Herz Resigns As FASB Chair

Robert Herz has resigned as Chair of the Financial Accounting Standards Board (FASB), effective October 1.   Concurrently, the FASB is returning to seven members from the current five.  The official announcement is posted here.  This development is sudden and unexpected.

A process has been initiated to search for a new chair and two new board members.

Why now? Herz is under no pressure to leave, and there are several professional reasons for him to stay.  It is my guess that this is motivated solely by personal concerns, possibly health related.   I wish the very best for the Herz family.

What are the implications for the convergence of U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS)? There are three major possibilities:

1. Convergence time table and Securities and Exchange Commission (SEC) Roadmap are pushed back one year. This is because the search process will take five or six months and three new members could need up to six months to get up to speed.   Probability:  65%.
2. Convergence ends, and the SEC votes in 2011 to adopt IFRS.  Probability:  30%.
3. The SEC votes to retain US GAAP instead of moving to IFRS. Lip service is paid to continuing the convergence process, but it is not a high priority.   Probability:  5%.

What is Herz’s legacy? Herz has been a strong advocate for converting American financial reporting from the U.S. GAAP basis to the IFRS basis.  An accurate generalization is that Herz has been focused on changing the accounting standards instead of improving the accounting standards already in place for American companies.  The conversion process has essentially been one of compromise between existing GAAP and IFRS standards.   Although the two boards pay lip service to improvement, there really hasn’t been much.

History remembers the names of those who help bring about profound change, so long as it benefits future generations. Not much chance of that here.

Robert Herz and Christopher Cox led the IFRS Railroading Express

In 2007-2008, there was considerable dissatisfaction with the way that SEC Chair Christopher Cox and Herz were pushing IFRS.  Bob Jensen (emeritus accounting professor) labeled this the Cox-Herz Railroading Express.

What about the increase from five to seven board members? Earlier today on AECM, Bob Jensen wondered if the 2008 decrease in board members from seven to five was to get rid of two that might have delayed convergence.   It’s clear Herz wanted only five that he could work with.   However, convergence is a lot of work and two more board members might be needed now to get the work done.

Debit and credit – – David Albrecht