Investors Technical Advisory Committee 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut Phone: Fax:

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1 Investors Technical Advisory Committee 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut Phone: Fax: Via June 15, 2009 Mr. John J. Brennan Chairman Financial Accounting Foundation 401 Merritt 7 Norwalk, CT Dear Mr. Brennan, The Investors Technical Advisory Committee ( ITAC ) has determined that it should share its views on some urgent and important matters with the Trustees of the Financial Accounting Foundation ( FAF ). 1 The ITAC was established by the Financial Accounting Standards Board ( FASB or Board ) for the stated purpose of serving as a standing resource to the Board and FASB staff that provides technical accounting advice, from the investors perspective, on current projects. The ITAC also identifies critical accounting and financial reporting deficiencies that require the Board s attention and proposes new items to be added to the Board s agenda, both major projects and technical application and implementation activities. The ITAC provides 2 investor perspectives on the implementation of new standards. The ITAC membership comprises thirteen investment professionals who are technically proficient in financial reporting and experienced in the analysis and use of financial statements. The members serve on an unpaid basis and have committed to devote significant amounts of their time and resources to assist the FASB in its mission to enhance financial reporting. 1 This letter represents the views of the Investors Technical Advisory Committee ( ITAC ) and does not necessarily represent the views of its individual members, or the organizations by which they are employed. ITAC views are developed by the members of the ITAC independent of the views of the Financial Accounting Standards Board ( FASB ) and its staff. For more information about the ITAC, including a listing of the current members and the organizations in which they are employed, see 2 Investors Technical Advisory Committee Home, Page 1 of 9

2 The purpose of this letter is to share with the Trustees our grave concerns about what we believe to be a substantial erosion in the independence of the accounting standard setting process as evidenced by recent events and a recent weakening of already inadequate accounting standards. Given the disturbing potential for certain weaknesses to undermine the quality of the standards issued by the Board going forward, and further erode investor trust and confidence in financial reporting at a time of financial crisis partly attributable to poor transparency, we believe it is crucial that the Board and its trustee, the FAF, take swift and appropriate actions to protect and preserve the integrity of our financial reporting system. A consensus exists among the ITAC, and we believe that many members of the FAF and FASB would concur, that: The capital markets cannot perform their function of channeling capital from savers to companies that require it, at a price that properly reflects expected risks and returns, without clear, complete, accurate, and timely financial information, a fact that has been recognized in the laws and regulations of the U.S. for more than three-quarters of a century. 3 In turn, our economy, upon which millions of workers and their families rely for jobs and the income necessary to sustain them, cannot function in the absence of properly functioning capital markets. The quality of financial information required by law and regulation to be provided to investors and other users is directly dependent upon the quality of financial reporting standards; indeed, a severe deterioration in investor trust and confidence in the quality of reporting by financial institutions has been identified by a number of public bodies, including those entrusted with oversight of the global financial system, as a major contributing factor in the current crisis. 4 The lack of transparency has led to a deepening and lengthening of the recession as investors withhold their capital from the markets altogether, or require a prohibitively large transparency risk premium to be induced to provide capital to those companies and institutions that need it to conduct their operations or even survive. 3 See for example the Securities Act of 1933 and the Securities Exchange Act of Thus, the ITAC members agree with the FASB that: Our financial reporting system is essential to the efficient functioning of the economy. That is because it is the means by which investors, creditors, and others receive the credible, transparent, and comparable financial information they rely on to make sound investment and credit decisions. Accounting standards are an important element of the financial reporting system because they govern the minimum required content of financial statements of U.S. public companies. [Emphasis added]. Facts about the FASB, Page 2 of 9

