Financial Reporting and Standard Setting by the SEC, FASB, IASB, and, GASB

Abstract
In the accounting industry there are different organizations that have been established to design, implement, and oversee accounting standards and financial presentation processes. Such organizations include the Securities Exchange Commission, SEC, the Financial Accounting Standards Board, FASB, the International Accounting Standards Board, IASB, and the Governmental Accounting Standards Board, GASB. Each of these organizations works closely with the others to attempt to provide the accounting industry with a similar, if not identical, set of accounting standards that align with those of the U.S. GAAP – Generally Accepted Accounting Principles and IFRS – International Financial Reporting Standards. The strengths and weaknesses of these organizations identify their similarities and differences and enable the organizations to continue to grow with the finance and accounting industries.

In the accounting industry there are several different organizations specifically designed to set, maintain, and regulate accounting standards and financial statement presentation. Among these organizations are the U.S. Securities and Exchange Commission, or SEC, the Financial Accounting Standards Board, or FASB, the International Accounting Standards Board, or IASB, and the Governmental Accounting Standards Board, or GASB. Each organization was established to carry out specific purposes, and handles the accounting standard setting and financial statement presentation in separate manners. Additionally, each organization provides strengths and weaknesses to the accounting community due to their standard setting and financial statement presentation methods. The creation of the Securities and Exchange Commission, or SEC, followed the Great Crash of the market of 1929 and the Securities Act of 1933 and the Securities Exchange Act of 1934. After the crash of the stock market, the morale of investors, creditors, and the general public plummeted significantly and U.S. Congress created the SEC in effort to raise the overall economic morale of the country. Prior to the crash in 1929, there were very few restrictions and regulations in the finance industries, and those that did exist were not always enforced as they should have been. The SEC was created and appointed tasks such as establishing, adopting, and maintaining finance regulations such as accounting standards and financial statement presentation. Congress established specific requirements for those who served in the SEC such as, “By law, no more than three of the Commissioners may belong to the same political party, ensuring non-partisanship. The agency's functional responsibilities are organized into five Divisions and 23 Offices, each of which is headquartered in Washington, DC. The Commission's approximately 3,500 staff are located in Washington and in 11 Regional Offices throughout the country.”(SEC.gov.2013). Further, the SEC oversees accounting standard and regulation maintenance such as the oversight of other organizations created to help enforce and maintain financial regulations, like the FASB and the IASB. There are several financial Acts in place in order to provide the framework for the SEC’s regulations and standard setting processes, including the Sarbanes-Oxley Act 2002, the Investment Company Act of 1940, and the Securities Acts of 1933 and 1934. The rulemaking process of the SEC includes, “…several steps: concept release, rule proposal, and rule adoption.”(SEC.gov.2013). By maintaining financial securities matters, the SEC serves as a law enforcement agency. Other private sector organizations have been appointed to help the SEC by maintaining and regulating standards before they are brought before the SEC. Although it is beneficial to have additional organizations that are appointed to help provide the SEC with regulation and standard setting instances, this forces the SEC to not only have oversight of the financial regulations and standard maintenance of the general public but also of those they have appointed to help in this process such as the FASB. “In the U.S., the SEC is legally responsible for accounting standard setting.” (Palmon, Peytcheva, & Yezegel.2011). While the SEC presents financial statements and maintains the standard setting process by delegating and overseeing those tasks to those financial organizations, such as the FASB which were created for this purpose, the other organizations function differently. This allows the SEC the ability to maintain the accounting standard setting processes over a wide range of the country without having to operate with substantial employees within the organization. By delegating these standard setting tasks to other organizations, the SEC is able to appoint the oversight of certain types of standards in certain settings to these organizations and simply intervene when the tasks exceed the scope of the organizations responsibilities. Being able to provide so much guidance and oversight of the accounting standards also provides uniform standards that must be maintained by all businesses and organizations and less of a chance of different standards for different entities due to having the standards being assigned by many different governmental bodies. The downfall to delegating out such tasks is that the SEC is not vulnerable to criticisms in the same manner as organizations such as the FASB and may be viewed as hiding behind the views of those organizations. The FASB operates as a separate organization with different processes, procedures, and requirements than those of the SEC, but is still ultimately overseen by the SEC. The Financial Accounting Standards Board, or FASB, was created by the SEC in 1973. The primary purpose for the creation of the FASB by the SEC, “…has been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities.”