up striking out on our own, who will write those rules?

Right now all the stakeholders seem to be playing at a narrowly-focused, tactical level.  We’ve divorced the standards-setting process from the larger context, and what Isocrates says is that you really shouldn’t.  The two are inextricably linked, one the reflection of the other, and to separate them is to create an artificial relationship that doesn’t exist.

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