3 Even as these problems with the financial reporting infrastructure have become apparent, special interests and their agents, including some from the same financial institutions that were the original source of much of the current crisis, have worked to influence certain members of U.S. Congress to bring political pressure against the FASB and the U.S. Securities and Exchange Commission ( SEC ) to further weaken or even overturn the reporting standards for the trillions of dollars of toxic securities that led to the crisis. 5,6 Unfortunately, the governance structure of the FASB has been insufficiently robust to fend off these attacks and to assert its independence in the face of the onslaught. This problem has occurred before, is exacerbating the current problems, and could occur again. This problem is not unique to the U.S. financial reporting standard setter but appears to be if anything even more dire outside the U.S., with some of those regulators and oversight bodies entrusted with the well being of financial markets in Europe and dozens of other countries around the globe directly threatening the long-term sustainability and existence of the other major financial reporting standard setter, the International Accounting Standards Board. 5 On March 12, 2009, FASB Chairman, Robert H. Herz testified before the U.S. House of Representatives Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises ( Subcommittee ). At that hearing Rep. Bachus stated that the Subcommittee did not intend to politicize accounting. Following Rep. Bachus comment Rep. Ackerman asked Chairman Herz for a clarification of FASB process in its review of mark-to-market accounting and the expected time frame contemplated. As Chairman Herz began his reply, Chairman Kanjorski pointedly interjected that there were three pieces of legislation presently pending in the Congress I guarantee you one of those pieces of legislation will become law before early April. In other words, Chairman Kanjorski asserted that Congress would act to override the actions of the FASB even before the time that Chairman Herz implied in his truncated response that FASB due process would require. Rep. Ackerman followed Chairman Kanjorski s comment, stating: I think what the Chairman said is if you don t act we will. [Emphasis added]. Clearly, any commitment by the Subcommittee to non-politicization was tenuous, at best. Obviously this exchange is diametrically opposed to the ITAC s and the Financial Accounting Foundation s ( FAF ) belief in a standard-setting process free of undue political influence. What makes our difficulty with these circumstances even more acute is that at these same hearings, Rep. Frank strongly encouraged the Deputy Controller of the Currency, Kevin J. Bailey, testifying at the hearing to volunteer recommendations for legislative action, which would provide the financial institution regulators with the tools they need to look through any distorting effects of mark-to-market or impairment accounting. Mr. Bailey, just as clearly, stated that they already have the tools necessary. In other words, regardless of one s view on mark-tomarket or impairment accounting and some people s perceived notion of its destabilizing effect on capital markets, regulators have the tools to protect the capital markets integrity. Disregarding this exchange, the Subcommittee pushed ahead with pressuring the FASB into an accelerated response to their concerns with mark-to-market and impairments. The Subcommittee effectively trampled the tenet of FASB independence. 6 See, for example, the letter to the Honorable Timothy F. Geithner, Secretary of the Treasury, regarding Accounting Changes under FAS 140 and FIN 46(R), Page 3 of 9

4 Thus, special interests that have been instrumental in causing the current crisis, the effects of which are borne by hundreds of millions of individuals and families around the globe, have targeted one of the critical components of global capital markets, financial reporting and the transparency it brings, and seek to subvert it to their own purposes. This woeful situation must end. We would remind the FAF that this political pressure bore the desired fruit: the issuance by the FASB on a highly accelerated basis with truncated due process, of standards that a number of investor groups and organizations including the ITAC stated publicly represented an erosion of high quality financial reporting. The standards resulted in a significant reduction in both transparency in the financial statements for distressed financial instruments, the so-called toxic assets, as well as delayed timely reporting of the problems. Many investors responded negatively to the reduced quality of information, as reflected in their investment decisions, but that response cannot compensate for the loss of information and, perhaps more importantly, the loss of trust and confidence in financial reporting and accounting standard setting. We are hopeful that the Trustees share our concerns regarding the independence and even the sustainability of the FASB. We note that a recent letter from the FAF to a Member of Congress stated: Effective accounting standards are achieved only when the standardsetting process is independent and free of undue political influence. 7 So let us reiterate: The independence of accounting standard setting is the bedrock to formulating an effective financial reporting system and a matter of concern to all who rely upon the capital markets and our economy. Consequently, when financial reporting is subverted under pressure from special interests to serve any purpose or mission other than providing complete transparency of the operations of companies that take capital from investors, the standard setting process, and the capital markets that rely upon it, are imperiled. When independence is threatened or compromised it has the potential to trigger severe adverse long-term consequences for financial statement users, companies, and the capital markets. The ITAC expressed its deep-seated concerns regarding the effects of this most recent onslaught in its letter of April 1 st. 8 7 Letter by Robert D. Denham, FAF Chairman, to the Honorable Barney Frank, Chairman of the U.S. House of Representatives Committee on Financial Services (Oct. 2, 2008) (emphasis added), See also the letter to President George W. Bush dated November 13, 2008 that states High-quality accounting standards are best achieved when the standard-setting process is independent and free of political influence, 8 Letter from Rebecca McEnally, Member, ITAC, to Mr. Robert Herz, Chairman, FASB (Apr. 1, 2009), &blobheader=application%2Fpdf (regarding Proposed FASB Staff Position: No. FAS 115- Page 4 of 9

