Private Standards, Public Governance: A New Look at the Financial Accounting Standards Board

The Financial Accounting Standards Board (the FASB ) presents a puzzle: How has this private standard setter managed simultaneously (1) to remain independent, (2) to achieve institutional stability and legitimacy, and (3) to operate in a politicized context in the teeth of opposition from its own constituents? This Article looks to governance design to account for this institutional success. The FASB\u27s founders made a strategic choice to create a regulatory agency that sought independence rather than political responsiveness. The FASB also set out a coherent theory of accounting, the Conceptual Framework, to contain and direct its decisions. The Conceptual Framework contributed to the FASB\u27s institutional success by disavowing a neutral posture, explicitly privileging the interests of the users of financial reports (investors and market intermediaries) over the interests of the reports\u27 preparers (large audit firms and their managers). Nonetheless, the FASB remains vulnerable to the allegation that its complex, rules-based standards serve the audit firms\u27 interest in lowering the risk of liability while sacrificing the users\u27 interest in fairly stated financials. This Article endorses the rejoinder position. What some see as capture also can be characterized as responsiveness, and the FASB serves a public interest in taking seriously the accounting firms\u27 need for auditable standards. Although detailed rules can distort the overall story told by a report\u27s bottom line, they also make it easier to see what preparers are doing, easing verification and making audit failures and scandals less likely. The FASB emerges as a generator of suboptimal but institutionally defensible standards