|RICHARD J. KORETO is a Journal news editor. Mr. Koreto is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.|
Old habits die hard. Dennis Beresford retired on June 30 as chairman of the Financial Accounting Standards Board after 10 productive years. He might be expected to look back on his administration, but he is still thinking about the future: Where is financial accounting going? What issues will the FASB have to wrestle with over the next 10 years? Will the FASB even be necessary in an increasingly global economy? Recently, he drew on his years of experience to talk with the Journal about where the FASB and financial reporting generally are heading and the whys and wherefores of the FASBs approach.
"From time to time," said Beresford, "someone asks, Havent you resolved all the issues yet? Is there really a need to have standard setting continue indefinitely? I always say yes." New transactions and new ways of processing old transactions are always cropping up, he said, citing derivatives as an example: Theyve been around for decades as simple commodities futures contracts but have exploded in the last few years, calling for additional guidance. "You will see companies searching for even more ways to deal with complexities and different kinds of risks that are part of doing business today."
In addition, the financial accounting community will have to deal with the increasing importance of intangible assets. "Financial statements do not do a particularly good job of capturing these assets, and this is a problem as we move from a manufacturing economy to an information economy. You can easily see how much money Microsoft has in the bank, but how do you find out the value of its intellectual capital? We may need to consider additional disclosures on training or on developing new products, for example."
Beresford also discussed the continued need to address the comprehensive business reporting model presented in the final report of the American Institute of CPAs special committee on financial reporting (the Jenkins committee). "The FASB hasnt made much progress with this model," said Beresford. He questioned whether there was sufficient support in the accounting community for expanding into a business reporting model, for requirements beyond the basic financial statements. "The FASB will move on this model, but slowly. I suspect the results may be voluntary disclosures, at least in the beginning. So many of the recommendations may apply only to specific industries. Nevertheless," he concluded, "you will see more and more attention given to issues related to the model over the next decade." (See "Whats Next for the Business Reporting Model," JofA, Dec.96)
Beresford does not believe in an absolute status quo, but he emphasizes the need to build on what is solid and recognized. "In the end, despite the influence of technology and the Internet, I dont see the traditional financial statements—balance sheets, income statements, cash flow statements—becoming less relevant. The basic statements still provide a bedrock on which other information is supported." For example, if the investing community has some comfort with financial reporting over the Internet, it will be in part because of the credibility of traditional financial reporting. "Other reporting methods may become more relevant than they are now, but traditional reporting will not become less relevant as a result."
AcSEC AND THE SEC:
COOPERATION AND CONTROVERSY
"Creative tension" is Beresfords phrase to describe the relationship between the FASB and the Securities and Exchange Commission. "Although the SEC relies on the FASB, it has the legal responsibility to establish standards for public companies. However, we have had an absolutely outstanding working relationship with the commission. SEC Chairman Arthur Levitt has been in our offices a half dozen times—he has shown his interest and given advice without trying to control."
Last year, however, the Financial Accounting Foundation locked horns with the SEC over the composition of the FAF board, which chooses FASB members. "The FAF trustees were concerned that this was too much SEC pressure, which was leading to too much SEC control. They pushed back a bit, and in the end the FAF—and the FASB—maintained its independence," although there were some changes in FAF composition. And although Beresford was quick to note that hes felt the FAF has supported the FASB since the beginning of his tenure, he was especially pleased with the changes that resulted from the SEC—FAF debate: "I think the change in the composition of the trustees was the single most important institutional change in the last 10 years—it ultimately confirmed our independence. The SEC supports us but does not control us." The addition of John H. Biggs, Charles A. Bowsher, Manuel H. Johnson and David S. Ruder, he said, "makes it even clearer that the public interest is represented by the FAF, not just the accounting profession and corporate officers. Its left us well positioned for the future." These four are public, or at-large, members (see Highlights, JofA, Aug.96).
Beresford also sees a continuing good relationship with another partner in financial accounting, the AICPA accounting standards executive committee. "There has been criticism over the years that the FASB should be the sole creator of standards, but I said 10 years ago and I say again that there is a place for AcSEC, especially with narrower, more specialized issues than the FASB normally handles." He emphasized that the FASB always has the right to prevent AcSEC from impinging on FASBs territory, and, of course, the FASB always must clear all AcSEC pronouncements. The relationship was further solidified, he said, when long-time FASB staff member Jane Adams became the AICPA director of accounting standards.
U.S. vs. THE WORLD
"International accounting standards are probably the biggest challenge we face right now, and its hard to envision how it will turn out over the next few years." As the International Accounting Standards Committee (IASC) develops its standards, a few people on one side, said Beresford, predict the FASB will become redundant and disappear, while some on the other side say international standards are of limited relevance in the United States. "I think the answer is somewhere in the middle. I do envision a viable FASB, with no loss of power or responsibility, continuing to set U.S. standards and with the ability to strongly influence international standards."