5 The ITAC believes that the time has come to reconsider the governance and infrastructure of the FASB and the steps that must be taken to ensure that this critical body can function in an environment free of political and other pressures, achieve its mission to develop high quality financial reporting standards for the benefit of investors and the capital markets more generally, and to do so in a long-term sustainable manner. We have several proposals to offer that we believe can help to achieve this objective. Two of our proposals are related directly to the structure and due process of the Board, but one is concerned with a proposed expanded role for the FAF. Proposals to Help Establish and Maintain FASB Independence 1. Restoration of the FASB Membership to Seven Full Time Members When the FAF proposed two years ago that the membership of the FASB be reduced from seven to five full time members, the ITAC strongly objected in a comment letter which we attach hereto. 9 Our letter fully detailed our objections and the reasons for them and we will not belabor them here, except to observe that our concerns seem, unfortunately, to have been fully justified by recent events. Not only do we believe that the size of the Board should be restored to seven members, but that the increase of two members should comprise investors who possess substantial technical accounting knowledge as well as experience in the analysis and use of financial statements in investment and related financial decision making. If the Board is to fulfill its mission to develop standards for the benefit of investors and the capital markets, it is essential that the Board have resident at the table, and participating directly in its deliberations, representatives of the investment profession who can provide the Board with the deep technical knowledge of emerging investment strategies and securities required to craft high quality standards for the full financial reporting of these activities. Put simply, it is not reasonable to assume that the Board will be able to develop standards in the future that meet the needs of investors and capital markets unless the Board members themselves possess the requisite expertise and experience to fully understand these needs. We would observe that the International Accounting Standards Board ( IASB ) has recently announced the addition of two highly regarded investment professionals to its own membership. Given the now uncertain future of the IASB in its own politically charged environment, we believe that adding investors to the FASB is all the more important, and even critical, to its future success. It is highly likely that such qualified a, FAS 124-a, and EITF b: Recognition and Presentation of Other-Than-Temporary Impairments; and Proposed FASB Staff Position: No. FAS 157-e: Determining Whether a Market Is Not Active and a Transaction Is Not Distressed). 9 Letter from Jeff Mahoney, Co-Chair, ITAC, to Ms. Teresa S. Polley, Chief Operating Officer, FAF (Feb. 12, 2008), &blobheader=application%2Fpdf (regarding Request for Comments on Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB) (see attachment). Page 5 of 9

6 investors are readily available and would welcome such service to the FASB and the ITAC would welcome the opportunity to assist the FAF in identifying outstanding candidates to fill those positions. 2. Restoration of FASB Agenda Decision Authority to the Full Board Again, in our earlier comment letter, which we attach, we opposed the FAF s proposal to vest sole authority for the setting of the FASB s standard setting agenda in a single board member, the chairman. This objection, as we stated, was not related in any manner whatsoever to the particular individual holding the position at the time, quite the contrary, but based upon our concerns about the enormous risks such concentration of power over standard setting posed to the entire process. Unfortunately, our concerns, large though they were, vastly underestimated the potential for mischief in such an arrangement, but those opposed to full transparency in the financial markets did not. It proved to be a relatively simple matter for these special interests to encourage certain members of Congress, many of whom have received substantial amounts of campaign funding from those interests in recent months and years, to arrange what was purported to be a general and routine hearing, inviting the FASB Chairman to testify on behalf of the FASB. 10 These same members of Congress then proceeded to engage in a process of very public threats and intimidation against the Chairman, who, with sole authority over the agenda decisions, and without the support of the SEC to do otherwise, acquiesced to the demands. The potential existence or appearance of existence of conflicts and ethical questions associated with members of Congress who first accept campaign money and other favors from special interests, and then apply enormous public pressure and threats to standard setters and regulators (who serve in the public interest) are beyond the scope of this letter and must be dealt with by others. We are also mindful that some of the most intense, and possibly even most successful pressures, or inducements may be applied out of the public eye and behind closed doors. In this regard, we do believe that individual Board members can and should be held accountable for their decisions, even those made under intense political pressure. But we also believe that ultimately, the key to preventing such occurrences in the future is to shore up the governance and infrastructure of the FASB to better position it to resist such pressures, changes that we think are well within the purview of the FAF, and we encourage it to do so. By reestablishing the agenda decision making procedures that provide for investor input, public deliberations, and a majority vote of the Board before an agenda decision is made, combined with having more voting members with extensive experience using financial statements for investment decisions, we believe the Board will be in a much stronger position not only to resist such pressures, but to work independently to achieve its mission on behalf of investors and the financial markets. Such broad decision making authority should also help to ensure that Board and staff time and effort, scarce resources under the best conditions, are directed to the most important projects with the greatest 10 See footnote 5. Page 6 of 9

