In a lawsuit against the Financial Accounting Standards Board (FASB) and the Financial Accounting Foundation (FAF) filed Wednesday, May 5, 2010, Silicon Economics, Inc., charges that that the FASB has illegally appropriated its intellectual property: a proposed set of alternative accounting standards. At stake are the accounting rules that could be used by over one million business and non-profit organizations that are not designated as SEC reporting companies (about 9,500).
SEI’s complaint seems reasonable, and I hope it prevails.
I’ll briefly summarize the case. Joel Jameson, founder of SEI, responded to a FASB request for comments in November, 2006, and discussed the merits of SEI’s invention–EarningsPower Accounting (EPA). Jameson, subsequently discovered a FASB statement that all comments, letters and ideas submitted to it become the property of the FASB (such statement was not included with the public request for comments). Jameson had secured a patent on EPA, and now the FASB alleges it owns both EPA and the patent. Hence the suit by SEI to recover its property.
Currently, for-profit organizations in the U.S. are not required to use GAAP if they do not qualify as a public company under provisions of the Securities and Exchange Act of 1934. Neither are privately owned businesses. Not all of these companies prepare financial statements, some use tax forms. However, those that prepare financial statements can and do select whichever rules they want to from GAAP (or from anywhere else).
A number of organizations (including the SEC, FASB and the AICPA) have come out in favor of changing accounting standards for the 9,500 SEC reporting companies from GAAP to IFRS. The AICPA has taken the position that all other business organizations in the U.S. should switch to IFRS standards for small and medium sized enterprises (sometimes called IFRS Lite).
If the FASB is successfully able to appropriate ownership of SEI’s EPA, then it has effectively removed a potential major competitor in the market for accounting standards for about one million American businesses.
Of course, the issue of accounting standards boils down to money. Large audit firms stand to gain the most if the U.S. switches from GAAP to IFRS. The largest firms wields significant influence over the SEC, FASB and the AICPA and has been able to convince these organizations to promote IFRS. However, the switch to IFRS is likely to be disadvantageous to investors and very costly to non-SEC reporting companies. Political support for the switch will be easier to get (and stronger) if most (or all) of the one million non-SEC reporting companies start using IFRS.
This is not to say that I endorse SEI’s EPA. I am ignorant of its provisions. I am not in favor, though, of imposing IFRS on any business in the U.S. These companies mostly cannot afford to acquire sufficient expertise to implement IFRS, and will incur a tremendous expense if required to make the switch. Moreover, there ought to be choice.
A lawsuit against the FASB is legally permissible, but is rare. Dennis Beresford, former chair of the FASB, said, “To the best of my recollection, the FASB was not sued during my ten and a half years at the Board.” I’ve never heard of a lawsuit during the other 26 years of the FASB’s existence.
To be sure, SEI’s original letter to the FASB was freely offered. Had the FASB incorporated its ideas into a concept or standard, it would not have been entitled to any compensation. However, given that the FASB rejected its ideas, ownership of the intellectual property should revert to SEI for it to attempt to profit from it as it may.
Debit and credit – - David Albrecht
