[Congressional Record Volume 144, Number 7 (Thursday, February 5, 1998)]
[Extensions of Remarks]
[Pages E120-E121]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               FINANCIAL ACCOUNTING FAIRNESS ACT OF 1998

                                 ______
                                 

                         HON. RICHARD H. BAKER

                              of louisiana

                    in the house of representatives

                       Thursday, February 5, 1998

  Mr. BAKER. Mr. Speaker, today I am introducing a bill that will serve 
as a legislative remedy to a flaw in the private sector process for 
developing financial accounting standards. Specifically, the Financial 
Accounting Fairness Act (FAFA) will provide for judicial review of 
accounting principles that the Financial Accounting Standards Board has 
developed and the Securities and Exchange Commission has approved. In 
short, public companies will not be able to do what they currently 
cannot: have their complaints with the substance of a proposed 
accounting principle aired in the neutral

[[Page E121]]

forum of the federal court system, just like those companies can when 
they are affected by other SEC rules and regulations.
  Congress should not have to inject itself in these controversies each 
time they erupt--as it has in recent years with squabbles over 
accounting for stock options and derivatives. Rather, the federal court 
system, the traditional mechanism our democratic republic has employed 
to solve disputes, should be called upon to serve as the final 
independent adjudicator of thorny issues that arise in accounting 
principles.
  Yesterday the issue was stock options. Today it is derivatives. What 
will the issue be tomorrow and beyond? The process needs to be fixed, 
and fixed now, before another disagreement again causes congressional 
intervention--an outcome few observers want.
  Since 1934, when Congress and President Roosevelt created the SEC, 
the agency has had the ultimate responsibility for establishing 
financial accounting and reporting standards for public companies. 
Although the SEC decided long ago to place that authority in the 
private sector--a system that by and large has worked well--it has 
maintained oversight authority of these principles with regard to the 
federal securities laws. Since its creation in 1973, the Financial 
Accounting Standards Board (FASB) has served this role. Like its two 
predecessors, the Committee on Accounting Procedure and the Accounting 
Principles Board, statements and interpretations of the FASB have 
benefited from an SEC presumption that financial statements not in 
compliance with these principles are misleading and therefore in 
violation of the federal securities laws. As a result of this policy, 
FASB pronouncements have generally had the full force and effect of SEC 
regulations.
  Although it is true that the FASB itself has extensive procedures to 
allow parties interested in FASB projects to make their opinions known, 
questions have arisen whether persons aggrieved by FASB pronouncements 
have the right to judicial review of their complaints, and whether such 
prononuncements must comply with the requirements applicable to other 
SEC regulations.
  Recently, for example, the FASB held 100 public meetings to discuss a 
project, followed by four days of public hearings, and still more 
public meetings on an ``Exposure Draft'' of a proposal related to 
accounting for derivatives and hedging activities. Yet, even with all 
this openness, and ample opportunity for interested parties to comment 
on the project, there exists substantial dissension on what has emerged 
as the final product. Some have claimed that the process, however open, 
does not provide meaningful opportunities for a party--whose business 
may be fundamentally affected by SEC-enforced accounting and reporting 
standards--to truly have their concerns heard. Ultimately, the FASB can 
and will move forward, and its product will be endorsed through routine 
SEC policy. This process is flawed. Congress, having given the SEC an 
important responsibility for establishing accounting principles for 
public companies, should now clarify that judicial review can and will 
be available for persons whose livelihoods are at stake because of 
these rules.

  FAFA makes it clear that judicial review is available in the event 
that an aggrieved party decides to seek it, and that accounting 
principles established for federal securities purposes shall meet the 
same good standards that other SEC promulgations must. To require less 
is to say that financial accounting principles are somehow different in 
nature and kind from other SEC regulations, and that they should be 
exempt from legal challenge, no matter how good the reason. At the end 
of the day, this legislation will simply provide a last chance for an 
aggrieved party to make its case before a neutral forum--a federal 
appeals court--rather than limiting it to pleas before the very body 
that implemented and created the standard.
  The Financial Accounting Fairness Act retains the current system of 
private sector development of accounting principles. It in no way 
interferes with the FASB's process for producing financial accounting 
guidelines. It will not meaningfully affect the speed with which these 
standards are implemented, except in the event that an appeals court 
decides that good cause exists to stay the implementation of the 
standard pending resolution of a case before the court. As a result of 
SEC policy, FASB pronouncements have generally had the full force and 
effect of SEC regulations. Other SEC regulations are subject to 
judicial review, and the Act would allow SEC-recognized accounting 
principles to be similarly reviewable.
  Under the Fairness Act, FASB accounting principles, as well as the 
FASB's record of proceedings, would be delivered to the SEC, which 
would in turn publish notice of each principle, and provide interested 
persons an opportunity to comment. The SEC would then determine whether 
the principle shall apply to public companies by issuing an order 
approving or disapproving it. In making this decision, the agency must 
consider the proposed principle's impact on the protection of 
investors, and whether it will promote efficiency, competition, and 
capital formation. Additionally, no principle may be approved that 
imposes an unnecessary or inappropriate burden on competition. These 
requirements are identical to those applied to other SEC regulations.
  If the principle will apply to persons subject to Federal banking 
agency oversight, each applicable agency shall be consulted, and its 
views considered. Without SEC approval, SEC registrants shall not be 
required to comply with FASB standards for the purposes of SEC filings.
  If an aggrieved party determines to seek judicial review, the Act 
would, in accordance with current law regarding SEC regulations, 
recognize the conclusiveness of SEC findings of fact supported by 
substantial evidence. Moreover, the reviewing court must affirm and 
enforce the regulation unless the SEC's action in approving the 
regulation is found to be arbitrary, capricious, or an abuse of 
discretion, among other such considerations already required under 
existing law. The Act would only apply to FASB pronouncements formally 
adopted after January 1, 1998.
  Recent events have highlighted the need for this legislation. I look 
forward to its passage, so that the need for congressional involvement 
in the development of financial accounting principles will be reduced 
or eliminated in the future. Only when aggrieved parties clearly have 
the opportunity to make their cases in court will we have accounting 
standards that are truly accountable for their impact on public 
companies