CEOs and the Future of GAAP

Big things are happening in the realm of Generally Accepted Accounting Principles and your company will almost certainly be affected. The [...]

August 1 2005 by Chief Executive


Big things are happening in the realm of Generally Accepted Accounting Principles and your company will almost certainly be affected.

 

The Financial Accounting Standards Board is increasingly in the driver’s seat in managing GAAP, whose 100,000 pages of guidelines issued over the past 60 or 70 years are maddeningly complex. FASB Chairman Robert Herz has launched a process to simplify and codify all GAAP rules-not necessarily to rewrite them, but rather put them in a more consistent package. At the same time, Herz is trying to migrate America’s GAAP to more closely resemble international standards set by the London-based International Accounting Standards Board.

 

Right now, chief executives take one of two approaches to FASB. The first is to ignore it. “A lot of CEOs delegate this to their CFOs and they in turn delegate it to their controllers,” says Herz. The second approach is to fight FASB. That’s what technology CEOs did by introducing legislation that would have undermined FASB’s power to impose new rules for expensing stock options. The legislation failed, but it obviously did not do much for the state of relations between FASB and CEOs.

 

What FASB wants, and what makes sense, is for CEOs to accept that it is the standards-setting body, and to engage with them on issues that will hit companies’ bottom lines, such as the treatment of variable interest entities. In short, CEOs have the power to help shape the future of GAAP. And that’s just smart business.