The SEC and FASB: Turning Down the Political Heat, Part 1

Key Takeaways

Is it hot in here, or is it just the FASB? Nicola White of Bloomberg and Alan Wilson, CPA and securities attorney from WilmerHale,  swing by to discuss the backstory and ramifications on a move to protect the Financial Standards Accounting Board from political interference—and get it to act a wee bit faster.  Learn more.

Season 4, Episode 3: The SEC and FASB: Turning Down the Political Heat Part 1 | Transcript

 

Steve Soter: Hello and welcome to Off the Books, where we surf the unchartered waters of accounting, finance, risk, and wherever else the waves take us. Off the Books is brought to you by Workiva, the risk, reporting, ESG, and compliance platform that simplifies your complex work so you can get back to tending your NFT garden. Check it out at workiva.com/podcast. My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I am very happy to be having this conversation, looking forward to debiting a great one, and I'm so glad you joined us. I'm also very happy to have Catherine Tsai joining us. Catherine, can you please tell the fine folks who you are?

 

Catherine Tsai: I'm not an accountant or Diet Coke aficionado, but I like asking questions and learning new things, so I'm here to learn. And today we're here because the SEC's Investor Advisory Committee has recommended that the SEC set up another advisory committee to make sure the Financial Accounting Standards Board, or FASB, remains politically independent and also puts the needs of investors first as it goes about setting accounting standards. This sounds like there might be a back story.

 

Steve: Definitely. See Catherine, the way you want to reduce politics is by introducing more political influence. No, I'm just kidding. We brought in Nicola White from Bloomberg to talk about it. Nicola stays close to the happenings of tax, the FASB, all things crypto, which sounds just like a dinner table conversation at the Soter home. So Nicola, tell us, what's the background here that helps put this into context for our listeners. Why are we even talking about whether or not the FASB is politically independent?

 

Nicola White: Independent accounting standard setting is pretty much the bedrock of quality financial reporting. The people who write these rules that companies have to follow, you want them to be as independent as possible. You simultaneously want them to be open to feedback, but also independent, which means that they're supposed to not be listening too much to politics or money or lobbyists, etc. And FASB is set up to, in theory, be as independent as possible. It's established in an office park in suburban Connecticut on purpose. It's, in theory, away from the money of Wall Street and the politics of Washington so that they can write these rules and won't get unduly influenced by one party compared to another.

 

Catherine: How does that line up with the perceptions?

 

Steve: Yeah?

 

Nicola: Right. So this is where kind of everything is coming to a head. FASB has gotten a lot of criticism over the years that it does listen a little bit more to the needs of businesses and accountants and not so much the investors who are their customers essentially. Even their mission statement says something along the lines of, you know, we want transparent accounting so that people can understand what's going on. And that's where the SEC Investor Advisory Committee recommendation comes in. They want some more oversight over what's going on at FASB. And they, as Steve said, they want a little bit more oversight from the SEC, it sounds like.

 

Steve: Is this really just that it all boils down to an issue that they aren't moving fast enough? I mean, you know, there was goodwill impairment, which for our listeners is a thing that you don't really have to worry about. But we were talking about it for years and then just this summer they kind of abandoned it. We've been waiting for crypto guidance for, you know, boy, I'd say at least five years, really longer than that. I mean, I'm in favor of modernized accounting standards as anybody, but I actually wonder if maybe the fact that the FASB is slow, maybe a little too slow, but maybe because they're deliberate is almost part of their staying power. I mean, I just feel like that sometimes investors can be super reactive and want new and different financial information, but just the way financial accounting, financial reporting, and auditing, boy, it is so hard and expensive and risky to start pivots, you know, pivoting things from one direction to another. But is speed, I think, at the heart of what they're complaining about?