7 potential to improve the quality of information provided to investors and the capital markets. 3. Expand the Role of the FAF to Assume Primary Responsibility for Maintaining the Independence of the FASB After long and careful deliberation, and after observing recent events in the U.S. and abroad, the ITAC has come to the conclusion that the only reasonable course at present is for the FAF itself to assume the primary responsibility for establishing and maintaining the independence of the FASB. It is a truism that any public interest organization or agency cannot maintain its own independence, and serve its purpose or achieve its mission, if the power structure of the environment in which it operates is such that a legislative body, governmental agency, or any other entity can, at its discretion and at any time, subvert the activities of the organization to the whims of any special interest group. It seems to us, that the natural course of action is for the body that currently serves in a limited oversight role over the FASB, and which is already tasked with responsibility for seeing that the due process and mission of the FASB are achieved, assume the responsibility for standing as a protective shield between the FASB and outside bodies. The FAF s history in this regard is somewhat inconsistent, but we see no reason why the FAF with special resolve could not fulfill this role in the future. We believe that it is particularly important that any body that is tasked with performing this function also be dedicated to serving solely in the public interest, that the membership be well-diversified and balanced among the primary constituents investors, preparers, and auditors and that individual FAF members formally commit to serving this mission in the public interest. In this regard, we commend the FAF for recently expanding its investor representation to include additional investors with substantial standing in the field. We believe the FAF and its mission would be well served by expanding this investor representation even further in the future. We envision that the new FAF would: Continue its current function of appointing FASB members and ensuring that the members have the requisite technical knowledge and experience, as well as a demonstrable commitment to the mission of the FASB, to serve the information needs of investors and the capital markets; Continue its current function of approving the budget of the FASB and making certain that the budget is sufficient to provide all resources needed by the Board in fulfilling its mission; Page 7 of 9

8 Continue its current function of ascertaining that the due process requirements of the FASB are fully met in its standard setting activities; but also Represent, defend, and safeguard the activities of the FASB in meetings and other dealings with all outside legislative bodies, governmental agencies, and other policy makers. That is, we believe that the FAF would respond to invitations from Congress to testify and otherwise provide information to the members of Congress regarding the activities of the Board. We recognize that not all of the FAF Trustees have the knowledge or expertise to immediately respond to all FASB related inquiries from members of Congress and others, particularly with regards to the technical details of FASB projects. When, however, those circumstances arise, we believe it would be both reasonable and appropriate for the FAF to consult with the FASB and seek their assistance before responding to those inquiries. We would also expect the FAF to maintain a dialogue with the SEC, the Commodity Futures Trading Commission, the Department of Treasury, the Federal Reserve and the various other U.S. banking oversight bodies, and all others concerned with the functioning of various aspects of the financial markets intended to enhance the quality of financial reporting for the benefit of its users. But, most critically, the FAF s chief objective should be to protect and defend the FASB from outside undue interference. We would note that this general mode of operating is the norm for other bodies that function in the public interest and whose work product requires substantial specialized expertise, e.g., those in medicine, law, architecture and engineering. Indeed, substantial public outcry has been observed when this norm has on occasion been breached. We believe it should be the case here. Any constituents, including the ITAC, as is the case now, could provide written or oral comments to the FASB, but none would have the authority, or even the possibility, to dictate what course of action should be taken by the Board. So, too, with the FAF which, while playing a critical role in the financial reporting infrastructure, would not have the authority to dictate what agenda or standard setting activities the Board should undertake or how it should carry them forward. The FASB itself would maintain sole and independent (i.e., free of undue pressures) responsibility and authority over its own agenda and its standard setting activities. We recognize that our proposal would likely increase the responsibility, the work load, and the public visibility of the FAF. However, we also believe that if this role is carefully and thoughtfully crafted with the sole objective of ensuring the FASB s longterm independence, that the FAF will have contributed in a very substantial and meaningful way to the long-term viability and vitality of our capital markets and economy. Page 8 of 9

9 Conclusions We believe that the integrity and long-term sustainability of financial reporting, our capital markets, and the economy that depends directly upon them, have reached a critical crossroad. It is clear to us that the current situation cannot continue and we seek to enlist the FAF in its public interest role in helping to resolve the problems posed by the current situation. We remain hopeful that a workable and sustainable solution can be found and we stand ready to provide our support in any way that we can. Again, we cannot emphasize too strongly our concern regarding these matters and hope that this concern is reflected in the FAF s response to this letter. We thank you in advance for your kind consideration. Sincerely, Investors Technical Advisory Committee By: Rebecca McEnally Member Adam Hurwich Member Attachment cc: Mary L. Schapiro, Chair, Securities and Exchange Commission Robert H. Herz, Chairman, Financial Accounting Standards Board Thomas J. Linsmeier, Member, Financial Accounting Standards Board Leslie F. Seidman, Member, Financial Accounting Standards Board Marc A. Siegel, Member, Financial Accounting Standards Board Lawrence W. Smith, Member, Financial Accounting Standards Board Teresa S. Polley, President, Financial Accounting Foundation Sir David Tweedie, Chairman, International Accounting Standards Board Page 9 of 9

