A Camel’s Nose Under A Tent: Sure Looks A Lot Like The SEC

From AAO Weblog

The flap started a week ago with the news, reported by David Reilly in the Wall Street Journal ($), that the SEC had reached an understanding with the Financial Accounting Foundation giving the SEC more say in who gets placed on the FAF’s Board of Trustees – which ultimately makes decisions about who sits on the FASB. That agreement was reached after the wrangling began in mid-December, when the FAF had submitted “a list of its final appointments and reappointments to its own board and the FASB” to the SEC. The SEC didn’t accept the list and insisted on a formalization of its role in FASB appointments.

According to the article, “…the foundation agreed to follow a specific timetable for notifying the commission of potential appointments and reappointments to the FASB and its own board; give commissioners the opportunity to nominate their own candidates; further notify the commission of finalists for any position; and allow commissioners to interview those contenders…”

The chairman of the foundation, Robert E. Denham, doesn’t believe that the agreement “fundamentally changes the ability of the standard setter to be independent.” True. But it exponentially raises the ability of the SEC to interfere with the FASB’s independence. It’s like building a Plan B into a battle scenario; if things don’t go the way you plan at first, well, there’s always Plan B. The trap door is built in.

Questions (to anyone listening): why did the SEC pick this time to start this action? What was so wrong about the way the FAF presented the list of appointments and reappointments that the SEC couldn’t accept them? Was there something wrong about some of the candidates? Or was this a cover story? Why is the SEC worried about the FASB being too independent?

It gets worse: this article by Marie Leone and Alan Rappeport in CFO.com, brought to my attention by reader Holly R. (and a handful of others), describes how the SEC sat on approval of pay raises for FASB members for four-and-a-half months before turning them down in March, in conjunction with the formalized nomination “understanding.”

Another question: Section 109 of the Sarbanes-Oxley Act of 2002 establishes that the “Budget of the Board [Public Company Accounting Oversight Board] shall be subject to approval by the Commission.” It doesn’t say the SEC has to approve the budget of the FASB. So – where does the authority specifically come from?

As Holly puts it, “the SEC is slowly getting the FASB in a Vulcan neck pinch.” Good metaphor, but it might be more accurate to say “a Vulcan mind-meld” – one in which the FASB merely channels the thoughts of the SEC through its collective mouth. It’s not easy to find a convincing case that these actions are going to result in a standard-setter that has the interests of investors at heart. (Unless that’s what the SEC says during a mind-meld. Scotty – beam us up!)

http://www.accountingobserver.com/blog/