 

Nicola: Yes, that is definitely one of the, I mean, I think it's one of the first things that's mentioned in this recommendation. FASB is an extremely slow organization, the pace of standard setting is very, very slow. Like I don't know how many, what adjective, whatever, it's slow, and that's by design. FASB just can't like today say, "Oh, with a lot of questions about this accounting issue. Let's clarify it tonight, and everybody will have answers tomorrow." That's just not how it works. It has to meet in the sunshine to discuss, meet in public. It has to discuss the issue. It has to vet a whole bunch of ideas. It then has to write a proposal that goes out for public comment. They have to listen to all the comments they have to meet again, and then they finally publish it. And then it may not become mandatory for a year or whatever until you actually see the accounting rule change. So on the crypto example, like you said, Steve, five years ago, people started asking FASB for new rules or clarity on how to account for cryptocurrency. And FASB rejected the call back then because just companies were using it so much. They got two more requests over the years, and they rejected it again. And then finally this year they picked it back up. And yes, it's been five years since the first request, but FASB is actually moving with lightning speed on this crypto project compared to others. From where I sit, it looks like they may even wrap up discussions by the end of this year. So yes, FASB moves slow—a lot of that is by design—but there definitely are cases where just things take forever and then they go nowhere like the goodwill project.

 

Steve: If I understood it correctly, there was a vote just this last week. Again, that'll probably be two weeks for our listeners. We're recording in advance, of course, but the FASB actually voted, I think, to pursue a project whereby pretty much all crypto assets would be carried at fair value. That's a really big deal. I mean, you and I have talked about before from my previous days when cryptocurrency was a big deal. The company that I was working with was one of the first to accept it. And, you know, I'm writing these accounting memos with our auditors and national office to try to figure out, "Hey, how are we even going to do this?" I had argued for a foreign currency treatment. I still think there's a little bit there. It sounds like the FASB might be moving in a different direction. I'm wondering, Nicola, how would the oversight work in practice with this committee? And I realize this is all sort of theoretical, but just based on what you understand. Would the committee be making their recommendations to the Office of the Chief Accountant, and then the Office Chief Account would be interfacing with the FASB. Do you have any thoughts?

 

Nicola: So I don't have any thoughts because I don't really know. I read the proposal a couple of times, and it mentions the committee, but it doesn't actually set up the structure of the committee. It does make reference a couple of times to a committee that was established in 2007 that basically reviewed financial accounting and financial reporting broadly at FASB and the PCAOB and the SEC. And they produced this almost 200 page report at the end of that in 2008. This is before my time, before I started covering accounting news, so I had to go back and take a look at that. But they mentioned that committee. I don't know if it would maybe be similar to that one, but from my understanding of that committee, from almost two decades ago, a decade and a half ago, that actually the FASB chairman at the time was on the committee or at least very much was part of putting it together. And this from just reading the latest proposal, it seems like they want outsiders, not necessarily FASB members themselves. And it sounds like, you know, just more input from the SEC. So kind of keeping things closer to Washington, not so much in Norwalk, Connecticut.

 

Steve: What could go wrong?

 

Nicola: We don't know. But and again, it just doesn't say exactly like, "Oh, this would be a panel that would meet specifically in D.C." It doesn't say that the recommendations would go to the Office of the Chief Accountant. It doesn't say if the recommendations would go to the SEC broadly. It just it doesn't say, but it raises the question of more oversight of FASB because it is this organization that is based in Connecticut. And probably all your listeners know how important it is, but the vast majority of Americans have no idea what FASB is, and it has an awful lot of power. It has a lot of authority. And I guess the people who wrote this recommendation think maybe it needs a little bit more oversight from the organization that gives it its authority, which is the SEC.

 

Catherine: Doesn't already have oversight though.

 

Nicola: It does. The SEC has the power to write accounting rules. Technically that's their job, but they don't do it because they have a lot of other things going on. They're Wall Street's cop, right? So they farm out the responsibility to FASB. They delegated that responsibility 50 years ago, so they have close ties with FASB. And I think it's fair to say that they talk to FASB regularly, but they don't ever really come out and say, "Don't do this accounting thing, or we don't agree with it." Who knows what happens behind closed doors though.

