1.

How did the APB pave the way for the FASB
The APB’s biggest contribution to the FASB was the due process procedures for the
establishment of
accounting standards. The APB initiated the use of discussion memorandums, public hearings,
and
exposure drafts, all of which have become standard procedures for the FASB.
2. In what ways does the FASB differ most markedly from its two predecessors? Perhaps the
FASB’s
biggest difference is its independence. The FASB, unlike its two predecessors, is independent
from and
not part of the AICPA. All board members must maintain complete independence. This not only
applies
to other employment arrangements, but also to investments. There must be no conflict, real or
apparent,
between the members’ private interest and the public interest. Financial independence from CPA
firms
and industry (attained from assessment of accounting support fees from companies issuing
financial
statements, SOX) reduces the appearance of undue influence from specific interests. Another
important
difference is the FASB’s commitment to research.
3 What is the weakness of Grady’s approach in arriving at principles in ARS 7? The primary
weakness is
that Grady codified existing pronouncements and then tried to derive the profession’s existing
structure
of principles. The study blended inductive and deductive approaches because it took the existing
pronouncements and then attempted to deduce accounting principles from the body of accepted
pronouncements.
4 Do you think that the nonbinding status of the FASB’s statements of financial accounting
concepts
(like that of APB Statement 4) is a good idea or not? The purpose of SFACs is not to establish
accounting
standards but to set forth the fundamentals on which financial accounting and reporting standards
will be
based. The FASB itself is likely to be the major user of SFACs and thus the most direct
beneficiary of
the guidance provided by them. The problem with the nonbinding status of the SFACs, however,
is that
they can simply be ignored, as has occurred in a significant number of cases.
5. Discuss the significance of the SEC’s ASR 150. ASR 150 represented the first time that the
SEC
formally recognized that accounting standards set in the private sector had substantial
authoritative
support. It said that SFASs and Interpretations will be considered by the SEC as having
substantial
authoritative support, and practices contrary to such FASB promulgations will be considered to
have no
such support.
6 What has been the SEC’s role in the evolution of the rule-making process? How has that role
changed
since the passage of SOX? The SEC’s role in the evolution of the rule-making process has been
as a
behind-the-scenes observer. It has played a definite role in practically all standards, but has
chosen to
take a low profile in most situations. The SEC has chosen to pursue the low profile role because
it has
been assumed to be best for the profession as a whole. By staying out of the limelight, the SEC
may also
be maximizing its life span and survival. SOX has further strengthened the SEC’s authority. The
PCAOB has responsibility for oversight of the audit and accounting functions (formerly
AICPA’s
responsibility), but the SEC has final approval on any policies, standards, etc. that it might
propose. The
FASB no longer receives its funding from corporate donations, increasing its independence from
industry
influence. Now, the SEC provides FASB’s funding by budget approval, so it is now more closely
controlled by this regulatory body. Additionally, in 2007 the SEC and FAF agreed that the SEC
would
have input to FASB board appointments.
7 What were the politics that led to the demise of both the CAP and the APB? The “politics” that
led to
the demise of both the CAP and the APB was the SEC’s belief that both groups were unable to
work
effectively due to their lack of independence. The members of both groups were only part-time
standard
setters and full-time practicing accountants with various vested interests regarding certain
accounting
standards.
8 “The FASB’s standard-setting procedure is a fairly narrow, cut-and-dried approach to
developing
accounting standards.” Evaluate this statement. The FASB’s standard setting procedure/process
is
anything but “cut and dried.” While there is an overall sequence of steps involved, the
consultations and
politicking can be quite extensive. Refer to the Johnson and Swieringa article discussed in the
chapter on
SFAS No. 115 on marketable securities, certainly not one of the more complex and extensive
9 Should constituents have input into the FASB decisions, or should the FASB neutrally and
independently set standards? Using constituents’ input and acting neutrally and independently
are not
mutually exclusive. Without question, the FASB should neutrally and independently set
standards;
however, it must consider its constituents’ input or its standards will not be accepted. One of the
FASB’s
biggest jobs is to obtain a consensus of the constituents on standards it promulgates. However,
current
conditions indicate a decline of influence by constituents, but it is still important to get their
input.
10 Explain how the role and form of research used by the APB and FASB differ. The initial role
of
research used by the APB was to develop postulates and principles. That role, however, quickly
changed
to one of completely examining certain narrow subjects, goodwill, for example. The APB then
used that
research as a basis of its deliberations. The FASB uses research in the same manner, but has
expanded
the role extensively. also uses research to determine the expected economic consequences of
many
proposed SFASs as well as the real economic consequences of its recently issued SFASs.
11 What is the importance of the FAF and FASAC to the success of the FASB? The FAF elects
members
to the Board of Trustees, whose responsibility is to select FASB members and perform the
oversight role.