10 Investors Technical Advisory Committee 401 Merritt?, 7, P.O. Box 5116, Norwalk, Connecticut Phone: Fax: Via February 12, 2008 Ms. Teresa S, S. Policy Polley Chief Operating Officer Financial Accounting Foundation 401Merritt7 7 Norwalk, CT * F A F - P C R E Q LEDER LETTER OF COMMENT NO. lj H 'i ^ Re: Request for Comments on Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB 1 Dear Terri: The Investors Technical Advisory Committee ("ITAC") appreciates the opportunity to comment in response to the Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB ("Proposal"). ("Proposal,,).2 2 The ITAC strongly agrees with the need for, and the authority of,3 3 the Financial Accounting Foundation ("FAF") "to periodically review the structure and governance of' the FAF, the Financial Accounting Standards Board ("FASB") and the Governmental Accounting Standards Board ("GASB,,).4 ("GASB"). 4 We believe any actions to improve the "effectiveness and efficiency" of the FAF, the FASB, and the GASB should be considered in the context of the need to protect the independence of the FASB and the GASB to ensure the development of high quality standards that serve the needs of investors and other users of financial reports, reports. Per our review of the Proposal, the ITAC neither can support nor meaningfully respond to the Proposal in its current form for the simple reason that we believe it fails to provide a sufficient basis for most of its proposed actions. actions, In hi that regard, our views are best summarized using a statement made by former F FASB member Katherine Schipper who, in commenting on the Proposal, stated: '''What "'What is the problem or set of problems to which this [proposal] is the solution?",5 solution?'" 5 I 1 Financial Accounting Foundation ("FAF"), Request for Comments on Proposed Changes to Oversight, Structure, and Operations of the F FAF, FASB, and GASB (2008), This letter represents the views of the Investors Technical Advisory Committee ("ITAC") and does not necessarily represent the views of its individual members, the organizations by which they are employed, or the views of the Financial Accounting Standards Board ("FASB") or its staff. For more information about the ITAC, including a list of the current members and the organizations in which they are employed, see s_technical_advisory_committee/. 3 FASB, Rules of Procedure 41 (Dec. 1,2002) (on file with author). 4 FAF, supra note I, 1, at 1. 5 Tim Reason & Marie Leone, Downsizing FASB, CFO.Com 1 (Dec. 18,2007),

11 February 12, Page 2 of 10 The absence of a sufficient basis for most of the proposed actions contained in the Proposal has fueled rampant speculation about the "real reasons" for the Proposa1. Proposal. 6 Such speculation does nothing to enhance the credibility ofthe FAF, is vastly inconsistent with the procedures required for proposals of the FASB,7 7 and does nothing to benefit investors or other users of financial reports. Given the aforementioned lack of clarity regarding the reasons for the proposed actions, ITAC recommends that the FAF re-publish the Proposal for public comment with additional information that more fully explains the basis for the proposed actions, including what other alternatives may have been considered and why they were rejected. We would also welcome the opportunity to meet with representatives of the FAF in person to better understand the basis for the conclusions reached. Notwithstanding our previously mentioned inability to provide support for the Proposal, we would like to offer the following specific comments in response to the questions raised therein: Proposed Action: Expand the breadth of individuals and organizations that are invited to submit nominations for the FAF F Board of Trustees with the understanding that final authority for all appointments rests solely with the Board of Trustees. The IT AC generally supports expanding the breadth of individuals and organizations that are invited to submit nominations for the FAF Board of Trustees. We believe individuals who serve on the FAF Board of Tmstees Trustees should have a demonstrated track record of acting in the public interest, sufficient knowledge and understanding of the needs of investors and other users of financial reports, and an ability and interest to actively protect the independence of the FASB and GASB while at the same time providing an appropriate level of oversight. We note that the proposed action would be a modest revision to current procedures because: (l) (1) it contemplates that the Financial Nominating Organizations ("FNOs") would continue to participate in the nominating process;8 8 and (2) five of the current sixteen F FAF Board of Trustees seats are "at large" selections and, therefore, are presumably the result of well qualified nominees solicited or received from parties other than the FNOs and the Governmental Nominating Organizations ("GNOs"). ("GNOs,,) See, e.g., Letter from Robert H. Colson, Chair, AAA Financial Accounting Standards Committee, to Teresa S. Polley, Policy, Chief Operating Officer ("COO"), FAF 10 (Feb. 1,2008). 7 FASB, supra note 3, al at 13. gfaf, 8 supra, nole note l,ai3. 1, at 9 Id. a12. at 2,

