A GAAP revolution: Have private company constituents “had enough?”

Nov 16, 2011

By Laura Hay, CPA, CAE

In August, the Public Company Accounting Oversight Board (PCAOB) issued a Concept Release requesting public comment on whether mandatory audit firm rotation would enhance audit quality by increasing auditor independence, objectivity and professional skepticism for audits of public companies.

OSCPA members continue to say “Too little, too late” to the Financial Accounting Foundation (FAF) proposal to establish a new council to consider private company differences within U.S. GAAP. (See the cover story of October 2011 issue of CPA Voice, “Private companies get little relief from GAAP.”)

Concerns about standards overload are nothing new, but the U.S. private company constituency came closer than ever before to relief with a series of recommendations to FAF from the Blue Ribbon Panel on Standard Setting for Private Companies.

Blue Ribbon Panel recommendations

A joint effort of the AICPA, FAF, FASB and the National Association of State Boards of Accountancy (NASBA), the Blue Ribbon Panel was appointed to address how accounting standards can best meet the needs of users of U.S. private company financial statements and to advance recommendations on the future of standard setting for private companies to the FAF Board of Trustees.

After examining the full range of options for accounting standards for private companies, the Blue Ribbon Panel advanced two key recommendations in a January 2011 report:

  • U.S. GAAP should include exceptions and modifications for private companies
  • An independent private company accounting standards board should be created with the authority to identify exceptions and modifications within U.S. GAAP, that are not subject to ratification or veto by the FASB

“If you support differential standards but don’t support a separate board, you won’t get differential standards, at least not substantially different,” AICPA President and CEO Barry Melancon, CPA said in a June interview with CPA Voice editorial staff.

Despite receiving letters of support from 3,000 private company constituents and a majority of the state CPA societies – including OSCPA – the profession’s argument for an independent board was not heard. In a Request for Comment issued Oct. 4, the FAF acknowledged the need for differences in U.S. GAAP for private companies, but proposed instead that a new council be established to identify those differences, subject to ratification by the FASB.

FAF proposal

In a Request for Comment, Plan to Establish the Private Company Standards Improvement Council, the FAF proposed:

  • A “Private Company Standards Improvement Council” (PCSIC) would be established under the direction of the FAF to improve the standard setting process for private companies.
  • The existing FASB/AICPA Private Company Financial Reporting Committee (PCFRC) would be eliminated.
  • The PCSIC would determine whether exceptions or modifications to nongovernmental U.S. GAAP are required to address the needs of users of private company financial statements.
  • Any proposed changes to existing U.S. GAAP would be subject to ratification by FASB and undergo thorough due process, including public comment.

In advancing these recommendations, the FAF proposal notes that, “The FASB has made recent, substantive changes to the manner in which it engages with private company stakeholders, and has demonstrated a greater operational and structural commitment to further address these issues.”

The proposal expresses that while an independent board was considered, it was concluded that an independent board was more likely to lead to the establishment of two separate sets of U.S. GAAP, which was not a desired outcome. The report also states that concerns communicated to FAF appear to be concentrated on a small but key group of standards that would be the initial focus of the PCSIC.

The proposal also notes that FASB should address more broadly, issues of complexity, relevance and cost-benefit issues for all constituents, as several constituent groups other than private companies expressed similar concerns about these issues.

The profession’s response

The AICPA responded to the proposal with a statement from Melancon and AICPA Chair Paul Stahlin, CPA:

“We are profoundly disappointed that FAF is not proposing to create a new independent board to set differences in U.S. GAAP standards, where appropriate, for privately held companies. This was the cornerstone of the Blue Ribbon Panel on Standard Setting for Private Companies’ report.

“For many years, the pleas of private companies to have differences in standards for private companies that are more cost effective and relevant for their users have too often been ignored. We understand and appreciate FASB’s need to focus on public company issues and emerging capital market concerns. And as we move forward, FASB’s focus will need to continue to be on the public market and on the convergence of U.S. Standards with IFRS, which themselves are focused on public companies. This clearly underscores the need for a separate independent board focused solely on the right standards for private company GAAP.”

In an online survey of OSCPA members, 82% disagreed with the FAF proposal, agreeing instead that they supported an independent standard setter for private companies. The remaining 18% felt that FASB should ratify differences within U.S. GAAP for private companies.

“We have always had Big GAAP and Little GAAP,” responded Eugene F. Svatek, CPA from Strongsville. “Private companies have been adopting their own GAAP for years. For those not following tax basis or other comprehensive basis of accounting (OCBOA,) they designed their own GAAP by having GAAP departures for things such as variable interest entities, capitalized leases, fair value, percentage of completion and more.

“The real world (private companies) looks at GAAP departures as GAAP, because it is more meaningful to them,” Svatek said. “However, as CPAs, we must look at GAAP departures not as a viable alternative but as a material misstatement of financial statement reporting for which we modify our accountant’s and auditor’s reports and issue a management letter pointing out that the informed decision made by management is wrong. Have you tried to explain that one to your private company management?”

“What I read in the FAF proposal is that they don’t care what the profession thinks,” said Glenn A. Roberts, CPA, Hoover & Roberts Inc. in Eaton. “The CPA profession and users of private company financial statements communicated immense support for an independent standard setter, and the FAF obviously said ‘Too bad – this is how we want to do it.’” “With FASB’s necessary attention at this time on international convergence and its upcoming SEC endorsement role, I foresee nothing from this initiative except business as usual for private companies,” Roberts said. “The PCSIC might in theory have a little more power than the PCFRC, but the requirement to submit its recommendations to the FASB is the stopper. Ultimately, the private company standard setting role would properly belong under FASB, but it needs to start out as a separate entity. While FASB has given a couple of head nods recently to private company concerns (when threatened with an independent standard-setting body), FASB has no established track record of caring about these issues.”

Action now

“We will continue to ask our members and others who support more relevant, more cost beneficial standards for private companies to make their voices heard loud and clear that the best answer is an independent private company board,” Stahlin said in the AICPA reply.

The AICPA has revised its letter writing tool on the Private Company Financial Reporting Interest Area of its website at www.aicpa.org, and is urging CPAs and users of private company financial statements to again respond.

The FAF Board of Trustees is seeking public comment on the proposal until Jan. 14, 2012. Access the Request for Comment at www.accountingfoundation.org, or contact Laura Hay at Lhay@ohio-cpa.com if you are interested in sharing comments with OSCPA.

OSCPA member poll

Do you think FASB should be able to approve or veto differential standards for private companies?

  • Yes, FASB should ratify differences within GAAP for private companies. 18%
  • No, I support an independent standard setter for private companies. 82%

Learning opportunities

GAAP Refresher
Fairfield | Dec. 2 | 01952CI

Get your arms around the complex GAAP rules that are most likely to result in financial statement restatements. This course provides answers to some of the more complicated accounting issues accountants face. You’ll get clear, concise, realistic examples of financial instruments, deferred taxes and uncertain tax positions, leases, derivatives, impairments and other “troublesome issues.”

Professional Standards and Responsibilities - Ohio Ethics Rules & Applications
Dublin | Dec. 14 | 04904CO
Webcast | Dec. 14 | 04904CO-WC
Dayton | Dec. 16 | 04905DA

Satisfy the Accountancy Board of Ohio’s professional standards and responsibilities course requirement. This course is presented through lecture and group participation using short ethical dilemmas. This course covers a professional’s commitment to maintaining competence in professional standards, including GAAP, GAAS and tax practice standards.