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Financial Accounting Standards Board

American Institute of Certified Public Accountants that result in neutral information that is useful in decision
(AICPA) and included approximately twenty representa- making.
tives of the accounting profession who served on a part- An independent group, the Financial Accounting
time basis. Pronouncements issued by those two bodies Foundation, oversees the activities of the FASB. It is
are considered to be generally accepted accounting princi- responsible for selecting members of the FASB, raising
ples (GAAP) unless they have been specifically amended money to fund the FASB’s operations, and providing gen-
or replaced by a subsequent pronouncement. eral oversight of the FASB to assure that it is performing
Largely as a result of criticisms concerning the per- its mission. The foundation is composed of a sixteen-
ceived lack of independence of the APB and the part-time member board of trustees that represent the majority of
involvement of its members, a major reconsideration of the groups interested in, or affected by, the accounting
the standard-setting structure in the United States standard-setting process.
occurred in the early 1970s. This led to the creation in The FASB has the authority to establish GAAPs but
1973 of a new standard-setting body designed to be inde- has no authority to enforce its standards. The SEC and
pendent of all other business and professional organiza- the AICPA are the organizations that provide the enforce-
tions. That new group was the Financial Accounting ment mechanism. The SEC requires compliance with
Standards Board (FASB). FASB standards by all public companies, that is, those
The FASB is funded by revenues from the sales of its whose securities are traded in public markets, either on
publications and by voluntary contributions, primarily stock exchanges or over-the-counter. The AICPA requires
from public accounting firms and corporations. The public accounting firms that audit either public or private
board consists of seven full-time members. The usual companies to express an opinion as to whether those com-
composition of the board is three members with extensive panies’ financial statements conform with GAAPs.
public accounting experience, two from a corporate back-
ground, one academic, and one financial analyst. STANDARD-SETTING PROCESS
The three pillars on which the FASB was built are Within this overall structure, the FASB has developed an
independence, openness (or sunshine), and neutrality. extensive structure of due process to conduct its standard-
Although independence can never be totally assured, the setting activities. The process usually starts by determin-
FASB charter did attempt to protect the board from as ing what financial reporting issues are sufficiently
much external pressure as possible. The charter gives the pervasive and important that they warrant consideration
FASB exclusive authority to set its own agenda and estab- by the board.
lish accounting standards. Board members are insulated The FASB has a professional staff of approximately
from external pressures by fixed five-year terms with a forty-five persons; once a project is added to the agenda,
two-term maximum, by the requirements to end all past staff members are assigned to begin research on the topic.
employment relationships, and by disclosure of and cer- On most larger projects, a task force of outside advisers is
tain limitations on investments and outside activities that appointed; they assist in the staff’s research and the
might create a conflict of interest. board’s deliberations by providing expertise, a diversity of
Sunshine characterizes the open process that the viewpoints, and a mechanism for communication with
board follows. It means that all its technical business is those who may be affected by the proposed standard.
conducted in meetings that are announced in advance and The FASB sometimes asks for written comments
are open to the public. Because the board’s Rules of Pro- from constituents during the research phase through the
cedure require a supermajority of five votes to approve the issuance of a Discussion Memorandum. Such a document
issuance of any new standard, no more than four board analyzes the problem in depth, delineates the issues, iden-
members can meet privately to discuss technical issues. tifies alternative solutions, and discusses the merits of
Neutrality means that accounting standards should those solutions in an objective way. Alternatively, the
be designed to provide the best possible information for board may issue what is known as a Preliminary Views
economic decision making without regard to how that document, which includes tentative decisions on a few
information may affect economic, political, or social basic issues and again seeks input from constituents.
behavior. Put another way, accounting standards should After completion of initial research by the staff and
not be intentionally biased for the purpose of promoting consideration of comments on a Discussion Memoran-
either private special interests or government policy goals. dum or Preliminary Views, if one of those documents is
Neutrality has been reinforced by adoption and adherence issued, the board members begin deliberating the issues in
to a broad set of principles called the conceptual frame- earnest. This process can take anywhere from a few
work. That framework was designed to produce standards months to several years, depending on the number and

308 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION