It is important to provide clarity regarding the functioning of the FASB since it operates under the authority of and with funding by the Securities and Exchange Commission (SEC). The FASB has the responsibility for establishing financial accounting for publicly traded companies. This role has taken on greater significance since the enactment of the Sarbanes-Oxley Act in 2002. Since the FASB operates under the umbrella of the PCAOB, the authority to set standards has effectively been shifted away from the accounting profession. While the accounting standards handed down by the FASB are for public companies, there is clearly a common tendency for private companies to adopt these standards. There are several issues with respect to differences in GAAP between public and private companies, which will be addressed in a later section. Our purpose here is to create understanding and clarity surrounding the setting of accounting standards by the FASB.

The FASB consists of seven full-time board members that serve for a five-year term. Board members are required to sever all connectivity and affiliations with the firms they served while they are fulfilling their terms on the board. The board members come from diverse backgrounds and are required to have knowledge of accounting, finance, and business. Since the board is setting accounting standards for public companies, board members must be sensitive to maintaining the trust of the investing public and readers of financial statements. The current composition of the board includes a mix of former public accountants; educators,...