12 February 12,2008 Page 3 of 10 We also note that historically the FNOs involvement in the selection offaf Board of Trustees appears to have been based, in significant part, on a commitment by those organizations to participate in the raising of funds required for the operation ofthe F FASB. 10 1O That purpose is currently less relevant as a result of the accounting support fee requirements ofthe Sarbanes-Oxley Act of 2002 ("SOX").' II ] Thus, it makes some sense to us that the nominating process be formally expanded beyond the FNOs and GNOs to solicit additional "at large" nominations. Finally, if the Board of Trustees decides to expand the breadth of those invited to submit nominations for the Board of Trustees, the ITAC would welcome the opportunity to participate in that process. Proposed Action: Change the term of service for Trustees from two three-year terms to one five-year term. The ITAC generally does not object to changing the term of service for Trustees from two three-year terms to one-five year term. We. We, however, do not understand how such a change would "provide the opportunity for a larger number of qualified Trustees to bring their skills and perspectives to the FAF.,,12 FAF." It seems questionable to us that a one-five year term would be more attractive to qualified candidates than a three-year term with the possibility of serving a second term. We believe the better argument is that the proposed action would actually reduce the number of qualified candidates interested in serving because some candidates would likely feel uncomfortable agreeing to a five year commitment and, therefore, remove themselves from consideration. Finally, we believe the existing two three-year terms might provide a better opportunity for new Trustees and the existing Trustees to mutually explore potential suitability issues and make more timely adjustments when appropriate. J0 )0 See American Institute of Certified Public Accountants ("AICPA"). ("AICPA"), Report of the Study on Establishment of Accounting Principles. Principles, Establishing Financial Accounting Standards 9 (Mar. 1972) (on file with author) (The original financial nomination organizations were the Financial Executives Institute, the National Association of Accountants, the Financial Analysts Federation, and the American Accounting Association) See Sarbanes-Oxley Act 0[2002. of 2002, Section 109(e) (2002). (2002), docsl gwbushisarbanesoxley pdf. \2 12 FAF. FAF, supra. supra, note I, 1, at 3.

13 February 12, 2008 Page 4 of 10 Proposed Action: Change the size of the Board of Trustees from sixteen to a range of fourteen to eighteen members. The ITAC generally does not object to changing the size of the Board of Trustees from sixteen to a range of fourteen to eighteen members. We, however, again do not understand how such a change would "enable the Board of Trustees to better react to a changing environment by having the ability to add particular experience and expertise as needed.,,\3 needed." 13 It seems to us that if the objective of the proposed action is to enhance the ability to add particular experience and expertise in response to a changing environment than the appropriate proposed action would be to change the size of the Board of Trustees from sixteen to a range of sixteen to eighteen or more members. We also note that this proposed change appears to be in direct conflict with the preceding proposed change regarding the terms of the Board of Trustees. If the objective is to be able to react more quickly to a changing environment by adding additional Trustees, why would you also propose to increase the term of service from a three-year to a five-year term? Finally, we believe there are other potential approaches to obtaining, at least in the shortterm, particular experience and expertise to better react to a changing environment. One short- such approach might be to assemble an ad-hoc advisory committee of individuals with the particular experience or expertise deemed necessary. If this approach were to be pursued, the ITAC would welcome the opportunity to assist in identifying individuals from the investor community who might be appropriate members of such a committee. Proposed Action: Strengthen and enhance the governance and oversight activities of the Trustees as to efficiency and effectiveness of the standard-setting process, process. The ITAC generally does not object to strengthening and enhancing the governance and oversight activities of the Trustees as to the efficiency and effectiveness of the standard setting process. The ITAC, however, does object to the Trustees having greater involvement in the FASB's "agenda setting" process as described in the proposed action [d. at [d. Id.

14 February 12, 2008 Page 5 of 10 We believe that expressly providing the Trustees a role in the agenda setting process increases the real risk of inappropriate special interest group influence on the standard setting process that would be inconsistent with the needs of investors and the capital markets. We note that when the FAF and FASB were originally founded, their respective roles were carefully, and we believe appropriately, designed to provide for a structure that would result in accounting standard setting "free of any private interests which might conflict with the public interest.,,15 interest." Within that structure, the part-time F FAF Trustees were limited to (1) appointing members of the FASB and the Financial Accounting Standards Advisory Council ("FASAC"); (2) raising and allocating the funds required for the operation of the FASB; and (3) periodically reviewing and, if deemed necessary, revising the structure of the FASB. 16 Distinct from the FAF, F the FASB was designed to be the standard setting organization free "from client and other pressures.,,17 pressures." Thus, the FASB was required to be composed of "full-time" board members with "no business affiliations.,,18 affiliations." Consistent with that designation, the F FASB was given the authority to establish its own agenda and "priorities" with input from the FASAC. 19 The existing by-laws of the FAF appropriately reflect this important division of roles and responsibilities by expressly prohibiting the F FAF from "undertak[ing] "undertaking] any particular project or activity or otherwise affect the exercise by the FASB or GASB of their authority, functions, and powers in respect to standards of financial accounting and reporting."zo 20 Consistent with the original purposes of the FAF and F FASB, we believe it is appropriate for the FASB to continue to be solely responsible for developing its own agenda with input from the FASAC,21 the!tac, ITAC, and other interested parties. We can identify no compelling basis for inserting the F FAF into the agenda setting process. Proposed A Action: Reduce the size of the FASB from seven members to five. Jive. The ITAC generally opposes reducing the size of the FASB from seven members to five. We note that the Proposal indicates that the proposed action will make the F FASB "more nimble and responsive to domestic and global demands," and "more effective and efficient.,,22 efficient." We find the basis for this proposed action less than convincing See AICPA, A, supra note 10, at ld. Id. at d. Id. at B Jd. Id. at Jd. Id. at FASB, supra note 3, at AICPA, supra note 10, at FAF, supra note I, 1, at 5.

