VideoIn contrast, the FAF's March memo, whittled down from a nine-page briefing document, specifically requires that the FAF give the regulator at least 30 days, and preferably 45, to review FASB and FAF candidates and their qualifications. That is a more specific layer of detail than is contained in the 2003 policy statement, although the memo repeats the earlier declaration that the FAF makes the final decision regarding board member and trustee appointments.
"On the face of it, having SEC input into the nomination process in a fairly transparent way would not be the end of the world," opines Damon Silvers, associate general counsel for the AFL-CIO, an institutional investor. But Silvers says the union is concerned because the move to formalize the selection process means that the SEC could exert pressure on FASB, and, in turn, on the standard setter's rulemaking. "It's not appropriate for [the SEC] to be holding the hand that holds the pen," contends Silvers.
What Silvers and others fear is a replay of political strong-arming of FASB that came to a head in 1994. That was the year that under intense pressure from Congress, FASB backed off of a proposal to expense stock options, compromising not only the board's position on expensing but also its very independence as a standard setter. FASB members and others involved in that decision now regret the move. Former SEC chairman Levitt admitted to CFO magazine in 2003 that urging FASB to back off was "the biggest mistake I made" during his eight-year tenure.
Politics interfered with stock-option rulemaking again, in 2003, when the House of Representatives threatened to push through a bill requiring a three-year study on the economic impact of employee stock-option plans before an accounting rule could gain SEC approval. The bill, which never took root, was viewed by critics as a stall tactic orchestrated by lawmakers who were pressured by constituents at Silicon Valley companies, and other high-growth corporations, who regularly doled out large stock-option awards to employees. Among the 111 co-sponsors of the bill was then-California congressman Christopher Cox, now chairman of the SEC.
FASB ultimately won the protracted battle, and in 2005 issued FAS 123R, the standard that requires companies to expense stock options and carry the charge on their balance sheets.
To be sure, the SEC's original nine-page brief appears to have been prompted by SEC concerns about timing. But the effort clearly resurrected memories of earlier political battles. "I think the first draft made it look like the SEC was stepping over its bounds with respect to independence," says John Radford, an FAF trustee and Oregon's state controller. "I don't think [the SEC was] trying to overstep its bounds; it wanted more influence and chances to make some comments. [But] it was the detailed nature of the [brief] that put the board off," he told CFO.com. Still, says Radford, the SEC makes clear in the two-page memo that the final decision regarding new appointments rests with the FAF. "I don't see that the SEC has impinged on the independence of the board."
"At the end of the day, we still decide who gets appointed and who doesn't get appointed," insists W. Steve Albrecht, an FAF trustee and associate dean at Brigham Young University's Marriott School of Management. Albrecht vouches for the independence of the FAF and insists that the memo represents nothing more than a clarification of a system already in place. "Nobody, including the SEC or anyone else, would run roughshod over [the FAF, which] would do anything that it could to protect that independence," he says. "People are making a mountain out of a molehill" over the memo.
Others feel the same way. Sarbox co-author Rep. Michael Oxley (R-Ohio) told CFO.com he has "great confidence" that the SEC knows what it is doing and "won't overstep bounds." Regarding the memo, he noted: "I think everything will be transparent . . . it doesn't keep me up at night." Similarly, University of Georgia accounting professor Dennis Beresford, the former FASB chairman who faced congressional pressure in 1994, says the agreement "is not a big deal," and not a blow to FASB independence.
Beresford claims that since 1973, when FASB took over standard-setting duties from the American Institution of Certified Public Accountants, the SEC has interfered only twice with accounting rules. The first time was in 1979 when it overruled FASB and allowed both the "successful efforts" and "full cost" methods of accounting to be used by oil-and-gas-producing companies when booking reserve quantities and costs. The second time was in 1994 when Congress pushed the SEC to shelve the stock-option expensing rule.
Still, Beresford thinks the SEC should probably come up with a standard practice so its involvement in the selection process does not depend on "who's in charge" at the SEC.
This story includes additional reporting by Alan Rappeport, Stephen Taub, David M. Katz, and Tim Reason.
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