Sep 29th 2011
By Anne Rosivach
CPA firms, private companies, lenders, and nonprofit entities have joined in a massive letter-writing campaign to the Financial Accounting Foundation (FAF) to express their views on the need for separate standards and an independent standard setting board for private companies. The new board would be empowered to make modifications to GAAP not subject to veto power by the Financial Accounting Standards Board (FASB). According to the American Institute of Certified Public Accountants (AICPA), 99 percent of comment letters from the privately held company constituency demanded that the FAF create differential standards for privately held companies.
The AICPA has taken a leading role in the campaign, by urging members to participate and by providing a form letter that members can use to write to the FAF. The letter can be customized to the interests and needs of individual letter writers. The letter supports the Blue Ribbon Panel on Private Company Financial Reporting that recommended a separate board and separate standards in its final report to the FAF in January 2011.
The comment letters incorporate some of the talking points of the AICPA sample letter. The majority of writers agree with the AICPA that (1) a systemic problem exists, (2) costs of compliance are too high, (3) accounting standards have become so complex they are irrelevant to private companies, and (4) the FASB is preoccupied with the needs of public companies.
Following are excerpts from a few letters wherein writers relate their personal frustrations with current accounting standards and convey the urgent need for change. There are also excerpts from those who are opposed to separate standards and an independent standard setting board for private companies.
Letters concerning GAAP departure
Donny Shimamoto, CPA practitioner, IntrapriseTechKnowlogies LLC: Shimamoto writes of the problem of GAAP exceptions, saying, "As [CPAs who specialize] in the small business and middle market sectors, too often we have to help clients navigate through GAAP issues and help back out GAAP adjustments to be able to provide meaningful financial information to their banks and other stakeholders. I have even had to do the same with my own firm's financials when we went to a bank for a loan."
William A. Pickert, partner at BKD: Pickert says, "In my practice as an audit partner in a regional CPA firm working with medium-sized privately owned organizations, I have been alarmed at the increasing frequency of the issuance of financial statements with GAAP departures. While once very rare, this practice is becoming routine. It is surprising how willing creditors and other third-party users have become in accepting non-GAAP financial statements. It is obvious the value and importance placed on the preparation of GAAP-based financial standards is rapidly eroding."
Letters regarding cost and relevance
Michael Pierce, CPA: Pierce writes that one of his clients has acquired a number of business entities over the past several years. Each year, Pierce and his client are required to go through the length and costly process of determining whether goodwill has been impaired. Pierce says, "If this process led to a more informative set of financial statements, my client and I might understand the need for it. But NO ONE cares about goodwill. The only external user is the client's bank that immediately subtracts goodwill from its analysis."
Krista Kae Hazen, Hospice of Lancaster County: "As the CFO for a $30-million-dollar nonprofit organization, I can tell you that requirements, such as FASB ASC Topic 820, Fair Value Measurements and Disclosures, provide an undue burden on private companies that do not have the required internal expertise to complete such a disclosure, and I would argue that the resultant disclosure is more misleading to the readers of our financial statements than it is helpful. This is one example of the need for separate standard-setting authorities; each concerned with the interest of the respective type of company."
Opposing view letters
Paul L. Shillam, CPA, CMA, Controller Pacific Medical Centers: Shillam opposes the proposal for separate standards and a separate standard setting board. His letter says, "The fundamental issue that is not being discussed is the exercise of professional judgment given the facts and circumstances of the organization whose financial statements the independent accountant is being called upon to render an opinion. Placing reliance on yet another set of standards is not the answer to the issue of applying existing standards to an organization's financial statements."
He goes on to say, "I oppose the creation of yet another new, separate body with standard-setting authority not subject to FASB approval. Differential standards and an autonomous standard-setting body to implement them for private companies are not needed now when the state of existing US GAAP and IFRS are in such a state of flux."
George Beckwith, Committee Chair on Private Company Standards, Financial Executives International: The Financial Executives Institute (FEI) recommends an alternative to a separate board and separate standards for private companies. Beckwith writes, "We believe that the establishment of a new group with standards-proposing ability may be a viable alternative to a separate peer board. In our view, this new group could be modeled after the Emerging Issues Task Force (EITF) in that it will have the ability to propose changes which are approved, adjusted, or denied by the FASB. This group, which we will call the Private Company Task Force (PCTF), would enhance the standard setting process by focusing entirely on private company issues and addressing their unique concerns."
"We feel that a separate board may create an "us-versus-them" mentality in standards setting and a perception of inferior standards in the users' minds to a greater extent than if the process were all under the authority of the FASB with significantly enhanced focus on private company issues."
The FAF is expected to issue a proposal on private company standard setting in the coming weeks.