15 February 12, 2008 Page 6 of 10 The F FASB was originally designed to have seven members because seven was viewed as "small enough to be efficient and large enough to provide for a variety of views and backgrounds."z3 23 The Proposal provides no basis for overturning that conclusion. Moreover, given the significant issues facing the FASB today, including addressing major topics on international convergence and transparency related to the market disruption caused by the sub prime crisis, reducing the aggregate expertise at the FASB might dangerously weaken accounting standard setting at a critical time. More specifically, it is our view that reducing the size of the FASB from seven members to five will likely make the Board less nimble and responsive and less effective and efficient for at least two reasons: (1) there will be fewer Board members available to take leadership roles on standard setting projects and related research and technical activities, and (2) there will be fewer Board members to engage in external communications with domestic (including the ITAC) and international constituents. For similar reasons, the FAF rejected a March 2002 proposal to reduce the size of the FASB from seven members to five members to improve "the FASB's efficiency.,,24 efficiency." On that occasion the reaction from preparers, auditors, and users was renerally generally negative 25 and the PAP FAF ultimately decided to retain a seven-member Board. 2 We are not persuaded that a different conclusion is now appropriate AICPA, A, supra note 10, at News Release, FASB, Financial Accounting Foundation Considers Changes to Streamline FASB Process; Emphasizes Need for Independent Accounting Standard Setter (Mar. 14,2002), See, e.g., Letter from Richard J. Swift, Chairman, Financial Accounting Standards Advisory Council, to Joseph S. LaGambina, Executive Vice President, FAF 1 (Apr. 1,2002) (on file with author) ("The general consensus of the FASAC members is that a reduction in the number offasb members is not advisable.... Q>."). 26 News Release, FASB, Financial Accounting Foundation Changes Financial Accounting Standards Board's Voting to Increase Efficiency (Apr. 24, 2002),

16 February 12, 2008 Page 7 of 10 We also find of some import that many of the commentators to the Proposal that are the most familiar with the F FASB have expressed strong opposition to this proposed change, including three former F FASB members, and the current Chair and most recent former Chair of the FASAC. 28 Finally, we again note the inconsistencies in the proposed actions. The stated basis for this proposed action is, in part, to make the FASB more nimble. The previous proposed action contemplating inserting more than a dozen Trustees into the FASB agenda process would almost certainly make that FASB process less nimble. Proposed Action: Retain the F FASB simple majority voting requirement. The ITAC generally supports retaining the simple majority voting requirement. We agree that requiring "a supermajority..... vote would have the potential to give too much weight to a minority view.,,29 view." We also believe that requiring a super majority vote might add additional pressure on the Board to "sacrifice decisiveness and principle to acceptability" a acceptability"-a result generally inconsistent with the needs of investors and the capital markets. 3o Letter from James J. Leisenring, Former FASB Board Member, to Teresa PoUey, Policy, COO, FAF 2-3 (Jan. 28,2008), 2008), lettersl5i letters/51884.pdf 884.pdf("It is most inopportune to propose this when pressures have increased on Board members to much more extensively deal with outside constituents"); Letter from Robert J. Swieringa, Professor of Accounting, The Johnson School, Cornell University, to Teresa S. Polley, COO, FAF I 1 (Jan. 28, 2008), lettersl51875.pdf ("I do not believe that reducing the number offasb Board members from seven to five would result in the FASB being 'more nimble and responsive to domestic and global demands"'); demands'"); Letter from Edward W. Trott, Former FASB Board Member, to Teresa S. PoUey, Polley, COO, F FAF 2 (Jan. 28, 2008), lettersl5i letters/51883.pdf ("I did not in 2002 and do not today believe that reducing the Board to five will make the F FASB 'more nimble and responsive to domestic and global demands'"). ''') Letter from Dennis H. Chookaszian, Chairman, Financial Accounting Standards Advisory Council, to Teresa S. Polley, COO, FAF 3 (Feb. 4, 2008), letters/si893.pdf("the proposed change seems more like a solution that is in search of a problem, rather than a problem in need of a solution"); Letter from Richard J. Swift, to Terri PoUey, Polley, President and COO, FAF 2 (2008), letters/5) ("The reduction of the FASB members to 5 doesn't make any sense to me") FAF, supra note 1, at AICPA, A, supra note 10, at 62

