Back in 1985, fresh from a stint on the staff of the Financial Accounting Standards Board, Professor Paul Miller co-authored (along with Rodney Redding, a faculty colleague at the University of Utah) what was meant to be a supplemental textbook for accounting courses.
But that first edition of The FASB: The People, the Process, and the Politics ended up being much more than a textbook; its candor and insights into the political pressure the standard-setter faces gave it a much higher profile that led to many citations in the academic literature.
The book went through three more editions in the 1980s and 1990s, its long life stemming in part from its unique glimpse into what goes on inside the standard-setter’s halls. “Firsthand observations of the place are really quite enlightening,” said Prof. Paul Bahnson, who worked on the first edition of The FASB as a graduate student, became a co-author with the third edition, and had spent a year with the board himself in the mid-1980s. “As you talk with people who haven’t been there, you realize they have a lot of misconceptions, and the book came out of sharing that firsthand perspective.”
Seventeen years after the fourth edition, in 1998, the fifth was published this June by Sigel Press. We talked recently with Professors Miller and Bahnson about how they updated the book, and what they hope the new edition will achieve.
What prompted you to create a new edition?
Paul Miller: Since the fourth edition’s release in 1998, an awful lot has changed, for the better but also for the worse, so it was time for new commentary. In 2012, I had a phone call from Terri Polley, the CEO of the Financial Accounting Foundation, and she explained that they were still using the fourth edition for orienting their new trustees, board members, and staff members. She lamented the fact that it was out of date and wanted to know when we were going to revise it. And so, with a lot of encouragement and other support, they gave us access to board members and the senior staff. We made a presentation in 2013 to both FASB and the Governmental Accounting Standards Board and their respective staffs about what we were thinking and aiming to do. We had access to everybody and they were candid with us, and the interviews were very helpful.
Paul Bahnson: The only thing I’d add is that we had the help and cooperation of FASB, but it’s clearly our own work, and it’s not an authorized biography in any sense. It hasn’t been cleared by them. It’s our own feelings, and that’s the only way we’d do it.
What’s updated, and what’s new in this edition?
Bahnson: In some respects it looks the same: The table of contents has six chapters and they’re pretty much the same in terms of their general concept, but the content is drastically different. It reflects the tone of our column for Accounting Today, because there’s a level of candor that we’ve internalized since the last edition. As veteran commentators, we added much more candid descriptions of the political pressure on the standard-setters over time. Before, we were a little more accepting of the places where they didn’t do everything they could have.
There’s a lot of discussion in this edition of the convergence of GAAP and International Financial Reporting Standards. As our readers in Accounting Today know, we’ve never been favorably impressed by that whole movement, and a lot of the commentary that’s been expressed in our column carries over into the book. We describe the history of that whole process, the outcomes, and it’s all there for the reader to see.
Another thing is that the book has been updated for new standards and issues that have been debated since the late 1990s. Even some older controversies have updated discussions, and I think we are definitely more challenging in terms of our evaluations of those as well.
Miller: When the first edition came out, the conceptual framework was the talk of the town. FASB had made a start at it, and, despite hitting a brick wall when it came to measurement, there was excitement that something was going to be done and reform would come. In the third and fourth editions in the 1990s, there was a residual hope that concepts would lead to better standards, so we were still somewhat hopeful about it. We saw the hole in it, that it didn’t describe measurement as it should have, but now, after 15 years or more, and 30 years from the beginning, we find that despite working on it with the international board, the framework is still grossly incomplete. We now believe, and say so in the book, that no standard has ever been completely consistent with the framework. It hasn’t delivered what it’s supposed to. In particular, one thing that we state very clearly is that the board made a mistake back in 1985 when they compromised and did not identify market value as the desirable reporting basis. As a consequence, that question has been debated in every project over the last 30 years. We encourage the board to move ahead and reach that conclusion. We simply find the framework to be incomplete and inadequate for the task that has been assigned to it, and we go on from that point to describe the best direction for overcoming the problems that come out of an incomplete framework.
We also provide a political history of FASB over the last 40 years — how it began under the protection of the auditing profession, known for its independence and its integrity, and how that began to change in the second half of the 1970s, as competition entered, ethics rules were changed. Thus, FASB fell under the domination of the management profession, and found itself being frequently intimidated for one reason or another, typically because it was trying to introduce more information that managers did not want to report. The threats of the managers were backed up by the fact that the board depended completely on their financial contributions.
In 2002, Sarbanes-Oxley was passed and eliminated that funding threat by allowing FASB to collect support fees from public companies, but in a move we find stunning, only 50 days later, they signed the Norwalk Agreement with the International Accounting Standards Board, committing to work with that board to produce converged standards. That essentially threw away the independence that Sarbanes gave them, because the international board is still dependent on donations from U.S. corporations.
Now, it’s hard to know exactly when it happened (we put the date in 2012), but the convergence movement has collapsed for lack of interest and lack of support. Very few people think that FASB ought to give up its status as the designated standard-setter. That continues to be argued by some, but we show that it doesn’t make much sense.
