College of Business: University of Illinois at Urbana-Champaign

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A Passion for Positive Reporting


4/29/2010

by Sarah Small

 

Before an engaged audience of students and faculty, Robert Herz, chairman of the Federal Accountancy Standards Board, spoke about the work his organization is doing to evolve and improve accounting standards in the U.S., and the challenges associated with this work.

Herz, who has been FASB chairman since July of 2002, visited the College on April 15 to share his thoughts with accountancy students and faculty.

His lecture focused on the changes, opportunities and evolution of accounting standard setting in the U.S. and around the word, and began with a discussion of his organization’s goals that dictate future growth.

“Every organization has to have strategic objectives, it’s just a characteristic of life,” Herz said. “And usually when you change leaders, [the objectives] change as well. So when I came in, we talked about it and we established three strategic objectives.”

Under Herz’s supervision, the FASB’s first strategic goal was to improve existing U.S. accounting standards, issuing new ones to accommodate the many changes in business and the economic climate.

Perhaps the biggest improvement the FASB set its sights on arose as its second strategic goal, to simplify the standards. “U.S. GAAP developed in a piecemeal fashion over many years, the result of influences from FASB, its predecessor the APD, the AICPA, and EFTF,” said Herz. Everything was written in slightly different formats and loosely connected. Recognizing that it was “kind of nuts,” Herz and the other FASB board members knew they had to get it all under control.

Since beginning his role as chairman, Herz said he has focused on simplifying existing standards and the format in which they are presented. The FASB launched an intensive multimillion dollar project to unify the different standards issued by different organizations into a single form.

“[We took] all this literature and reorganized it by topics,” Herz said. “Almost like a dewy decimal system, and put it in an online database.”

Along with their reorganization efforts, the FASB is making progress on improving the comprehension of its standards and how they are written.

The organization’s third strategic objective is international convergence, but Herz added that an SEC policy dictates that the FASB should pursue international convergence only in situations where it makes sense from a U.S. perspective.

“International convergence is kind of a labor of love for us, but is not, at least under the law, a primary objective,” Herz said.

Moving away from the individual objectives of the FASB, Herz opened his talk to broader topics affecting the accounting world and how these, in turn, affect the accounting standards setting, including, the global financial crisis.

“The accounting system of 10 years ago and the accounting system of now are very different reporting systems, and they’re going to be very different five years from now,” Herz said. “The global financial crisis is obviously a very interesting episode. That in turn has sparked a whole round of financial reporting regulatory reform.”

He presented his own opinion for why the financial crisis happened, and what kinds of regulations are necessary to ensure that it does not repeat itself.

He believes an unregulated trillion dollar market for derivatives was created in the U.S. The absence of regulatory structures allowed bad practices to flourish and by the time the danger was realized, it was already too late.

“So, what needs to be done, what they’re talking about in Washington is to try put things on markets,” Herz said. “Create prices and start creating more standardized information about securities.” With basic regulatory structures, reporting, and accountability, a derivative market would be less likely to go out of control.

The question of systemic risk is an important one that impacts the FASB and its role. Even the FASB is considered to be operating in a “silo” as are companies and industries. Herz pointed out the need for an organization to monitor the build-up of systemic risk, but added that no one has yet figured out who could do it reliably.

Overall, Herz argued the financial system needs principles of transparency and accountability at a policy level to guide reporting. However, a difficulty centers on how such policy might enable or disable the appearance of stability in practice. Some believe that completely truthful and transparent reporting may, at times, contribute to unstable markets and policy should, therefore, bolster stable reporting in some capacity. Exactly how this might work is uncertain.

Herz raised additional questions dealing with global cooperation and the politics of public and private company reporting which must be navigated in the pursuit of a common set of standards. The FASB has made significant progress in this regard working with the International Accounting Standards Board in London.

The U.S. Government asked the FASB to redouble its efforts in cooperating with the IASB in creating a common set of standards. Herz said his organization has gone above and beyond what was requested; he believes the effort has been increased tenfold beyond expectations. Herz and other members of the FASB fly to London at least once a month to spend a few days working face-to-face with international standard setters.

The organizations are working toward completing a specific list of projects by 2011, and although this will not result in complete convergence, Herz said it is a necessary foundation for future progress.

“This is a labor of love,” Herz said “Anyone who’s worked in the international arena knows that you have to have passion. You have to have a lot of patience, and common views, common objectives.”

By the time Herz finished his lecture it was apparent that his passion for standard setting carries him through each of the FASB objectives toward an elusive goal of improving financial reporting for us all.

UIUC College of Business