accountingtoday.com
January 2012 | accounting today 11
BY DAVID MORGAN
Private company
reporting needs an
independent board
Many of us on the Blue RiBBon Panel
on standard-setting for Private Companies
believed we were on the verge of an historic
change that would have relieved millions of
private companies of accounting standards
geared more to the needs of public companies and their financial statement users.
That’s why there is so much disappointment
over the fact that the recent proposal by the
financial accounting foundation rejected
the cornerstone of the panel’s recommendations — to create a new standard-setting
board that would have the authority to establish modifications in Generally accepted
accounting Principles that reflect differences
for private companies.
The panel, formed by the american institute of CPas, the faf and the national association of state Boards of accountancy, had
18 members who represented a top-level
cross-section of financial reporting constitu-encies, including lenders, investors, owners,
preparers and auditors. it proposed a new
private company standard-setting board that
would report to the faf, just like the financial
accounting and Governmental accounting
standards Boards currently do.
a solution like this has been a long time
coming. for many decades, CPas who work
for private companies in the u.s. have recognized that the financial information needs of
private businesses and their financial statement users are very different from those of
large public entities. historically, the problem has often been referred to as “standards
overload,” and has been of particular concern
to small and midsized private businesses,
since they are least able to bear the substantial costs of complying with increasingly
complex u.s. GaaP.
as far back as 1980, the aiCPa’s committee
on small and medium-sized firms found that
David Morgan, CPA, served as a member of
the Blue Ribbon Panel on Standard-Setting
for Private Companies, and is managing
partner at Lattimore Black Morgan & Cain.
roughly 90 percent of all CPas agreed there
was an accounting standards overload prob-
lem, with most believing it was particularly
burdensome for non-public companies.
even back then, many professional stan-
dards were designed for the public securi-
ties market and were irrelevant, or at least
not cost effective, for smaller private compa-
nies that did not rely extensively on outside
unsecured credit. This sentiment has been
repeated often over the years by a variety of
independent experts and committees, until
finally the accounting profession seemed to
be on the verge of an historic breakthrough,
with the panel’s recommendations.
two examples of existing standards that
are not appropriate or relevant for private
companies are those formerly known as fin
48, on accounting for uncertainty in income
taxes, and fin 46R, related to consolidation of
variable interest entities. in addition, fasB’s
push to incorporate more fair value mea-
surement in financial reporting is simply not
as relevant to the users of private company
statements, who can generally access what-
ever additional information they need from
the company they are evaluating, versus pub-
lic companies who must make all information
public at the same time for every user.
These examples highlight how the needs of
private company financial reporting users dif-
fer substantially from the needs of their public
company counterparts. in fact, the needs of
those two groups of financial reporting users
will continue to diverge more and more.
the recent faf proposal largely retains
the status quo, and the status quo is not
working. it proposes to create a new Private
Company standards improvement Council,
which really is just an enhancement of the
existing Private Company financial Reporting Committee, which has met with only limited success, having not seen its major recommendations (such as a private company
exemption from fin 48) approved by fasB
during its five-year existence. There is no rea-
See MORGAN on
12
NCCPAP knows small businesses
Both your editorial and the article
“a line in the sand” (November 2011, page 1)
miss the point. “The three-decade-old issue
of private standards” is being addressed once
again. and that’s good! The problem is that
the solutions being put forth have one major
fault. There is no real representation of small
business in the Financial accounting Standards Board or the proposal for the american
institute of cPas to be the standard-setting
body for small business.
The one organization that represents only
practicing cPas, the national conference of
cPa Practitioners, is not represented on the
Blue ribbon Panel, FaSB or the standard-setting groups of the aicPa. These are the
cPas who prepare the financial statements
for small business, who assist small business
with their banking and credit needs, and who
understand the problems and opportunities
of small business.
Both FaSB and the aicPa have had 30
years to come up with standards to help
small business. until the recent recession
and downturn of the u. S. economy, neither
organization really seemed to recognize that
“small business” was a major factor of the
nation’s financial system. GaaP was the rule
that was promulgated primarily to place con-
trols on publicly held companies, and small
business had to cope with it, in spite of the
difficulties it presented.
now the Blue ribbon Panel has come up
with a plan that is supposed to give relief to
small business. The members of the panel are
well-known, well-meaning, interested, suc-
cessful and devoted people. Their intentions
are honorable and sincere. none of them
really represent small business.
Edwin J. Kliegman, CPA
Founding partner, Marcum & Kliegman
Past president, NCCPAP
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