The FASAC’s role is to advise the FASB on its operating and project plans, agenda and
priorities, and
appointment of task forces as well as on all major technical issues. FASAC’s influence will
probably
decline given the SEC’s increasing role. Note that now the SEC participates in board appoints;
this is a
significant change.
Q-12 The three attempts at standard setting in the private sector (CAP, APB, and FASB) have all
dealt
with the need for a theoretical foundation. Why were the CAP and the APB unsuccessful at this
endeavor? The CAP never really attempted to develop a theoretical foundation. Although it
recognized
the need for one, it did not believe that it could afford the time commitment. The APB attempted
to
develop a theoretical foundation by commissioning ARSs 1 and 3; but neither of those ARSs
were
accepted by the accounting profession. APB Statement 4 was mildly successful in developing a
theoretical foundation, but it neither had authoritative support nor went far enough. The short
answer as
to why the CAP and APB failed to develop a theoretical foundation is that they “put out fires,”
focused
their efforts on short-term successes versus the work required to assure long-term progress.
13 Can any overall trend be detected in FASB pronouncements? Explain and cite examples to
substantiate your opinion. At one time there was an attempt to “clean up” the balance sheet by
expensing
items such as research and development costs (SFAS No. 2) and development stage enterprises
(SFAS
No. 7). There is, however, a movement toward current values with marketable securities (SFAS
No.
115), derivatives (SFAS No. 133), and even impaired assets (SFAS No. 121 and 144) although
this is a
“lower-of” type of valuation. The FASB-IASB convergence project will likely result in increased
fair
value approaches, an asset-liability view. SOX actually required a review of principles-based
accounting
for U.S. standards, so this approach is likely in the future. The U.S. Congress now requires that
the
FASB and SEC report on progress towards adopting principles- based accounting and increased
transparency in financial reporting.
14 In terms of financial reporting in the future, do you expect greater refinement of
measurements
appearing in the body of the financial statements or increasing disclosure with less effort directed
toward
refinement of measurements? In the foreseeable future, if the recent past is any indication,
accounting
standards probably will be directed more toward increasing disclosure with less effort on
refinement of
measurement. This is not necessarily acceptance by the FASB of the efficient-markets
hypothesis, but
rather the practicality of establishing accounting standards. It is easier to obtain a consensus on
disclosure than on changing the measurement of items that appear on financial statements. Of
course,
stock options is an important counter-example, although disclosure is the final result!

Q-15 How has Sarbanes-Oxley of 2002 affected FASB’s jurisdiction and independence?
Sarbanes-Oxley
puts more of an emphasis upon auditing because the Auditing Standards board of the AICPA no
longer
sets auditing standards. Pressure will also be put on the public accounting firms and corporate
officers to
sign off on their financials. The beneficial changes affecting the FASB is that financing comes
from
assessments on public companies and accountants, but not contributions. However, the FASB
will
become more of a quasi- governmental body. On balance, FASB should be more independent
from
industry influence, particularly as it works with the International Accounting Standards Board on
“convergence.”
Q-16 In late 1990s, the “Wyden Amendment” was stricken from the Crime Bill passed by
Congress.
The amendment would have required reporting by auditors on internal controls. Letters sent by
FEI
members opposing the amendment were instrumental in its defeat. The AICPA supported the
amendment.
From an agency theory perspective, why do you think the AICPA supported the amendment and
the FEI
was against it? Explain The AICPA supported the Wyden Amendment because its members
would have
generated more auditing fees from reporting on internal controls. The FEI was against it because
the
firms, represented by its members, would be paying the increased fees to the public accounting
firms.
The politics and positions were to be expected.
Q-17 “Since the FASB is independent from the AICPA, the latter is no longer concerned with
standard
setting and related issues.” Evaluate this statement. This is not true; the AICPA is still interested
in
standard setting. Its members must understand the standards and audit their implementation by
industry.
AcSEC plays an important liaison role as well as issuing SOPs and Industry Accounting Guides.
In
addition, the AICPA works with the International Accounting Standards Board at the
international level
(Chapter 10). However, the AICPA, on balance, has lost a significant amount of influence in
recent years.
Q-18 What is the relationship between the National Commission on Fraudulent Financial
Reporting and
Private Securities Litigation Reform Act of 1995? The activities of the National Commission on
Fraudulent Financial Reporting were instrumental in helping to draft and pass the Private
Securities
Litigation and Reform Act of 1995.
Q-19 What is the difference between joint and severable liability and proportionate liability?
Joint and
several liability can result in a guilty party being stuck with more than its proportionate share of
the
damages if other guilty parties do not have the financial means to pay their share of the damages.
Proportionate liability restricts each defendant's damages to their proportionate share thereof
Company