Should the SEC Replace the FASB?

he Securities and Exchange Commission (SEC) was created in 1934 by Congress’ Securities and Exchange Act to enforce the recently passed New Deal laws.  The organization was needed to protect the interests of investors in the stock market by requiring companies to provide adequate information about their financial position.  During this time, the Accounting Principles Board was the association that was the dominant force in the standard setting process.  However, in response to a lack of credibility in the Accounting Principles Board, in 1973, the Financial Accounting Standards Board (FASB) was created and put in charge of the standard setting process.  Since the inception of the FASB in 1973, there has been a continuing controversy between the two groups.  Today, the FASB uses discussion memorandums and exposure drafts to resolve current accounting problems.  The standards they develop are regarded as Generally Accepted Accounting Principles.  The function of the SEC is to enforce the rules developed by the FASB.  This website will address the issue of whether the FASB should be abolished and the SEC control both standard setting and enforcement.

The following sources have been used to develop this page:

Ë“The Buck Stops with FASB.”  International Treasurer.  June 23, 1997.  Available at:

http://www.intltreasurer.com/buckstop.htm. [Accessed Nov. 17, 2000].
 

As FASB continues to set Accounting Principles, other groups and organizations continue to find faults in their system.  FASB has stood strong and the board has justification for their actions.

Ë       Beresford, Dennis R.  “The Need for Accounting Standards.”  The CPA Journal  v 68 Jan. 1998.  Wilson Web
 

This article discusses the support needed for the FASB project and the consequences if it is not attained.

Ë       “Congress Challenges FASB’s Standard-Setting Structure.” The CPA Journal  v 68 no 49.  April. 1998.

http://vweb.hwwilsonweb.com/cgi-bin/webspirs.cgi. [Accessed Nov. 13, 2000].
 

Included in the text of this article are statements that show the challenges made against FASB’s standard setting process.

Ë       “Financial Accounting Standards Board.” Rutgers Accounting Web.  Available at:

http://www.rutgers.edu/Accounting/raw/fasb.html. [Accessed Oct. 24, 2000].
 

This site gives valuable information on the Financial Accounting Standards Board including membership, missions, structure, and their decision making process.

Ë       “The Investor’s Advocate: How the SEC Protects Investors and Maintains Market Integrity.” Aug. 8, 2000.

Available at: http://www.sec.gov/asec/wwwsec.htm. [Accessed Oct. 24, 2000].
 

This article includes the background of the U.S. Securities and Exchange Commission.  The site provides an explanation of what the organization does and how it operates.  It explains each department and introduces SEC officers.          

Ë       “Levitt defends FASB.”  Journal of Accountancy  v.184 p 11 Aug. 1997  Wilson Web.
 

Since the inception of the private-sector accounting body in 1973, up until today, FASB and the SEC have had some very tense moments.  Through all the disagreements, FASB continues to set standards and the SEC recognizes them as Generally Accepted Accounting Principles.

Ë       Mayer, Martin. “FASB on Trial.”  Institutional Investor.  v. 31 pp. 78-83.  Nov. 97

http://vweb.hwwilsonweb.com/cgi-bin/webspirs.cgi. [Accessed Nov. 13, 2000].
 

This site talks about the criticisms against FASB, but mostly shows the support of FASB by Arthur Levitt Jr.

Ë       Parrish, Michael E.  Securities Regulation and the New Deal.  New Haven and London: Yale University Press, 1970.
 

This book is a detailed account of the start of the SEC in 1934.  It explains in depth about how the organization was meant to operate.

Ë       Skousen, F., E.K. Stice, J.D. Stice.  Intermediate Accounting.  US: South-Western College Publishing, 2000.
 

In this text, PhD’s and Certified Public Accountants explain what both the SEC and the FASB do in relation to accounting.  It gives an overview of how these two organizations work together.

Ë       Wyatt, Arthur R.  “Accounting Standard Setting at a Crossroads.”  Accounting Horizons v. 5 pp 110-114.  Sept. 5,

 1991. Wilson Web.
 

This article cites the problems with FASB and what the consequences will be if a change is not made.

There has been much debate about whether the FASB should be eliminated from the standard setting process, giving sole control to the SEC.  There are valid arguments for each of these positions.  The following points support the position of the SEC.  The SEC has established a reputation due to the length of time they have been involved with accounting standards.  The standards set by FASB are only accepted by the accounting community because they are validated by the SEC.  In the past, FASB’s standard setting process has been criticized.  For example, in 1998, legislation was introduced in both the House and the Senate against the FASB in reference to their derivatives proposal.  Some believe that the SEC would make more appropriate decisions and in a more timely manner since they would not require outside approval.

FASB and the SEC have worked together over the past 27 years to put together most of the accounting principles used today.  The method used by FASB is appropriate because the decisions are free from political influence due to the fact that it is an organization in the private sector.   The partnership between the FASB and the SEC provides for a system of checks and balances.  Therefore, unreasonable principles that contain biases cannot be written and approved by the same body.  The FASB standard setting process devotes a great amount of time to developing these principles utilizing open forums, discussion memorandums, and exposure drafts.  This process thoroughly analyzes the issues at hand to determine a suitable course of action.  As a result, a popular belief is that these two organizations should continue to be partners in the standard setting process. 

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