It has been more than five years since a group of mutual funds run by Morgan Keegan & Co. crashed in an accounting debacle, costing investors about $1.5 billion. Now the scandal has reached the boardroom at one of the U.S. accounting profession’s highest bodies.

This week the Securities and Exchange Commission accused eight former Morgan Keegan fund directors of shirking their oversight responsibilities when it came to the funds’ asset valuations. One former director, Mary Stone, is a trustee for the Norwalk, Connecticut-based Financial Accounting Foundation, which oversees the board that sets U.S. accounting standards.

After the SEC’s enforcement division filed its claims on Dec. 10, the foundation issued a news release saying Stone had requested and been granted a leave of absence from its board of trustees. It didn’t say why. The SEC previously had accused the funds of fraudulently overstating their asset values.

That the foundation appointed Stone to its board in the first place was a serious lapse. It was a matter of public record when Stone was selected that she had been the funds’ audit-committee chairman during the time when the SEC said the fraud occurred. The SEC filed its complaint accusing Morgan Keegan and two employees of accounting fraud in April 2010. Stone was named a trustee of the accounting foundation in November 2010, while the SEC’s investigation was ongoing.

Settlement Terms

Stone, who is an accounting professor at the University of Alabama in Tuscaloosa, didn’t return phone calls. Through their attorneys, the eight former directors have denied the SEC’s allegations, saying they acted diligently and in good faith. Morgan Keegan agreed to pay $200 million in June 2011 to settle fraud claims by the SEC and other regulators. The two employees at the Memphis, Tennessee-based securities firm also paid fines.

The SEC’s order this week said the fund directors “delegated their responsibility to determine fair value to a valuation committee without providing any meaningful substantive guidance on how those determinations should be made.” Additionally, it said “they made no meaningful effort to learn how fair values were actually being determined” for illiquid securities.

You have to wonder what the accounting foundation’s trustees were thinking when they selected Stone. Of all the people they might have tapped, surely they could have found someone who hadn’t been on the audit committee of an outfit accused by the SEC of accounting fraud. The foundation should be setting a positive example when choosing its leaders. Trustees’ backgrounds should be pristine.

Stone’s job as an audit-committee member was to oversee the financial integrity of the Morgan Keegan funds. Regardless of whether the funds’ violations were Stone’s fault, they happened on her watch. Stone already was a defendant in numerous investor lawsuits when she was named a trustee.

So how did Stone, 62, manage to get picked? Robert Stewart, a spokesman for the foundation, said he “can’t comment on any specific case.” Speaking generally, he said candidates are interviewed by members of the trustees’ appointments committee, and that names of finalists are submitted to the SEC chief accountant’s office. He also said that the foundation conducts background checks on finalists, and that SEC commissioners have the opportunity to express their views.

Obviously, the foundation’s trustees knew or should have known about Stone’s role at the Morgan Keegan funds before hiring her. All anyone had to do was a Google search. Likewise, they should have realized there was a risk the SEC would file claims against her individually, as it did this week. It isn’t clear what the SEC told the foundation about Stone, if anything, or what the board’s rationale was for choosing her.

An SEC spokesman, John Nester, declined to answer questions about Stone’s appointment process.

Different Animal

The accounting foundation is no ordinary private party. It oversees the Financial Accounting Standards Board, which sets U.S. generally accepted accounting principles, as well as the Governmental Accounting Standards Board, which determines accounting rules for state and local governments. It’s up to the SEC to decide whether the FASB continues as a designated standard-setter for U.S. companies.

The foundation’s 17-member board is filled with luminaries from the worlds of accounting and finance. Its chairman when Stone was appointed was John Brennan, the former chief executive officer of the investment manager Vanguard Group Inc. Brennan, who remains a trustee, was succeeded as chairman this year by Jeffrey Diermeier, the former CEO of the CFA Institute, which is the global accreditation body for chartered financial analysts.

In a 2003 policy statement, the SEC’s staff said: “While the FAF makes the final determinations regarding the selection of FASB and FAF members, we believe that to fulfill our statutory responsibilities we should provide the FAF with our views and that the FAF should consider those views in making its final selection.”

A thorough explanation of how Stone wound up being selected is in order -- and soon. The accounting foundation and the SEC are supposed to be about accountability. They should show some.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

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