FASB Trustees Prepare for Legal Challenges to Fees

July 30, 2003 (PLANSPONSOR.com) - Trustees for the Financial Accounting Standards Board (FASB) are battening down the hatches in anticipation of a maelstrom of legal challenges to the new corporate fee-based funding mechanism to fund the board's operations.

>The discussion held by the trustees of the Financial Accounting Foundation (FAF) and its attorneys is based on “rumors” floating around the business community about possible legal action surrounding the first invoices that are expected to be sent in August to US public companies.   There is “probably a high probability that we will be challenged,” said Samuel DiPiazza Jr, a trustee and chief executive officer (CEO) of PricewaterhouseCoopers, according to Washington-based legal publisher BNA.

>This comes as companies are expected to be billed based on a formula keyed to their level of market capitalization. Bigger public companies would pay more than smaller firms.

>Previously, the Connecticut-based FASB relied heavily on voluntary contributions to fund its operations, but the new funding is scheduled to come courtesy of a new system put into place by the implementation of the Sarbanes-Oxley Act.   Also expected to be dragged into the legal muck is another spawn of Sarbanes-Oxley – the Public Company Accounting Oversight Board (PCAOB).

Earlier, the PCAOB approved a plan to fund its operations through fees levied on companies with more than $25 million of average monthly market capitalization and mutual funds with more than $250 million of net asset value.  However, the funding will not be even, with approximately 95% coming from corporations and the remaining from mutual funds.   In fact, for the largest of the companies, the fees could amount to $1 million or more.

Legal Challenge

>John Bostelman, serving as outside counsel for FAF, speculated that any lawsuit over the funding mechanism would be leveled more at FASB’s revenue source rather than the auditing oversight board’s along the following theoretical lines: that the revenue to FASB would represent a transfer between private payers without sufficient, direct government oversight of a system that is being set up under federal law.

>This is due to PCAOB members being selected by the US Securities and Exchange Commission (SEC), the board’s budget being approved by the SEC, and the board is directly overseen by the SEC. On the other hand, FASB has had its budgetary and other operations overseen by a private, nonprofit organization, the FAF.

>However, while the worse case scenario for the FASB is that funding would be cut off while a lawsuit percolated through the court system, thus draining FASB’s reserve fund, most of the trustees do not see this happening.   This is because without payment, a company would not be able to obtain the auditor’s imprimatur that the company’s financial statements comported with generally accepted accounting principles. Therefore, the companies effectively would be delisted or would not be able to seek investment.

“That’s the leverage,” said Manuel Johnson, head of the FAF trustees. The accuracy of that reading – no payment, no signing off by auditors – is to be checked by the foundation.

This is not the first rumbling of a possible reaction among the business community in response to the fees.   Earlier, FASB cautioned that some corporations may be mounting a fee embargo counterattack to daunt the push to require stock options be treated as an expense on financial statements (See  Companies Prepare FASB Fee Boycott ).