(FASB.org). The FASB is part of an entity which includes the Financial Accounting Foundation, Foundation; the Financial Accounting Standards Advisory Council, FASAC; the FASB; the Governmental Accounting Standards Board, GASB; and the Governmental Accounting Standards Advisory Council, GASAC, and is independent of all other business and professional organizations. The FASB standard setting procedure includes placing the item in question before the board, the board appointing a task force in charge of researching the problem and providing a formal statement of the problem and their suggested solutions for a discussion memorandum, the memorandum being presented in a public hearing within a few months, and then a final draft of the standard being issued after the closing of the comment period. Seidman, Chair of the FASB in 2011, stated that his opinion of the role of the FASB was to help, “…our country to understand what changes were being proposed… and be a strong voice in the process to make sure we end up with standards that benefit U.S. investors and other users of financial statements.”(Kranacher.2011). Research found by several economists and those is social psychology suggests that organizations that are required to answer to other entities such as the relationship of the FASB and the SEC, “…leads decision makers to align their views of the evaluative audience to whom they are accountable.” (Palmon, et al.2011). This type of relationship is a weakness for the FASB as they are seen to have specific interests in their standard setting processes that align with those special interests of the SEC, which may appear to advocate more for the private sector than the public sector. The International Accounting Standards Board, IASB, formerly known as the IASC, was established by the accountancy bodies of nine countries including Canada, France, Germany, Australia, Japan, Mexico, the United Kingdom and Ireland (UK), the United States (US), and the Netherlands. Initially, upon the creation of the IASB, the organization utilized accounting standard setting policies based on their initial fourteen standards which they intended to dissect and restate a new state of core standards in 2002. Together with the FASB, the IASB issued the Norwalk Agreement in which “…they pledged their best efforts to make their existing reporting financial standards fully compatible as soon as practicable and to coordinate their work programs to ensure that compatibility was maintained…”. (Kirsch.2012). The Norwalk Agreement outlined the plan to maintain these standards stating that they would do so by, “…(a) aiming the short-term project at removing a variety of individual differences between GAAP and International Financial Reporting Standards (IFRSs), (b) removing other differences between GAAP and IFRSs by addressing concurrently new, discrete, substantial projects (mutual undertakings)…” (Kirsch. 2012). Like the FASB, the IASB is monitored by an additional entity, the FASB. Unlike the SEC’s monitoring of the FASB however, the FASB’s monitoring of the IASB is to gain a better insight into the standard setting processes of the IASB. Further, this relationship allows the FASB to provide insight into their standard setting and financial statement presentation processes for the IASB as well as the IASB providing insight of their inner-workings to the FASB. As of 2010, the FASB and IASB were working jointly to present financial statements in a manner that allowed for a smooth transition to the IFRS requirements while still complying with U.S. GAAP. Examples include the display of gains and losses on financial statements being presented differently to better facilitate the transition. While this will allow for a smoother transition to IFRS, such financial statement presentation costs will be substantial. Although there may be significant changes that occur when the IFRS convergence occurs, the FASB and IASB intend to present financial statements in a manner that provides, “…aligning line items, their descriptions, and their order across financial statements.”(Moehrle, Stober, Jamal, Bloomfield, Christensen, Colson, Watts.2010). The Governmental Accounting Standards Board, or GASB, serves to “…improve state and local governmental accounting and financial reporting standards…”(GASB.org.2013) that provide financial statement users with useful, understandable information that is beneficial. The GASB is overseen by the Financial Accounting Foundation (FAF) Board of Trustees, much like the relationship between the SEC and the FASB. Although the GASB works avidly to provide financial statements that accomplish their intended goal, a study conducted by the FAF in 2012 suggested that it was clear what was within the GASB’s scope of issuing accounting standards and what was not, the limits within the range of what could or could not be done by the GASB when issuing accounting standards, were not clearly established. This posed as a strength and weakness both for the GASB and the FAF in their oversight of the organization. Each organization operates separately but has generally the same standard setting processes and financial reporting presentations. The strengths and weaknesses of these organizations provide the framework for the accounting standard setting processes worldwide.
References

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