The FAF described its new Post-Implementation Review (PIR) initiative, whereby a team created within the FAF will systematically review existing standards to assess the extent to which they accomplished their originally-intended objectives.

I personally think that this is a valuable initiative and that it appears to be well-designed.

A thought that I had in listening to the FAF presentation is that there is a potentially useful side-effect of this process:  PIR presents opportunities for the boards (FASB and GASB) to learn about the way that their standards are implemented in practice generally. 

To clarify, in my experience working for the FASB in 2008-2009, the FASB works extremely hard to design standards that will be effective in improving guidance for whatever transaction or situation is at hand.  There is the assumption on the part of the Boards and staffs that once the rule is finalized and adopted, consituents will implement the guidance in the spirit in which it is intended.

However, there are instances (perhaps fairly numerous) where that has not been the case.  In some situations, auditors and their clients appear to have interpreted guidance in ways that were not the original intention of the standard.  One that comes to mind is practice surrounding other-than-temporary impairments of financial instruments.  As I understand it, in practice there arose a convention that effectively defined “other-than-temporary” to be some fixed period (e.g. 1 year — perhaps because of the disclosure requirements included in EITF 03-1, which required identification of securities that have been in a continuous unrealized loss position for more than 12 months) and that the fixed period became a fairly widely-used convention. 

I think one could consider preparers’ and auditors’ responses to the FASB’s definition of a Qualified Special Purpose Entity to have been similarly unanticipated.  My sense was that the purpose of the definition was to indicate parameters that could be used by accountants to make informed judgments about whether a given entity should be consolidated.  However, in practice, it seems that the definition ended up being used as a bright line to enable creative structuring of transactions to avoid consolidation.

Given that the FASB, GASB, and IASB must anticipate preparer and auditor responses to the standards they issue, it seems that an enhanced understanding of how practice implements standards is a critical tool if standards are to be successful in addressing their objectives. 

From a research perspective, I think a study that focused on documenting and explaining the implementation/interpretation behavior of preparers and their auditors would be both very interesting as well as a significant contribution to our understanding of the standard-setting process.  It would also provide very useful insight to the Boards about how they might expect future standards to be (mis-)interpreted, which would be valuable given the large number of standards about to be issued in the next several months.

I hope that included among the analyses to be done as part of PIR, the FAF’s team will directly address and consider how, why, and under what circumstances the parties to financial reporting departed from the intentions of the standard when that happens.  It could be one of the most valuable, if unintended, outcomes of PIR.  To the extent that they do not, this is a good opportunity for academics to make a contribution.