 

Catherine: Well, listening to you and Steve talk about this, it sounds almost like the Investor Advisory Committee is kind of giving FASB this corrective action plan. Like, please hurry up on developing your accounting standards. But I also wanted to get back to the point that both of you made about political independence for FASB. And this came up a little bit. I don't want to fangirl too hard, Nicola, but I was reading your articles about the IRA, the Inflation Reduction Act, and then also the measures in there about corporate minimum tax and how this could potentially get politicized.

 

Nicola: Yeah, and I think that the Inflation Reduction Act really kind of puts FASB independence right there in the forefront. So it's a little bit backwards to kind of get into how this affects FASB's independence, but basically because the Inflation Reduction Act ties what large companies report in their audited financial statements as their book income, which is actually not a term in GAAP. Correct me if I'm wrong, Steve. You would know that.

 

Steve: That is correct.

 

Nicola: Yeah, but they call it book income. So what your report as your book income, which is your net income with some adjustments, gets tied to what you pay the taxman. Normally those two are completely different things. So, any time FASB writes a rule going forward that affects net income, that can affect potentially what the largest companies in the U.S. end up paying as their tax bill at the end of the year. And so that could give these companies, you know, just a little bit like, "Oh, right, the work of the FASB. I should be paying attention to that. Or maybe I should be lobbying FASB because every time they change an accounting rule, it really very personally affects me." So that kind of opens up the door for FASB to be more susceptible to outside influence or like basically have to defend itself a little bit more and say, "No, you know, we're not listening to you just because this affects your tax bill."

 

Steve: It'd be hard to overstate just how radically different this approach is. I mean, we had an episode on Off the Books at the end of season three of myself and Josh Gertsch talking about that. But book income, or generally accepted accounting principles, is one thing. Tax income is another thing. And I can understand why Congress said you've got these people, these companies reporting these huge, enormous book profits, but yet they pay very little tax, meaning their taxable income, which is calculated differently, is very low. And so I understand the point.

 

Nicola: And that's absolutely right. And the Investor Advisory Committee on the first page talks about the Inflation Reduction Act and how that could affect FASB and why that, in their mind, is one of the really important reasons as to why the SEC and others need to be paying more attention to FASB's independence.

 

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And we're going to throw back to Steve and Catherine talking about the SEC and FASB's relationship. We wanted to get more insight into what's going on at the FASB, so we called Alan Wilson to break it down for us.

 

Steve: Well, Alan, welcome back to Off the Books. I'll remind our audience that you are a CPA, a licensed attorney practicing securities law at WilmerHale. We have been talking about all things FASB. And I'm wondering, what's your take on the SEC's Investor Advisory Committee looking to increase oversight of the FASB?

 

Alan: Yeah. So, glad to be back, Steve, always a pleasure. The recommendation is an interesting one because I think it raises a couple of questions around really if it's the right approach in terms of achieving the desired outcomes. There were three primary recommendations that were set out, and it's all under the guise, I think, of being more responsive to investors. But it's interesting in that FASB already has an Investor Advisory Committee that exists and advises FASB from the investors' perspective. So while the tone of the recommendation here from the SEC's IAC is effectively that a greater responsiveness to investors is merited, it's interesting in that it somewhat overlooks the existing structure that's in place for that.

 

So, you know, as you probably have gathered from our prior interactions, I'm not a big fan of adding additional complexity where it's not otherwise needed. And so whenever I hear about adding additional committees and oversight, I always think that's kind of an interesting first approach. You know, one of the things that comes to mind too is whether that's in addition or whether it's appropriate or whether it's actually legal or possible to accomplish in terms of how the committee would be structured. If we think about it, FASB is a separate, independent, nonprofit organization that to which the SEC has delegated and recognized under the Sarbanes-Oxley Act as an independent body for purposes of setting accounting standards that are recognized in the U.S. If we're now going to add a committee that's actually involving itself in this private enterprise, it calls into question whether that still works under the requirements of SOX, and whether that's, in fact, from an efficiency perspective, really the right approach.