However, he said the FASB also will continue to look outward at how other countries are developing their generally accepted accounting principles and become an importer, as well as an exporter, of accounting theory. He cited the recent harmonization between the IASC and the FASB on earnings per share, which resulted in two nearly identical standards (see "FASB, IASC Finalize Earnings per Share," JofA, Mar.97). He expects the United States and Canada to issue virtually the same standards on segment reporting as a result of close collaboration. Still, he believes the IASC has some procedural shortcomings. "It doesnt hold open meetings or have a large staff that can ensure consistency from project to project. FASB standards are the result of vigorous debate among accountants, analysts and the business community—this isnt yet true of the IASC. Its standards do not compare favorably with ours right now. Over time, maybe they will."
Finally, Beresford countered the notion that a "kinder, gentler" international GAAP would ultimately win out over a more rigorous U.S. GAAP. "Big companies realize that U.S. capital markets are the best, deepest, most liquid and fairest in the world, thanks in large part to credible financial reporting. There may be surface appeal to easier standards, but the marketplace shows that high-level standards pay off in the long run."
JUDGMENT OR PRESCRIPTION?
Much of the accounting standards discussion, both internationally and within the U.S. business community, centers on the problem of judgment vs. prescription. How much leeway do you allow companies and how stringent should you be to protect the public? The IASC and Great Britain, in particular, he said, tend to favor GAAP that allows more room for judgment; sometimes they see the FASB as overly prescriptive. "Thats not really true, however. There will always be room for judgment. Well never try to issue a standard saying, for example, Heres the exact formula for a bank to calculate its loan losses." He said the issue of judgment vs. prescription is not always as simple as it seems. Many erroneously assume that businesses always ask for more leeway and auditors always want rigid rules. "But recently a representative from a corporation on the emerging issues task force said about a particular issue, Can we be very specific here? I want to know exactly what my company will have to do." Beresford looks at the whole financial accounting community as the FASBs customers, and "if the customers want a set of clearly defined rules in a certain area, well try to give it to them."
Beresford said with each standard the FASB issued, it wanted to present accountants with a statement of what it was trying to achieve, including some guidelines to consider. "But in the end the company and the auditor nearly always have to exercise a lot of judgment. Sometimes weve felt a need to be very prescriptive, as with capitalization of leases; such decisions are made case by case." He doesnt believe there is, or should be, an overarching approach. Beresford said most people in the financial community were well intentioned. "If we are ever overly prescriptive, it is because we dont want to offer loopholes to the few who arent." He pointed out that it may look at times that the FASB is favoring business, while at other times it is being too restrictive. "Its really a balancing act. In fact, I would say that in the last 10 years, balance was my word to live by."
THE FASB AND THE PROFESSION
An increasing number of CPAs no longer are involved in financial accounting or auditing; FASB pronouncements seemingly have become inapplicable to many in the profession. Beresford voiced his opinion on the continuing relationship between the FASB and the over 300,000 U.S. CPAs. "I understand there are CPAs who say that because of the nature of their practices they dont have much interest in the FASB." Beresford doesnt have anything against consulting and diversification, but he warns CPAs not to lose touch with their roots in financial accounting and auditing. "I hope the CPA consultants realize that auditing and accounting are still the foundation; theyre what being a CPA is all about. Theres a professional responsibility for all CPAs to support the development of GAAP and generally accepted auditing standards. This is what distinguishes us from non-CPAs." Without this foundation, he argued, the CPA designation might melt away. "Youd be left with the American Institute of X."
At least for now he sees continued support from the entire profession. "Its been a wonderful part of the job seeing how many people give up their time to serve on task forces and write comment letters on our exposure drafts. I felt I could call nearly any CPA cold, introduce myself and get help on a key issue I was working on. The whole process depends on a lot of participation."
WORDS OF WISDOM
Beresford was reluctant to tell his successor (still unnamed) how to handle the job, but he did have some general advice that also helps explain why the FASB has been successful and how it can continue to thrive. "Ive kept a positive attitude and didnt let my energy or enthusiasm flag, despite 10 years of controversy," he said, noting that even though CPAs and the business community respect the board and the process, they can still bicker over individual issues. "Ive listened to all points of view—I think thats important." Recently, on separate occasions, two people who had strongly disagreed with him on certain positions told him that despite their vociferous disapproval, they respected him personally for his willingness to meet with and listen to people. "I was proud to hear that; I hope my successor realizes reaching out and listening are a key part of the job."
His only other advice is to get a dog. "After a day of debating with your colleagues, with firms, with businesses, with the SEC, its good to come home to a dog that gives you unconditional affection."
Goodbye Connecticut, hello Georgia. Beresford is pleased with his new position: He will be executive professor of accounting at the J. M. Tull School of Accounting at the University of Georgia, Athens. And although he plans to continue to speak and write on a variety of accounting issues, he had one final message to the profession as chairman: "I want to thank the AICPA and all the CPAs who have spent so much time these past 10 years helping with the financial accounting process."