Editor's Commentaries

In 1999 the American Institute of Certified Public Accountants (AICPA) granted FASAB the authority to set accounting standards for the accounting profession (Rule 203 status). This was a huge development because it gave FASAB credibility as a legitimate organization that could set generally accepted accounting principles (GAAP). It was a controversial decision at the time because many influential CPAs did not view FASAB as being an independent standard setting body because of the oversight role of the Principals (OMB, Treasury, and GAO) and the ability of any Principal to veto a recommended standard.

FASAB changed dramatically after being granted standard setting authority to enhance its independence. The membership was changed to provide for a majority of non-federal members and veto authority was limited to OMB and GAO. Many other actions were taken as well since the AICPA indicated that it would review FASAB every 5 years to ensure its actions were those of an independent standard setting body. FASAB was reviewed in 2004 and no change in status resulted. FASAB has been warned that if a recommended standard were vetoed by a Principal, FASAB's status as a standard setting body for the accounting profession would be revoked. Another review by the AICPA is scheduled for 2009.

During the consideration of a new standard for social insurance programs, time and time again the Principals have threatened to veto a recommended standard that recognizes liabilities for social insurance programs before the amounts become due and payable. In 2006 all of the non-federal members (six members) determined that actuarially determined amounts should be recognized as liabilities when eligibility requirements are met. The four federal members opposed such recognition. A preliminary views document was issued in October 2006 with the primary view advocating recognition of actuarial liabilities and the alternative view opposing recognition of liabilities until amounts are due and payable.

Since October 2006 two of the six non-federal members have left FASAB and have been replaced by two "non-federal" members both of whom were formerly Deputy Controllers at OMB and federal members of FASAB. Such appointments constitute provocative actions by the Principals who determine FASAB's membership and are even more provocative in light of recent threats by the Principals to veto a recommended standard on social insurance that is not to their liking. Clearly, the Principals are not concerned about the possibility of the AICPA revoking FASAB's authority to set accounting standards for the accounting profession since these recent actions reinforce the notion that FASAB is not an independent standard setting body.

It is also clear that no recommended standard regarding social insurance will be approved that goes beyond recognizing amounts due and payable as liabilities for social insurance programs. If one or more of the new "non-federal" members votes with the four federal members, there will not be six votes to support the view of recognizing actuarial liabilities (six votes are needed to recommend a standard to the Principals). If the two new "non-federal" members vote with the other four non-federal members to recommend a standard that recognizes actuarial liabilities for social insurance programs, it is a virtual certainty that OMB's Director and/or GAO's Comptroller General will veto the recommended standard because they have demonstrated with their recent actions no concern about the AICPA's possible revocation of FASAB's authority to set accounting standards for the accounting profession. Also, the Comptroller General is personally involved and he will not be denied.

So why don't the Principals care if FASAB has the authority to set accounting standards for the accounting profession? Gaining such authority was a big deal in 1999. The insiders know the answer. Those of us on the outside can only speculate. Whatever the plan is, it is a certainty that the actions of the Principals have been carefully considered.

In May 2007 I attended the public hearing on the preliminary views document on accounting for social insurance. During the lunch break I learned that Hal Steinberg would be joining Woody Jackson as returning FASAB members. I was astounded. I thought it had been recklessly audacious to appoint Woody Jackson in November 2006 but this latest news was just breathtaking. I suspected the fix was in on accounting for social insurance and went home shortly after lunch — there was no point in attending a charade. (Messrs. Jackson and Steinberg are enormously capable people but both were Deputy Controllers at OMB and federal members of FASAB — they should not have been appointed as non-federal members after having served as federal members. If one or both had taken a position as a federal FASAB member that social insurance obligations should not be recognized as liabilities until the amounts were due and payable, the appointment(s) would be absolutely outrageous — it would be fixing the result on the contentious issue of when liabilities should be recognized for social insurance programs.)

Having been involved with FASAB from its inception, I had acquired hundreds of binders of FASAB materials over 16 years. I kept it all. When Woody was appointed I went back to my materials to see if he had espoused a position on social insurance during his time as OMB's member. I found nothing. When Hal was appointed I did the same thing and found nothing until just a few days ago (approximately January 29, 2010) when I was tossing out all my FASAB binders. (It took several evenings to get the job done.)

At this point I need to provide some background. Bob Kilpatrick (a brilliant economist with a doctorate from Yale) was one of OMB's FASAB staff persons who provided staff support to both Hal and Woody. (Bob died several years ago and everyone who ever knew him misses him very much.) Bob was married to Justine Rodriguez who is also a brilliant senior level OMB employee. Bob and Justine firmly believed that social insurance obligations are not liabilities. Justine was also involved with FASAB.

From 1991 until 2005 I provided staff support to Treasury's FASAB member. I would prepare briefing materials for my session with my board member who I would meet with before each board meeting. My practice was to provide a status report on FASAB related developments that had occurred since the last board meeting and then discuss all the issues for all the subjects that would be on the agenda for the upcoming board meeting. I would write up all the issues and my comments on those issues. I made a point to be on all the task forces so that I would be knowledgeable about everything related to FASAB. My intent was to provide high quality service to my board member — I wanted to keep the FASAB staff support assignment that I had managed to attain. I say all this about my modus operandi to indicate that I took my staff support function very seriously and made every effort to be accurate.

