The SEC's Influence on FASB in Setting Accounting Standards

Introduction

The question of the extent of power and influence wielded by the Securities and Exchange Commission (SEC) over the Financial Accounting Standards Board (FASB) in the context of setting accounting standards is a matter of significant importance within the realm of financial regulation. The interplay between these two regulatory bodies raises questions about the dynamics of their relationship, whether they collaborate as suggested by the authors of "The Accounting Standards Setting Process in the U.S.: Examinations of the SEC-FASB Relationship," or if the FASB enjoys complete autonomy in the standard-setting process.

The SEC holds the legal responsibility for establishing accounting standards but has delegated this duty to the FASB. This essay seeks to delve into the intricacies of this relationship, exploring the nuances of power dynamics, influence, and collaboration between the SEC and the FASB. Additionally, it aims to address whether the SEC's delegation of standard-setting authority to the FASB is a strategic move to evade criticism, and to what extent the FASB acts in response to the SEC's influence.

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The Delegation of Standard-Setting Authority

The SEC, as the primary regulatory body overseeing financial markets, holds the ultimate legal responsibility for establishing and enforcing accounting standards. However, rather than directly setting these standards, the SEC has entrusted this responsibility to the FASB. This delegation of authority has raised questions about the extent of the SEC's involvement in the standard-setting process and whether it maintains a degree of influence over the FASB's decisions.

It is crucial to note that the FASB operates within a framework where the SEC exerts significant pressure and control.

The SEC's involvement is driven by its mandate to protect investors and ensure the integrity of financial reporting. As such, it closely monitors the FASB's activities to safeguard the interests of the investing public.

Evidence of Collaboration

Historically, evidence of collaboration between the SEC and the FASB is abundant. Since the establishment of the FASB in 1973, discussions between the two entities regarding the development of new accounting standards have been well-documented. Even if one were to argue that the FASB and SEC did not actively collaborate, evidence strongly suggests that the FASB was aware of the SEC's expectations and tailored its standards to align with them.

One piece of evidence supporting this collaboration is the transparency of the SEC's views and opinions on accounting matters. Chief accountants and members of the SEC often delivered speeches and published the commission's accounting positions. This meant that the FASB had access to the SEC's stance on various issues, allowing it to consider these perspectives when setting standards.

Furthermore, individuals who had previously held positions within the SEC, including chief accountants, became members of the FASB's advisory council and assumed other roles within the FASB structure. These transitions demonstrate a behind-the-scenes collaboration, where individuals with SEC backgrounds continued to influence accounting standards even after their transition to the FASB.

Evaluation of SEC Influence

A comprehensive study analyzed 158 FASB Statements based on seven criteria to gauge the extent of SEC involvement with the FASB. These criteria included whether the FASB's position aligned with the SEC's, whether the SEC initiated the subject of the statement, any threats made by the SEC, instances where the FASB acted under pressure, changes made to accommodate the SEC, and situations where the SEC intervened or overturned a statement. The study drew evidence from various sources, including speeches, issued discussion memoranda, Wall Street Journal articles, public hearings, and documented instances of SEC intervention or support for the FASB.

The findings of this study dispel the notion that the SEC has minimal involvement in the standards set by the FASB. On the contrary, the research reveals that the SEC plays an active and influential role in the standard-setting process. Key indicators of the SEC's power include its control over the FASB's budget and the approval of potential board members. Additionally, the SEC possesses the ability to exert pressure, thereby influencing the FASB's response to specific issues and concerns.

While the FASB is responsible for formally establishing accounting standards, it is evident that the SEC plays a pivotal role in shaping the agenda and outcomes of this process. The power dynamics between these two regulatory bodies are complex, with the FASB serving as the standard-setter and the SEC as the ultimate arbiter of which standards are enacted.

Conclusion

In conclusion, the relationship between the SEC and the FASB in the setting of accounting standards is marked by a significant degree of collaboration and influence. While the SEC has delegated the formal standard-setting authority to the FASB, it continues to exert substantial control and oversight over the process. This collaboration is driven by the SEC's mission to protect investors and ensure the integrity of financial reporting in the United States.

Through evidence of transparency, personnel transitions, and detailed analyses of accounting standards, it becomes apparent that the SEC's influence extends beyond mere delegation. The SEC's power is evident in its ability to shape the FASB's agenda, influence its decisions, and ensure alignment with the commission's goals.

Ultimately, the FASB sets the standards, but the SEC wields considerable influence over the direction and content of those standards. This intricate interplay between the two regulatory bodies underscores the importance of their collaboration in maintaining the integrity and transparency of financial reporting in the United States.