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On Balance

A recent culture shift at the Financial Accounting Foundation, says CEO Terri Polley, reflects a more complex world and increased standard setting. The FAF is communicating—and listening—to help ensure that standards are working the way they're intended to work.

By Sue Menditto

Terri Polley Expects Quality Control Expansion

Named president and chief executive officer of the Financial Accounting Foundation (FAF) in late 2010, Terri Polley is the first person in FAF's 38-year history to hold the title of CEO. Since her appointment as the FAF's president in 2008, she has played a key role in positioning the foundation and its standard-setting boards-the FASB and the GASB-to meet constituent expectations and the challenges driven by worldwide events. Polley's extensive experience with the FAF-she served as controller from 1990-99 and spent several years with the FASB as a technical associate-and early career work as an auditor (with Arthur Andersen) all influence her perspective on the FAF's future. She admits that expectations have changed now that she holds the CEO title, but "a recent culture shift within the FAF toward greater accountability to and engagement with constituents reflects a more complex world, increased standard setting, and the need for greater quality control."

*Explain how your background prepared you for the top job at the Financial Accounting Foundation.

I'm a certified public accountant with an educational background in both accounting and French. I was an auditor before joining the FASB technical staff in 1987. When the FAF controller's position became open a couple of years later, I applied. Having been involved in auditing and standard setting, I wanted to learn firsthand about preparing financial statements and implementing accounting standards.

The first standard I had to implement was FASB's Statement No. 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions.” Practical and theoretical differences between the “preparers” (me!) and the FASB members as to how we should implement were quite evident.

What is the most important thing that constituents need to know about the FAF?

We believe that the responsibility for independent standard setting is a privilege that the FAF, the FASB, and the GASB must earn every day. One way we do that is by listening to constituents, both at the standard-setting level, and at the FAF's oversight level.

We recently instituted a column—“From the President's Desk”—and I love to hear from constituents, including your members, about what is on their minds.

Developing NACUBO materials on financial standards becomes more challenging, because standard setting for higher education has been split between the FASB and the GASB for more than 25 years. Should higher education leaders be concerned that nonpublic independent institutions may be moved under yet another separate standard setter—as a result of the Blue-Ribbon Panel on Standard Setting for Private Companies?

Because a separate standard-setting board for private companies would fall under the FAF's purview, we embarked on an extensive outreach effort that was independent of the FASB board and staff. FAF trustees and senior leadership met with many lenders, auditors, preparer groups, and FASB advisory groups.

When FAF representatives attended the September Not-For-Profit (NFP) Advisory Committee meeting, an important realization underscored what we'd already heard from other constituents. We realized that higher education and other nonprofit organizations see themselves as having much more in common with public companies than with small private businesses in terms of accountability to their constituents.

In addition to many colleges and universities having public or conduit debt, numerous stakeholders rely on higher education's externally reported financial information. This was an “aha” moment for us. It very likely will influence the trustees as they consider the Blue Ribbon Panel's recommendation for a separate standard-setting board for private companies. (See Editor's Note below.)

The extensiveness of FAF outreach is impressive, but how does the information gathered—and learned—reach the level of FASB and GASB staff, and ultimately the board members?

It's very challenging. Our recent outreach is a great way to work with constituents and is part of a culture shift that began when Jack Brennan became chairman of the FAF Board of Trustees. He has challenged FAF trustees to become more actively engaged.

As a result, the FAF has taken its oversight and quality-control role to heart. Through increased communication, we are trying to become more public about the role of oversight and checks and balances, emphasizing that independence is earned by being accountable to constituents.

We share what we hear from constituents with the FASB and GASB members both formally and informally. I regularly meet with the FASB and the GASB, and the trustees do as well.

The FAF has announced a post-implementation review process. How does it relate to the quality-control role and the new culture you're trying to create?

We need a way to ensure that standards are working the way they were intended to work. The GASB and the FASB already had the means to monitor how their standards are being implemented. Standards' issues have historically come to the GASB or the FASB and are put into a technical agenda queue. However, the boards did not have a systematic, formal process to review standards after a specific period to ensure that the original objectives are being met, so the FAF is stepping into this quality-control role.

We are building a formal process from the ground up, engaging both boards in development of a process and structure. Selected FASB and GASB staff will serve approximately two years on the FAF project team, collecting data and researching the efficacy of standards being reviewed. Staff will not be assigned to review standards that they had a hand in creating. The ultimate goal is to improve the standard-setting process. An anticipated benefit is that project staff will return to their respective boards with an enriched experience that influences the way they approach future technical standard-setting work.

Just to be clear—we are not trying to micromanage standard setting. Rather, the foundation will present our findings, and ultimately the boards will decide whether any additional standard-setting activity is needed.

Is the quality control culture related to another FAF project that has been in the news lately, concerning the scope and purpose of financial accounting and reporting of state and local governments?

Yes. The trustees' oversight committee is leading this effort. We've learned—during listening tours and through other outreach activities—that constituents have questions about the nature and scope of some of the GASB's work.

So, the FAF commissioned an academic study on the purposes of financial accounting and reporting of state and local governments. The study team is assessing how GASB constituents and users of governmental financial information view the accountability of governments. Ultimately the study will help the trustees determine the scope of the GASB's work—which type of activities fall within the board's mission and which may exceed it.

What about funding and composition of the standard-setting boards?

One of the foundation's responsibilities is to ensure that the boards have adequate funding. In 2002, the Sarbanes-Oxley Act created a funding mechanism for the FASB through fees paid by public companies. GASB funding has presented more of a challenge. Right now, a rule-making process is under way to create a funding mechanism for the GASB through transactions fees in the municipal securities markets. This legislative provision was included in the Dodd-Frank Act, and the Financial Industry Regulatory Authority is working with the SEC to implement the provision.

As far as composition, the FASB and the GASB each have seven members, but are structured differently. The FASB is a full-time board, while the GASB has a full-time chairman and six part-time members. Both boards' members are incredibly dedicated professionals who truly want to improve financial reporting for users of financial statements.

Because higher education is a split industry, what could NACUBO do to request that certain industry comparability issues get attention?

The FAF does realize that there are a few split industries and that certain concerns can come up from time to time. One thing we will consider is whether we can facilitate a dialogue between the affected constituents and the standards boards on some key issues that are identified. I'd like to hear more from constituents on this issue.

What is the No. 1 thing you would tell the higher education community about the FAF and its goals?

We want people to know that we are here and that we represent an important resource for constituents. While we are not a sounding board for the pros and cons of standards, we absolutely want to hear from constituents about the process. We want to ensure that the process of standard setting is thoughtful, robust, and thorough, and that constituents feel that the FASB and GASB are listening.

We will continue this dialogue and certainly hope that higher education leaders will participate and make their views known. In this way, we can all work together to help guide standard setting and accountability in a more complex world. i

SUE MENDITTO is director of accounting policy at NACUBO. 

Editor's Note: After this interview, the FAF released a comment document, Plan to Establish the Private Company Standards Improvement Council. The document states that all not-for-profits (which include smaller, nonpublic, higher education institutions) are excluded from the council's scope.