Financial Accounting Standards Board (FASB) history

The organization in the private sector that sets standards of financial accounting and reporting in the United States. The FASB establishes GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), which govern the preparation of financial reports. Accounting standards are necessary for the efficient functioning of the economy. Financial reports based on accounting standards help investors, lenders, and the public efficiently to make decisions on allocating their resources to business organizations.

The FASB receives its authority to set accounting standards from the U.S. Securities and Exchange Commission (SEC). The SECURITIES EXCHANGE ACT OF 1934 gives the SEC statutory authority to establish financial accounting and reporting standards for publicly held companies. In 1938, the SEC adopted a policy of relying on existing accounting principles with significant authoritative support in the private sector, in Accounting Series Release No. 4. This action effectively shifted authority to the American Institute of Certified Public Accountants (AICPA), through its Committee on Accounting Procedure (CAP, 1936–59) and its Accounting Principles Board (APB, 1959–73). The FASB was founded in 1972 and began operations in 1973 to provide an equal opportunity for all interested groups to participate in the standards-setting process. In contrast, independent auditors dominated its two predecessors.

The FASB is the operating arm of a three-part organizational structure that also includes the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Advisory Council (FASAC). The FAF is the nonprofit parent organization, administered by 16 trustees with an executive vice president. Its trustees raise funds for the FASB but do not advise it. The FAF trustees appoint members of the FASB and the FASAC. The FASAC advises the FASB on the priorities of accounting issues and the suitability of its tentative resolutions. The FASAC has a minimum of 20 members, which includes financial statement users, auditors, preparers, and the public.

The FASB has seven board members who work full time to resolve financial accounting issues, communicate with constituents, and serve as a focal point for research. Members preserve their independence as standard setters by severing ties with their previous employers. They are appointed to a five-year term, with the possibility of reappointment for a second term. The FAF attempts to appoint knowledgeable board members from diverse accounting backgrounds to represent its various constituents. In February 2001, three board members were auditors, two were corporate financial officers, one was a securities analyst, and one an academic immediately before their appointments to the FASB. The FASB has a research and technical activities staff to support its members.

To establish generally accepted accounting principles (GAAP), the FASB first endorsed the standards of its predecessors, the CAP Accounting Research Bulletins and the APB Opinions. It has continued to establish GAAP through three types of pronouncement: statements of financial accounting standards (SFAS), interpretations, and technical bulletins. The board follows an orderly public process before issuing any pronouncement. Due process includes preliminary evaluation of the problem, admission of the problem to the FASB agenda, early deliberations, tentative resolution, further deliberations, and final resolutions. Statements of financial accounting standards consist of principles at the highest level, approved by a two-thirds majority of board members. As of February 2001, the FASB issued 140 SFAS, although many amend previous standards or delay implementation of new standards. The board issued 44 interpretations by February 2001 to explain, clarify, or expand on an existing SFAS, an APB opinion, or a CAP accounting research bulletin. The research and technical activities staff of the FASB issued 50 technical bulletins through February 2001 to address less controversial and pervasive problems. In addition, the FASB has issued seven general statements of financial accounting concepts as a framework to guide its standard setting, to help practicing accountants, and to educate nonaccountants.

Further reading

• Miller, Paul B. W., Rodney J. Redding, and Paul R. Bahnson. The FASB: The People, the Process and the Politics. Homewood, Ill.: Irwin, 1994. 
• Previts, Gary John, Barbara Dubis Merino. A History of Accountancy in the United States: The Cultural Significance of Accounting. Columbus: Ohio State University Press, 1998. 

Mary Michel