Bahnson: We’re afraid that most involved in financial reporting believe that the information in the financial statements is the only thing that’s used by analysts, users and others in making decisions. That idea seems spurious, but we think it fits the observed behavior. Unfortunately, if you subscribe to that paradigm, then what you try to do is get what you want into the statements, whether it’s the truth or not. Of course, the markets are much more perceptive than that, and participants in the markets capture lots of other information from other sources. Markets see through false and unreliable information that’s not transparent, and so it’s really a wasted effort. We embrace another paradigm that says you really ought to shoot for telling the truth, what we call Quality Financial Reporting. If you tell the truth with candor, the rewards you receive are reduced risk and uncertainty for investors and others, and that translates into a lower cost of capital.
Miller: That theme runs throughout the book — that there’s this inadequate point of view of many who are involved in setting standards, including the board and its constituents that participate in the due process, that the message in the financial statements almost determines securities prices. As a result, there’s a lot of debate over what ought to go in and what should be left out, but it’s often based on what management wants to report, not what users want or need to have.
Our point is that from the beginning of time with setting standards, that paradigm has been in control, and as a consequence, there’s much more controversy than there needs to be, and much more inefficiency than there ought to be, because the financial statements are incomplete. This insight gave us a platform on which we could stand to assess the inadequacies of past standards and current standards, and those that have been talked about. Just to give an example — off-balance-sheet financing continues to be a struggle, when it doesn’t fool anybody.
What are the audiences you hope to serve with the book?
Bahnson: We are hopeful that this book will end up in classrooms across the country — and maybe even outside of the country; who knows? — in all levels of courses in accounting and finance. It’s clearly more than just an accounting book. FASB has used it in the past to help new people there, whether they be board members or staff, to get the lay of the land. FASB and the work that it does has implications for people throughout our society. It’s not just investors, it’s not just auditors, it’s not just managers — our standard of living is tied to the efficiency with which our capital markets operate, so it’s really something that impacts everyone. We think that a lot of people other than students will benefit from this book’s messages.
Miller: Examples of other readers would be financial analysts, regulators, people in the media, and frankly the board itself. Accountants tend to think that accounting is only for the benefit of accountants.
Bahnson: And I think others tend to think of accounting as something that’s only of interest to accountants!
Miller: There are many misperceptions that we would like to help everyone in the markets to overcome. Thus, wanting to reach that broader market, we’ve priced it pretty aggressively. The paperback is about $20, and the e-book is only $10. We’re also in the process of arranging to have the book translated into Japanese. We would expect this book to have an impact in other countries and how they think about standard-setting in their own countries.
What should readers take away from it?
Bahnson: That standard-setting is a political process, that it’s not about a group of intellectuals sitting around coming up with a conceptually pure answer to a particular issue. It’s really informed by the conflicting desires of preparers, auditors and even users, and oftentimes it has more to do with who has the most clout than who has the best answers. I think that strikes people as pretty surprising.
Miller: Accounting practice and accounting standards are in desperate need of very significant reform so that they can actually serve society. The standards themselves are politically derived and limited, but we also find an attitude that the capital markets should just accept whatever we give them, instead of being re-oriented in our thinking to find out what users actually want and need, and then trying to provide it. That’s a huge challenge, because it’s an entirely new approach to the process.
Where do you think FASB is headed? And where should it be headed?
Miller: That is one of our frustrations — we can’t tell for sure where FASB is headed. We know that they are independent. They do not depend on managers and they’re no longer in the situation where they have to build a consensus with the international board, but it seems to us that the members and the staff have operated so long under a condition of political dominance that it’s almost like they don’t realize that constraint is gone, or how much freedom they actually have now to create new standards that would lead to better information. Until they get that picture, they’re not going to be able to do much. We think they’re comprehending more and more that there are much bigger problems to solve, and they now have the freedom to solve them.
Bahnson: This goes back to our paradigm that we’ve talked about, that we’re all dependent upon markets that operate efficiently — even if we don’t have any investments, for society as a whole our standard of living is better if our markets operate efficiently — so this other idea that some people have that they can control the information flow to the markets and manage share prices is false, but they operate that way and they really limit the amount of information that markets have to work with and make them struggle to find it, and therefore it really drags down the efficiency. So the board should be all about where they can improve reporting in a fundamental way to help create that market efficiency. This paradigm isn’t just high-minded and thinking about ethics, it’s about the fact that if you better inform the market, if individual companies do that, then the investors who are looking at their securities face less risk and are willing to pay higher prices for them. It’s actually a win-win situation, but there’s an old mindset that still prevails that makes FASB’s process very adversarial and competitive.
Miller: Here we are, well into the 21st century, yet our accounting standards are rooted firmly in the 20th. That’s especially true with regard to the technology that’s available for compiling and distributing information.
Bahnson: With this freedom that FASB has found, they have the opportunity to take on a leadership role with respect to setting out what standards should look like for the international board and others around the world. If we develop better standards here in the U.S, that will certainly not go unnoticed by market participants elsewhere. Nominally, the international board is the worldwide standard-setter except for the U.S. and a couple of other places, but they certainly can be helped along the way by good leadership from FASB.