 

You know, we can talk about some of the recommendations that were in the report. And I think the one that really struck me as most interesting was—it's kind of the odd dichotomy between not being responsive enough to investors but yet also needing to be incredibly responsive to the Tax Act change that was really kind of one of the prompts for doing this. So it's funny in that we're concerned about FASB becoming overly politicized because this recent legislation, but yet we then go on to talk about the fact that the standards are so slow. So it seems as if there's a bit of a difference there to be reconciled.

 

The other thing that struck me is if you kind of think of it from the FASB's defensive perspective. They have had instances of being quite responsive to market developments. You've got COVID guidance that came out in prompt order, you know, in 2020 and a number of the significant areas. And I thought that that was incredibly responsive and helpful. And also, if you go back a few years, I think there were a fair number of criticisms of the FASB's rapid release of proposals. You can thank rev-rec credit and leases all in a couple of years' span, and I think particularly for companies, but even investors thought that that was a challenge to navigate a significant amount of standard development in a short period of time.

 

So I do wonder whether, in fact, investors actually are looking for significant overhauls. Interestingly, you probably saw at its latest meeting, FASB tentatively proposed to change the accounting for crypto assets, which has been, for the past couple of years, a big concern. At, you know, the way in which they've been accounted for and that the proposal is, in fact, to allow for the fair value accounting. Granted, that's a tentative position and not definitive yet, and guidance still needs to be written, but that's certainly moving. So I don't necessarily think FASB's entirely asleep at the switch. It just has a slower process, which in part is designed to insulate it from rapid shifts in investor demand and keep some sort of steady approach to the accounting while also having mechanisms in place for the inputs that it needs to have so that it can be facile in responding to market developments as they occur, which is, in fact, one of the requirements of a SOX in terms of being a recognized accounting standards setting body.

 

So there's a lot of interesting conversation around this, and I think a lot that can be unpacked. But I do wonder, you know, I think it's an area where the SEC would be prudent to think critically about how it wants to proceed with a recommendation and really what's most efficient and engaging with dialogue with the bodies that oversee FASB that are already in place before thinking about additional administrative complexity, particularly when the outcomes may not necessarily be that different. So there's a lot there, I think, but it's certainly a space to watch.

 

Catherine: And another goal of the suggestion, I think, was to make sure FASB stays politically independent, but how politically influenced is FASB right now?

 

Alan: Yeah, I mean and that's the interesting part. So I mean it's a, it's a nonprofit organization right as it is. So it doesn't have political influence. It's funded by the accounting support fee, so it's not taking political donations. And in fact that would jeopardize a number of things, including its ability to be recognized by the SEC in the first instance. So there's certainly strong guards in place FASB not to become politically motivated. And, you know, for that the Tax Act that was really cited in the Investor Advisory recommendation for the risk that FASB would become politicized. I think it's interesting because that didn't result from FASB, right? So the concern is not FASB looking to insert itself into the political process but rather the other way around, which is the political process looking to FASB for a purpose of the tax code. And admittedly there are challenges to that, which I think maybe have merit if you think about it, because there are indeed differences between taxable income under the code versus net income for GAAP. But that's a political question to be answered, and I don't really think it's necessarily thrusting FASB into the political spotlight for determining the tax amounts for companies. As the letter or the recommendations identify, as we talked about, they think FASB is operating slowly. So it calls into question how quickly they would actually act in changing the net income calculation and whether that would be in the best interest of investors. I think that that's a pretty low risk, at least based upon that one piece of legislation.

 

Mike: Thank you to Nicola White and Alan Wilson for joining us today. And thank you, dear listener, for surfing along with us. I'm Mike Gravagno, that was Steve Soter and Catherine Tsai, and this has been Off the Books presented by Workiva. Please subscribe. Leave a review and tell your buddies if you like the show. What did you think of the episode? What do you want to hear us talk about next? Drop us a line offthebooks@workiva.com. Next week we'll be back with part two with Nicola and Alan, so I hope to see you there. Surf's up and we'll see you on the next wave.