e Committee from among their number, and charged that Committee lity of “making recommendations to the Board of Trustees regarding any sic structure of the Financial Accounting Standards Board and Financial Standards Advisory Council. . . .” Ar's and FASB's internal evaluations have resulted in improvements. In early FASB established a technical division to deal specifically with an increasing emerging problems involving narrow but significant accounting questions of agency, and appointed a continuing 15-member Screening Committee on Emerging Noris to assist it. In mid-1976, the FAF's Structure Committee recommended that the Securities Industry Association, representing investment bankers charged by Federal statute w significant duties to the public, be added as a sponsoring organization to broaden still cher public support and involvement in establishing accounting standards. The Securities Industry Association became a sponsor effective October 1, 1976. In December 1976, the third anniversary of the FASB's first accounting pronouncement, the FAF's Trustees directed the Structure Committee to conduct a comprehensive oversight study of all aspects of the FASB's organization and operations. After an extensive process of interviewing over 100 persons of various disciplines, including persons in the Federal Government, and a two-week field review in Stamford, Connecticut of all aspects of the FASB's technical and administrative operations and procedures, the Structure Committee has recommended and recently made public specific proposals designed to increase still further public participation in the FASB's processes and to improve its effectiveness and efficiency in meeting its responsibilities. The FAF's Trustees have agreed in principle with this report and intend to consider expeditiously the Committee's recommendations. As discussed below, and perhaps of particular interest, the Structure Committee has recommended that the Trustees consider further representation of financial statement users on the FAF's Board of Trustees, and that the AICPA's Board of Directors be replaced as sole elector of FAF Trustees by representatives of the Foundation's six sponsoring organizations with each having an equal voice in the Trustee selection process. In a similar vein, and in anticipation of the expiration of the FAF's five-year start-up financing plan in December 1977, the FAF Finance Committee is currently proceeding with a new plan for 1978 and subsequent years predicated on further increasing the breadth and depth of public support. This plan is based on the principle that no one person, firm or corporation will be solicited to contribute, or will contribute, annually more than the lesser of $50,000 or 1% of the FASB's annual operating expenses. This plan will have the practical effect of reducing the annual contributions of the eight major accounting firms from the $200,000 contributed annually by each since 1972—a practical necessity when the FASB was launched—to no more than $50,000 per firm each year, and reducing other contributions as well through the AICPA's Accounting Research Association. The FAF's Trustees are also reviewing another aspect of the FASB's process. The Trustees have directed its Committee on Personnel Policies to review the FASB's existing conflict of interest policies, and to make such recommendations as the Committee may deem appropriate. In particular, the Trustees have charged the Committee to consider reporting of all investments, even immaterial ones, by FASB members and staff directors; specific limitations on certain securities transactions and on receipt of gifts from non-family members; and adoption of a more general rule with respect to potential conflicts of interest. The Committee is expected to make its recommendations at a meeting of the FAF Trustees later this spring. While the FAF and FASB disagree with the Study's assertions as to the effectiveness of existing personnel policies and emphasize there has been no instance of detrimental conduct since the Board's formation, they accept the principle articulated in existing policies that perceptions of potential conflict, however unfounded, can be as troublesome as conflict in fact, and should be investigated, not ignored. The FAF and FASB are consistently on record as welcoming a fair and objective study of the structure and the public procedures for establishing and improving financial accounting and reporting standards. We are confident that when an objective analysis, based on a complete, accurate and balanced record, is made, the conclusion will be that the existing structure with the FASB is most effective in establishing financial accounting standards in the public interest. This structure has evolved and is evolving in response to Congress' recognition in the first Federal Securities Laws of the unique responsibilities of the accounting profession and the significance of financial statements to public investors. As the balance of this Statement of Position demonstrates from varying perspectives, this structure has worked and is working effectively in the public interest through the FASB, as the designated standard-setting body, with support within the private and public sectors and review and participation by the SEC. I. INDEPENDENCE AND OBJECTIVITY OF THE FASB IN THE STANDARDSETTING PROCESS A. Formation of the FAF and FASB The FAF and FASB were created in 1972, the result of the recommendations of a seven-man study group appointed by the AICPA's Board of Directors to study the process of establishing accounting principles and to make recommendations for improving the process. Chaired by Francis M. Wheat, a lawyer and a former SEC Commissioner, the Wheat Study Group, after public hearings, numerous interviews and review of position papers, concluded that a "continuing dynamic relationship between a private standard-setting board and the SEC offers the greatest potential for future progress in financial accounting". The Wheat Study Group also concluded that "continuation of the framework and the process of developing accounting standards originating in the 1930's would result in acceptance of a private body's accounting standards by the accounting profession, government and the public at large", if 1. the standard-setting body were independent and objective in fact and appearance; 2. there were significant participation by the financial reporting community in the standard-setting process; 3. standards were issued only after public procedures insuring that all who wished to be heard would be heard and their views considered; 4. the quality of the body's pronouncements were high in terms of logic and supporting reasoning, consistent with objectives, amenable to the exercise of professional judgment where appropriate, and useful to investors and the