17 February 12, 2008 Page 8 of 10 Proposed Action: Realign the F FASB composition. The IT AC generally supports a realignment of the FASB composition that would increase the representation of the main customers of the F FASB's s product-investors product investors and other users of financial reports. More broadly, we believe that all FASB member appointments should be the result of a selection process that considers candidates to be the "best qualified" in terms tenns of: (I) (1) independent-mindedness; (2) financial accounting and reporting expertise; and (3) a commitment to improving financial accounting and reporting for the benefit of investors and other users of financial reports. 31 Proposed Action: Provide the F FASB Chair with decision-making authority to set the F FASB technical agenda. The ITAC generally opposes providing the FASB Chair with the decision-making authority to set the FASB F technical agenda. We note that this proposed action would result in a significant structural change to the F FASB's s historic standard setting process which was designed, in part, to broaden the base and variety of skills involved in standard setting decisions.32 This notion is reflected in the FASB's current rules of procedure, which specify that the F FASB Chair shall prepare "an agenda of projects and priorities," but that any agenda must be submitted "for approval" by the FASB members. 33 We are troubled by the fact that the proposed action would appear to provide the F FASB Chair the authority to remove a project from the technical agenda even if the project was supported by all of the other FASB members and the ITAC. Our concern is heightened by the public reports over the past year of efforts by the United States Securities and Exchange Commission to exert more control over the standard setting process in direct conflict with the language and intent of SOX We believe maintaining the existing agenda decision making process "driven by Board member consensus" with input from the F FASAC, the IT AC, and other constituent groups lessens the opportunity for the F FASB's s independence to be impaired by self interested special interest groups to the detriment of investors and the capital markets. 36 Finally, we are also concerned that providing the FASB Chair with decision-making authority to set the FASB technical agenda will inhibit the ability to attract strong candidates to the FASB. Some high quality candidates would likely have concerns about joining a board in which their ability to effect improvements in particular areas may be stymied by the Chair's control over the agenda FAF, supra note I, 1, at AICPA, A, supra note 10, at J3 33 FASB, supra note 3, at See, e.g., Marie Leone & Alan Rappeport, SEC Said No to FASB Raises, CFO.com (Apr. 2, 2007), PAF, FAF, supra note 1, at F FAF, supra note 1, at 6.

18 February 12, 2008 Page 9 of 10 Proposed Action: Secure a stable mandatory funding source for the GASB. Although the IT AC has limited interaction with the GASB, we generally support securing a mandatory funding source for the GASB so that it can meet the needs of the users of the financial reports of state and local governmental entities. We believe that the GASB, like any accounting standard setter, must be adequately funded to provide high quality and timely standards We also believe that the key criterion for evaluating the appropriateness of a funding source for the GASB or any other accounting standard setter is whether the source enhances rather than detracts from the independence of the standard setter. 38 Proposed A Action: Retain the current size, term length, and composition of the GASB. The IT AC generally does not object to retaining the current size, term length, and composition of the GASB. However, to the extent that additional funding becomes available, we would support having seven full-time GASB Board members subject to a prudent evaluation of other needs and the potential benefits. In addition, as with the FASB, we believe that all GASB member appointments should be the result of a selection process that considers the best qualified candidates in terms of: (1) (l) independent-mindedness; (2) financial accounting and reporting expertise; and (3) a commitment to improving financial accounting and reporting for the benefit of the users of financial reports. Proposed Action: Provide the GASB Chair with decision-making authority to set the GASB technical agenda. The IT AC generally opposes providing the GASB Chair with decision-making authority to set the GASB technical agenda for the same reasons we oppose providing the FASB Chair with that authority. * * * * 37 See Letter from Jack Ciesielski, Member, Investors Technical Advisory Committee to Nancy M. Morris, Secretary, Securities and Exchange Connnission Commission 3 (Nov. 2, 2007), ~843.42/investors /investors _technical_advisory advisory _ connnitteelll committee/ _ifrs _ conceptjelease.pdf. release.pdf. 39 Id. ~ ~ "

19 February 12, 2008 Page 10 of 10 Thank you for the opportunity to comment on the Proposal. Should you have any questions, or would like to further discuss any of our comments in more detail, please contact me at Sincerely, JeffMahoney Co-Chair Investors hivestors Technical Advisory Committee