Verbatim - Leading the Charge

As chairman of the Financial Accounting Standards Board (FASB), Robert Herz is the most influential accountant in America. Now, more than a year into his second five-year term, Herz will oversee one of the most extensive changes to the U.S. accounting system since the days when accountants wore green eyeshades and pocket protectors. In late August, the Securities and Exchange Commission laid out a timetable for adoption of International Financial Reporting Standards (IFRS) that would put the United States on track to follow a more principles-based accounting system that reduces complexity and paves the way to a global standard. Herz has already pursued a feverish agenda at FASB and has shown that he is unafraid to take on controversial topics such as fair value and accounting for stock options.

How is FASB funded and where does it derive its authority from?

Our funding changed under Sarbanes-Oxley. Previously, we received voluntary contributions from large auditing firms through the American Institute of Certified Public Accountants and from companies. SOX put an end to that because there were concerns about conflicts of interest. We are now funded through an accounting support fee that mutual funds and public companies pay. That’s worked very well because it is a secure source of funding; it’s something we can depend on.

FASB sets standards for public, private, and nonprofit entities. For public companies, it’s really a delegated responsibility from the SEC. SOX provided that the SEC should designate a standard-setting body, and in turn, it formally assigned FASB to that role for public companies.

What was the impetus for a move toward a global accounting standard?

Before joining FASB, I was on the International Accounting Standards Board (IASB). In 2002, we met with our friends in the IASB in Norwalk, Conn., where FASB is headquartered, and put together the Norwalk Agreement, which was a framework to work together to develop global accounting standards. Most of our major projects since then have been accomplished together with a mixed staff. We’re looking to produce common standards and to work together to identify common high-quality solutions.

How has it progressed and what is the outlook for IFRS?

Last year, the SEC lifted the requirement for reconciliation to generally accepted accounting principles (GAAP) for foreign filers that use IFRS. That was step one. We look at this as a road map. At some point if there’s enough progress, the next set of issues is whether to allow U.S. companies to use IFRS and switch from GAAP.

The next step was for the SEC to put out a proposal on that, which it did in late August. That proposal, now in a comment period, would allow a limited group of major U.S. companies to begin voluntarily using IFRS as early as 2009, with a decision in 2011 whether to require the use of IFRS for all filers in 2014, 2015, or not until 2016.

To what extent is it a choice to move to a ‘principles-based’ from a ‘rules-based’ approach?

Our GAAP is much older and more mature and has much more detail and guidance. But there is a misunderstanding on this. Our system has principles, too, and not surprisingly, IFRS has some rules. There’s no doubt our accounting system has been influenced by our regulatory and legal systems, but IFRS reflects a need to have much broader application across the world. But it is not purely one or the other. There’s always been a sentiment in our country that every question should get an answer. We’re trying to move away from that.

What will be some of the biggest changes with the adoption of IFRS?

You have to train people differently…try to understand the principles and get the facts and apply judgment. It also requires changes by the regulators. It might be staggered, like [SOX Section] 404—big companies first. There is an issue of what to do with private companies. Should private companies move to IFRS and, if so, when? Should there be some kind of slimmeddown version of IFRS? It’s about two things: coming to a single set of standards, but also achieving a higher quality so there is improvement. Both sides need to adopt the advice that used to be given to the father of the bride—you’re gaining a sonin- law, not losing a daughter.

What could keep it from happening?