public at large; and 5. the accounting profession supported these standards in attesting to the fair presentation of financial information. To accomplish these goals, the Wheat Study Group recommended that 1. A Financial Accounting Foundation be established separate from all existing professional bodies, with a Board of Trustees nominated by organizations** having • Other members of the Wheat Study Group and their affiliations at the time were John C. Biegler (senior partner of Price Waterhouse & Co.), Arnold I. Levine (national executive partnermanagement of J. K. Lasser & Company), Wallace E. Olson (executive partner of Alexander Grant & Company), Thomas C. Pryor (Senior Vice President of White, Weld & Co.), Roger B. Smith (Vice President-Finance of General Motors Corporation), and David Solomons (Professor and Chairman of the Accounting Department, Wharton School of the University of Pennsylva nia). **American Accounting Association (AAA) (12,000 accounting educators, academicians and practicing accountants), American Institute of Certified Public Accountants (130,000 certified public accountants), Financial Analysts Federation (Analysts Federation) (14,000 analysts, investment advisers and portfolio managers), Financial Executives Institute (FEI) (9,250 financial and accounting executives representing 5,000 companies), and National Association of Accountants (NAA) (70,000 financial and accounting executives and accountants). In September 1976 the Foundation's Certificate of Incorporation was amended to add the Securities Industry Association (SIA) (600 investment banking and other securities firms) as a sponsoring organization and to expand the Board of Trustees to include an additional financial executive and an investment banker. The current Trustees and their principal occupations are listed in Exhibit A hereto. special expertise and continuing interest in financial accounting and reporting matters and consisting of five certified public accountants in public practice (including, ex officio, the Chairman of the AICPA), two financial executives, one accounting educator and one financial analyst. The principal duties of the Trustees would be to appoint members to the Financial Accounting Standards Board and to a public advisory body, the Financial Accounting Standards Advisory Council; to raise funds to support these organizations; and to review periodically the basic structure of the standard-setting organization; 2. The FASB be given all authority, functions and power of the AICPA and Foundation's Trustees for establishing and improving standards of financial accounting and reporting and the conduct of all activities relating thereto. The FASB would have seven full-time, salaried members independent of all other professional and business affiliations, four of whom would be certified public accountants drawn from, or principally experienced in, public practice, while the remaining three, who might but need not be certified public accountants, would be well versed in problems of financial accounting and reporting*; and 3. A Financial Accounting Standards Advisory Council be appointed from the public to work closely with the FASB in an advisory capacity as to accounting and reporting matters, with its members drawn from a variety of disciplines with no particular occupation predominating.** These recommendations were widely endorsed at public hearings and in interviews and comment letters by the accounting profession, the SEC, the financial and business community, accounting educators, and the interested public. The Internal Revenue Service ruled in 1972 (and reaffirmed in 1976) that the Foundation was an educational charitable institution exempt from taxation under Section 501(c)(3) of the Internal Revenue Code. Of special significance, the accounting profession and the SEC each took prompt steps in 1973 to endorse the FASB as the official accounting standard-setting body and to designate its pronouncements as authoritative and presumptively binding for financial statements. The AICPA designated the FASB, effective July 1, 1973, as the successor to the Accounting Principles Board (the “APB") in establishing accounting principles for purposes of Rule 203 of the AICPA's Code of Professional Ethics. Rule 203 provides that no accountant who is a member of the AICPA may opine that financial statements are fairly presented in conformity with generally accepted accounting principles if such statements depart from an FASB pronouncement or an effective pronouncement of its predecessor standard-setting bodies, the Accounting Principles Board and the Committee on Accounting Procedures, unless the accountant can demonstrate that due to unusual circumstances the financial statements would otherwise be misleading. In December 1973, the SEC reaffirmed its administrative practice and policy of looking to the accounting profession's authoritative standard-setting body for initiative in establishing and improving accounting principles and standards, and stated that principles, standards and practices issued by the FASB and its predecessors were presumptively required to be applied in financial statements filed with the SEC and that financial Currently these three include a former accounting educator, the former Chief, Office of Accounting and Finance of the Federal Power Commission, and a former corporate financial executive. See Exhibit A hereto for a listing of the seven current FASB members and their former affiliations. **The current members and their affiliations are listed in Exhibit A hereto. stateme an SEC B. Indej, The cor Group and ad is designed to as accounting stand.. Under the FoL (i.e., its members, or s Similarly, there can be no personal pe.. technical work of the FASB or any of its ouïca serving simultaneously as FASB members Advisory Council, the FASB's Screening Come task forces. Correspondingly, no appointed memo Trustee or as an FASB member or staff member, at of the AICPA (the Foundation's present elector): member. The effect of these prohibitions, and the person. to FASB members and staff members, ensures at al pressures and influences which might be perceived as or objectivity of the FASB as a standard-setting b proven as effective in practice as it was when first rec and endorsed by the SEC and the accounting profess * These circumstances are the same as for removal of FASH Trustee has been removed or considered for removal. ** An FASB member can be removed only on the vote of e*** only then in limited specific circumstances for reasons of malfeasance, or conduct otherwise detrimental to the Fo member has been removed or considered for removal for any re assertion, these standards do not permit removal excer power of removal is not a means of assuring that the I^ desires of the Trustees, and certainly cannot be inv |