SEC chairman reiterates

Levitt Defends FASB

“W hat is the Financial Accounting Standards Boards great sin?” asked Arthur Levitt, Jr., chairman of the Securities and Exchange Commission. Speaking to the Economic Club of Detroit in May, Levitt was responding to a throng of criticisms leveled by corporate executives at the accounting standard-setting process and, specifically, at the FASB. “It has asked companies to tell investors the whole truth about their financial performances including exposure from their own investments.”

Levitt, who titled his speech, “CPAs and CEOs: A Relationship at Risk,” reiterated his support of the FASB and the standard-setting process, and he denied public and private charges by CEOs that accounting standards were crippling the competitiveness of American business. “In an era of global securities markets, it has never been more important for the United States to have a strong and independent body standing guard over our accounting standards,” said Levitt.

The chairman mentioned recent debates between corporate management and the FASB, including the 1996 recommendations by the Financial Executives Institute to reduce the size of the FASB and the 1993 debate in which CEOs argued vehemently against a FASB proposal to account for stock compensation as an expense. The most recent skirmish centers on how companies account for derivatives, according to Levitt.

“We are in a situation in which the notional amount of derivatives outstanding has reached some $70 trillion,” he said. “Accounting for derivatives has simply failed to keep pace with their exponential growth.” The chairman said he supported the FASB proposal that derivatives be reported at fair value. “The value of derivatives is certainly not zero, although that is how many derivatives are reported today.”

Levitt said that at the center of the derivatives debate was the standard-setting process. “I consider it unthinkable to take standard setting out of the private sector; unthinkable to replace government oversight with government control; unthinkable to bring the independence, quality and fairness of accounting standards into question by politicizing the process that creates them,” said Levitt.

World standards must meet the test
The chairman also spoke about the efforts of the International Accounting Standards Committee to establish a core set of accounting standards. He said the SEC supported the IASCs effort and encouraged the FASBs participation. However, Levitt requested that the IASC value the quality of the result over the speed of the process, expose and resolve differences of opinion and hold the interest of investors supreme.

“The SECs acceptance of international standards is not a foregone conclusion,” said Levitt, adding that although international harmonization was a desirable goal for the United States, “we can accept only a framework that would enhance, rather than diminish, the strength and stability of U.S. capital markets.”

CPAs Hailed as Guardians of 401(k)s

O lena Berg, assistant secretary of labor for the Pension and Welfare Benefits Administration, recently commented on the trends in U.S. retirement plans and CPAs role in safeguarding them. She emphasized the challenges brought about by the rapid increase in 401(k) plans in the last decade.

Berg said that there were only 17,000 401(k) plans covering 7.5 million workers in 1984. In 1993 there were 155,000 plans covering 23.1 million workers. Because such plans are largely self-directed, “it is crucial for workers to become financially knowledgeable,” said Berg. To that end, she emphasized the Department of Labors Interpretive Bulletin 96-1, Participant Investment Education , which makes it easier for employers to offer advice. (See “New DOL Ruling Eases PFP Worries,” JofA, Sept.96) However, there still may be a long way to go to educate workers about the need to save for retirement and to take advantage of 401(k) plans; Berg said nearly one-third of all employees eligible for 401(k) plans dont participate in them.

Part of the DOLs plan to increase employee participation is assuring workers that such plans are safe. Berg said the DOL could do only so much; the accounting profession was key in assuring the safety of such plans, especially since CPAs are the “only third parties who regularly review the 401(k) plan financial statements.”

Berg pointed out that it was an accountant who discovered one recent incident of an employer who had embezzled $2.7 million of 401(k) contributions. “In the role of auditors of 401(k) plans, CPAs play an indispensable part in detecting delinquent contributions. To the extent that CPAs educate plan trustees and administrators about their duties, the odds are overwhelming that the problem of delinquent employer contributions will be minimized.”