The impetus for this historic transition in accounting policy began in March 1971, when Marshall Armstrong, as President of the AICPA, appointed a seven-man group "to study the establishment of accounting principles and to make recommendations for improving the process." Francis M. Wheat, a Los Angeles attorney and former Commissioner with the SEC (1964 -1969), chaired the study group. The appointment of the study group was made at a time of mounting criticism of the work of the Accounting Principles Board and with a keen awareness of the need to extend participation in accounting policy to interest groups other than certified public accountants.
The study group rendered its report in March 1972. It bore the title Establishing Financial Accounting Standards but is referred to informally as the Wheat Report, after its chairman. The principal recommendation of the Report was to create an independent organization for setting accounting standards to be known as the Financial Accounting Foundation.
The Financial Accounting Foundation is governed by nine trustees who serve without pay. One of them is the president of the AICPA, ex officio, and the other eight are selected by the Institute's Board of Directors-four certified public accountants in public practice, two financial executives, one financial analyst, and one accounting educator. Selection in the last three categories is done on the basis of lists submitted by organizations in the fields represented. The primary duties of the Foundation's trustees are these:
- To appoint the members of the Financial Accounting Standards Board.
- To select the members of the Financial Accounting Advisory Council.
- To arrange for financing the new structure.
- To approve the annual budget of the Financial Accounting Standards Board.
- To review periodically the basic structure of the standard-setting function.
The Board is responsible for issuing accounting standards and interpretations of those standards. In conducting its work the Board acts independently of the Foundation. The Board's Rules of Procedures are designed "to encourage the participation of all groups and to create effective channels for the communication of all points of view. Every effort will be made to keep the public fully informed about the Board's activities. Pronouncements usually will be preceded by thorough research, by public hearings addressed to the substance of a question as well as possible alternative solutions, and by broad public exposure of proposed statements."
Under the FASB rules of procedure, the work of the Board is assigned to task forces who are responsible for refining the definition of a problem and its financial accounting and reporting issues, defining the nature and extent of the First members of the Financial Accounting Standards Board.
Each task force is chaired by a member of the Board, but task force membership usually extends beyond the members of the Board or Advisory Council to include other persons who are aware of the responsibilities of issuers and the needs of users of financial statements, or possess expertise relevant to the subject. The Board began its work with an agenda of seven items-each assigned to a task force under the direction of a member of the Board.
Research is designed to play a significant role in the promulgation of standards by the Board, with technical and research personnel assigned to each task force. Coordinating the research efforts of the Board is Ronald J. Patten, Director of Research, who was formerly professor and head of the accounting faculty at Virginia Polytechnic Institute.
The Financial Accounting Standards Advisor's Council, with about twenty members, serves as a vehicle for contact and communication between the Board and individuals and groups in business and the professional associations. The Council also assists the Board in identifying problems in financial reporting, setting agenda priorities, establishing task forces to work on specific projects, and reacting to proposed financial accounting standards.
The new policy structure in accounting incorporates five attributes which distinguish it from its predecessor organizations, as noted in a statement issued by the trustees of the Foundation:
- It is more broadly based than any former standard-setting body. It represents the financial community as a whole and the points of view of all who contribute to and rely upon such standards.
- The insulation of the Board from all other organizations gives assurance of its independence both in fact and in appearance. This independence-and its concomitant, objectivity-will confirm the authority of its pronouncements and thus enhance their acceptance.
- Because of its compact size and its full-time character, the Standards Board is able to devote undivided attention to its tasks and, when necessary, to move expeditiously to resolve urgent problems.
- Because of its ties with both the accounting profession and the financial community, the Standards Board will command the support essential to effective enforcement of its standards.
- The existence of the Board will help to retain the standard-setting function in the private sector where it will be responsive to the needs of the public.
The accounting profession has placed great faith in the FASB as being an effective policy-making body which preserves the private sector tradition of regulation in this important area of the economy. As a recent issue of the Price Waterhouse & Co. Review observes, "what the FASB does in the next few years could spell the difference between progress or decline for the accounting profession."
