SEC FASB Should the FASB

SEC FASB

Should the FASB be abolished?

Outlining the major arguments for and against the SEC replacing the FASB

Both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Committee (SEC) play critical roles in establishing the standards of GAAP. Only the SEC has the power and authority of United States law to set and enforce accounting standards. The FASB is a private organization that is supposed to show professional leadership in establishing and improving the accounting methods used to prepare financial statements. It functions much as the National Bar Association or American Medical Association might, in establishing professional guidelines.

The argument for subsuming the SEC into the FABC is that the recent accounting scandals such as Enron, demonstrate that legal 'teeth' are needed to enforce accounting procedures in a uniform fashion. Until now, the FASB has shown little proactive action in addressing ethical issues. For example, the SEC had to ask the FASB to add revenue recognition, concerns about the pooling-of-interests method of accounting, and accounting for financial instruments at fair value, and transparency issues related to derivatives, investments and loans to its agenda for review because the number of SEC enforcement actions related to these matters (Herdman 2002). Also, unlike the broad ethical guidelines provided by other professional organizations, the FASB's standards have been rule-based, as opposed to principle-based which may provide extremely detailed guidelines but also can eliminate the ability of the individual accountant to exercise personal judgments (Herdman 2002). The SEC, in contrast, attempts to provide principle-based guidelines and can back up those guidelines with the force of law.