Managing change: FASB chairman Robert Herz says that meeting the demand for improved financial reporting standards is a matter of balance

Internal Auditor, Feb, 2007 by David Salierno

ROBERT HERZ BECAME CHAIRMAN of the Financial Accounting Standards Board (FASB) during one of the accounting industry's most tumultuous periods. His July 2002 start date came just months after corporate disasters at Enron and WorldCom put an intense spotlight on financial reporting practices. A few weeks later, U.S. President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law, enacting the country's most sweeping accounting reforms since the 1930s.

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Herz entered his new post well-prepared. Before joining the FASB, he was a senior partner with PricewaterhouseCoopers, in charge of the North American professional, technical, risk management, and quality areas, and a member of the firm's global and U.S. boards. He also served as a part-time member of the International Accounting Standards Board (IASB) and chaired both the American Institute of Certified Public Accountants' (AICPA's) U.S. Securities and Exchange Commission (SEC) Regulations Committee and the Transnational Auditors Committee of the International Federation of Accountants.

Herz's extensive list of professional affiliations has no doubt helped facilitate the FASB's efforts to meet recent challenges. An ongoing "convergence" project, for example, requires the FASB to work extensively with the IASB to find common ground on accounting standards. Coordination with the AICPA and SEC also are integral to the success of the FASB's efforts. And with calls among its constituency for simplified financial reporting, increased small-business guidance, and expanded use of fair value measurements, the FASB must balance the needs of numerous parties while continually managing change. Herz recently spoke to Internal Auditor from his office in Norwalk, Conn., to discuss the FASB's current work.

Q. How does the FASB go about developing its standards?

We use a very open, thorough due process. People write the FASB to inform us of issues they feel need our attention. Suggestions come from companies, auditors, the SEC, and users of financial statements such as investors. We look at these suggestions carefully and decide whether they represent an opportunity to improve our current standards. We then make a formal agenda decision, requiring a vote by all members of the board. If the majority votes positively, we add it to our technical agenda. The FASB staff then begins developing project plans issue by issue, and we review those issues in public meetings. Some projects take only a few months to complete; some take years. Everything we do is subject to proposals that are exposed for public comment--we hold public roundtables, conduct field visits to companies, and touch base with many different advisory and liaison groups.

Q. Aside from the unsolicited suggestions you receive, how does the FASB collect input from its constituency?

The process works in several ways. On most projects, we assemble a "project resource group," consisting of people who are knowledgeable in a particular area, to assist the staff. Participants on these groups include companies, auditors, investors, and the SEC staff. They advise the staff, and the staff, in turn, bounces ideas off of them. We also have formal advisory councils, including our main one, the Financial Accounting Standards Advisory Council. The approximately 35-member group comprises chief financial officers and senior executives from large and small firms, auditors, financial analysts, rating-agency professionals, etc. In addition, we have a Small Business Advisory Committee that consists of people from companies, audit firms, and investors who are interested in small and private companies, as well as a User Advisory Council that represents investors, creditors, lenders, and rating agencies. Moreover, our Investor Task Force enables us to obtain input from portfolio managers of some of the largest mutual funds in the United States. We also meet periodically with more than 25 different liaison committees consisting largely of representatives from industry accounting committees and other groups, and we hold industry forums. And of course, we meet regularly with the SEC and the U.S. Public Company Accounting Oversight Board (PCAOB).

Q. Is the FASB's Small Business Advisory Committee seeing a demand for more guidance among the professionals it represents?

Private businesses want to ensure that their voice is heard in our process and that the large companies or large auditors don't drown them out. They want to make sure that we consider, where appropriate, whether there should be differences among the standards or relaxations in certain areas due to cost-benefit considerations. The cost burden falls disproportionately on smaller companies, or at least it can if we don't make accommodations when necessary. We look at small-business issues project by project. Sometimes we decide to make accommodations; other times we don't.

Q. To what extent has the FASB transitioned from historical to fair value accounting?

We have selectively introduced more use of fair value--particularly for financial instruments--during the last 10 or 15 years. I think investors and other users of financial statements generally believe that a full conversion is long overdue and that we should be requiring all financial instruments to be carried at fair value. Nonetheless, we're proceeding cautiously. We issued a statement earlier this year--Standard 157--that, while not introducing new fair value measurements, describes what we mean by "fair value" and explains how to develop these kinds of measurements. That way, when people come across them in the existing literature, they'll know better what to do.