About the author: John J. Brennan is chairman emeritus of Vanguard. He is the former chair of the Financial Industry Regulatory Authority and trustee and chair of the Financial Accounting Foundation.
Back in the 1990s, I received a phone call from Arthur Levitt, chairman of the SEC. “Jack, I need you to serve your country,” Levitt said. He then asked if I would consider serving on the board of trustees for the Financial Accounting Foundation.
To be honest, I had never heard of the organization, which appoints and oversees the Financial Accounting Standards Board and the Governmental Accounting Standards Board. Of course, I had heard of the FASB, but even though at the time I led one of the largest investment firms in the world, I didn’t fully understand who actually constructed the financial reporting building blocks upon which the capital markets, owners of companies, and providers of capital depend. I was actually embarrassed at that reality.
I quickly realized that what the Financial Accounting Foundation did mattered enormously to the millions of people—50 Years of Upholding Capital Markets Integrity at the Financial Accounting Foundationand companies—dependent on capital markets in this country. In reality, we are all so fortunate that people had the foresight to set up the FAF and that its stewards have been so committed to its success since June 30, 1972—exactly fifty years ago today.
As someone who has spent a career in the investment business serving millions of large and small investors alike, I know that the ability of firms like Vanguard to put money to work on behalf of individuals and institutions depends absolutely on the integrity of the financial-reporting regime in the United States. And that, in turn, begets immense trust in the integrity of our capital markets.
The bedrock of that reporting regime is US GAAP, or generally accepted accounting principles. While far from perfect, they are universally acknowledged as the gold standard of both inputs and with respect to financial reporting. Over the decades, the rest of the world has sought to emulate it and to create processes that reflect its best practices.
I can tell you that this broad recognition of the importance of integrity in financial reporting is a truly great thing. But none of us should ever take the integrity of the financial reports we see for granted. The integrity of our financial reporting system must be protected, preserved, and continuously evaluated.
When I had the privilege to chair the FAF, as part of the strategic planning process for our organization, the trustees who oversaw the FASB and the GASB took a step back and asked themselves a simple question: “What matters in standard-setting and financial reporting if those processes are to serve their intended purpose in the capital markets and the various government agencies of the United States?”
The good news is there was a simple answer: independence and improvement. It’s a pretty straightforward articulation of the test that should be applied to what happens at the FAF.
Independence is absolutely critical. The standard-setters must be independent of corporate, political, or other outside pressures and interests. That’s not to say, of course, that they can live in an ivory tower.
Independence in the establishment of accounting and reporting standards was set as a base principle decades ago. The people who established the FASB 50 years ago and the GASB some 15 years later knew exactly what they were doing.
Independence is not a right but a privilege. It’s a privilege that’s earned through many parts of the process, but the most important, in my view, is by both listening to and hearing the concerns, challenges, opportunities stakeholders present to the FASB and the GASB. Listening and hearing may sound redundant. Trust me, it’s not. Listening is easy. Hearing—and processing the information you hear—is harder.
Hearing is also essential to the second fundamental element of financial accounting: continuous improvement. The FASB and GASB have certainly heard their share of criticism over the years, and that’s not surprising. Stakeholders don’t speak with one voice, and standard-setting decisions may please some while frustrating others. But I don’t think that pleasing all stakeholders should be the measure of standard-setting success.
Early in my time as the FAF chair, I conducted a series of listening sessions with constituents. Near the end of each session, I’d ask them two questions. First, “Do you have confidence in, and value, the board’s due process?” The universal answer: “Absolutely.”
Second, “Is financial reporting today better than it was five years ago and ten years ago?” And the answer was universally: “Yes, it is.” Even stakeholders who vehemently disagreed with individual FASB or GASB decisions admitted that, overall, financial reporting was better than ever.
As I reflect on the profession in which I’ve spent my career—investing on behalf of clients, large and small, to create better financial futures, it’s inarguable that deep, liquid, transparent, and low-cost capital markets are the engine that drives the economy, creates trust in those markets and, yes, allows better futures to be built for people and institutions. Better futures for entrepreneurs who want to take a public company, homeowners seeking affordable financing, citizens who want accountability in state and local government, and workers saving for retirement.
That’s what matters. That’s why it matters. That’s why we should all celebrate 50 years of impact, evolution, and success at the Financial Accounting Foundation.
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