The document I found on or about January 29 was my briefing agenda for October 19, 1994. In the status section of the briefing agenda I wrote "The liabilities ED has been sent to the publishers. During the fatal flaw review Steinberg and Blum expressed their concern regarding the basis for conclusions discussion addressing social insurance. That discussion implied that the firmness of the obligation was a factor in determining whether a liability existed. Steinberg and Blum both indicated that it is the 'nature' of the obligation that matters — not the 'firmness.' The basis for conclusions was revised to accommodate this concern; this revision also impacted the Ives alternative so Ives revised his language. I have attached the pertinent memos as well as the paragraphs in the basis for conclusions and the Ives alternative (alternative B)."

The pertinent memos were: (1) a memo from Bob Kilpatrick and Justine Rodriguez to Hal Steinberg dated September 28, 1994 that asserts: "The decision not to recognize social insurance transactions as creating liabilities until they become due and payable is related to the Board's distinction between exchange transactions (with reciprocal or two-way flows of resources or promises) and non-exchange transactions (nonreciprocal or one-way flows). The significance of this distinction arises from two factors. One of these factors is the nature of the obligation (in equity if not in law) that is created...."; and, (2) a memo from Jim Blum to Ron Young (FASAB Executive Director) dated September 30, 1994 that includes the following language: "I think the suggestion by Justine Rodriguez and Bob Kilpatrick to use 'nature' instead of 'firmness' is a good one."

The fact that there is no memo from Hal Steinberg is not of great importance since Hal would on occasion send a Bob Kilpatrick memo to FASAB as representing his (Hal Steinberg's) views. He did this in a July 8, 1994 letter to Ron Young when commenting on the liabilities exposure draft — he closed that letter saying "I am also enclosing a memorandum containing Bob Kilpatrick's comments on the proposed exposure draft. I agree with all of his comments." Jim Blum the Deputy Director of CBO would never have seen a suggestion by Justine and Bob unless Hal agreed with it. It is also obvious that Jim Blum is referencing a memo in the possession of Ron Young who would not have received a memo that Hal did not agree with. Thus, in 1994 Hal Steinberg as a federal FASAB member representing OMB held the view that social insurance obligations should not be treated as liabilities until the amounts become due and payable. There is a sufficient and convincing paper trail documenting this fact.

When Hal Steinberg was appointed to FASAB in June 2007 the fix was in. Why was Woody Jackson also appointed a few months earlier when Hal Steinberg was the solution? I don't know the answer. Maybe the folks at OMB thought Woody was the solution and realized after the fact that it should have been Hal (Justine remains at OMB as Deputy Associate Director for Economic Policy) so Hal was appointed as well (to make room for Hal the Principals tossed Claire Cohen off the Board after her first 5-year term — this had never happened to a board member who wanted to remain on the Board for another term).

The Principals got the result they wanted — no recognition of actuarial liabilities for social insurance programs (Hal Steinberg joined the four federal members to deadlock the Board 5-5 per the February 2009 FASAB meeting minutes). Those of us who supported the recognition of actuarial liabilities and sent comment letters and/or appeared at public hearings were just wasting our time (actually I enjoyed preparing my comment letter even though I was pursuing a fool's errand).

Does any of this matter or is it like some academic feud where there is much strife over an idea when the stakes are small or non-existent? I suggest it does matter a lot. We have a cash basis bottom line every year — it's called the budget deficit. We don't have an accrual basis bottom line every year — we just have a lot of information that confuses people. It would have been really helpful to have an accrual basis bottom line that you don't need to have a doctorate in economics to understand.

[This commentary could be entirely wrong. It may just be that having 3 deputy controllers from OMB sitting at the table determining FASAB standards is the way things happen to have worked out and there was nothing devious going on. The fact that one more vote was needed to secure the result the Principals wanted and Hal Steinberg would deliver that vote if he voted consistent with his views as a federal FASAB member could be just happenstance. I don't believe the Principals just lucked out but I could be wrong.]

I just watched a video of Gregory Anton (Chair of the FASAB Rule 203 Review Panel) reporting the panel's recommendations to the AICPA Council on May 23, 2010. I saw absolutely nothing in the presentation that questioned FASAB's independence. How is that possible?

The AICPA should acknowledge that FASAB is a fine organization but it was manipulated by the Principals when accounting for social insurance was revisited. The non-federal members (a majority of the Board) all wanted to recognize actuarial liabilities when eligibility requirements were met for Social Security and Medicare. The Principals found a way to negate that determination. This is the one standard that really matters — everything else is nickel and dime stuff by comparison.

The AICPA should not allow the Principals to get away with this outrage. FASAB's standards on social insurance should not be considered GAAP standards. They should be carved out and placed in a different category.