Feb 1st 2013
By Frank Byrt
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The long-running debate over who's responsible for developing a framework for standards for financial reporting by privately held, small and midsized US businesses is far from over.
The American Institute of CPAs (AICPA) is getting push back for its Proposed Financial Reporting Framework for Small- and Medium-Sized Entities, which would create a non-GAAP (generally accepted accounting principles) financial reporting framework for small and medium-sized entities (FRF for SMEs).
The AICPA says its proposal will result in a less complicated and therefore less costly accounting system for smaller, privately held firms than one that would come from having to adhere to the requirements of GAAP, while still presenting an accurate financial picture of the business.
But the National Association of State Boards of Accountancy (NASBA) thinks its approach is better. Its board of directors voted to adopt a resolution urging the AICPA "to either table or withdraw the proposal in order to allow the Financial Accounting Foundation (FAF) Private Company Council (PCC) adequate opportunity to develop standards uniquely applicable to private companies that can be authoritative and part of GAAP," according to a January 30 NASBA press release.
The PCC was created in 2012 by the FAF to work with the Financial Accounting Standards Board (FASB) to recommend exceptions or modifications to US GAAP for private entities.
NASBA says its standing in the matter comes "under the Tenth Amendment of the US Constitution and the Sarbanes-Oxley Act, Section 209 [which says that] State Boards of Accountancy are vested with significant authority in the development, adoption, and enforcement of standards. This authority is particularly relevant as it relates to the private sector and the topic of the AICPA's FRF-SMEs proposal."
"There are increasing demands for significant improvements in the current financial reporting system serving the unique needs of private companies and their many stakeholders," said NASBA Chairman of the Board Gaylen Hansen in the NASBA press release. "We share those concerns with the AICPA, but we also recognize that well thought out and authoritative solutions stand a better chance of long-term success."
Robert Durak, AICPA's director of Private Company Financial Reporting, said in an e-mail statement, "We have received many comments on the FRF for SMEs and will be considering all of the input, as we decide upon appropriate revisions to the Framework and its development process in light of those comments. As is our normal policy, we will not be commenting on individual letters that have been received."
There also appears to be no unanimity in the accounting community about which approach is superior.
Big Four accounting firm PricewaterhouseCoopers (PwC) also asked the AICPA to reconsider its proposal, in a January 29 letter, a copy of which was shared with AccountingWEB by the AICPA. PwC prefers strict adherence to GAAP, saying, "We believe efforts focused on enhancing GAAP will be more beneficial for a broader population of private company stakeholders than creating another non-GAAP framework."
Scott Appel, CPA and partner-in-charge of the Orange County, California, office of Hein & Associates LLP, a public accounting and advisory firm, agreed: "I really think the best answer is for the Private Company Council to issue standards through FASB."
"I think the frustration out there is that they debated this for at least a year, and people are looking for progress to be made," but he added that it's questionable whether NASBA can override the AICPA's proposal. "I don't' disagree with what they want for the ultimate outcome, but I don't know that they have the authority to prevent the AICPA from doing what it's doing."
But on the other side of the debate is David Glusman, CPA and partner-in-charge of Marcum LLP's Philadelphia office. He says that he and his firm "believe that the AICPA proposal is a good proposal for our clients and for small and midsized businesses."
Glusman said, "My point of view is 'what does the business community need and want?'" Holding smaller, privately-held businesses to the same GAAP standards as huge, publicly-held companies "is overkill. The people who read their financials are management, who may be entrepreneurs or family, their bank, and maybe some outside investors.
"The bankers are the biggest users of their financials and they don't need the over-reporting," rather, they're most interested in whether the company is in compliance with its loan covenants, Glusman said. "For a long time, it's been a debate of big GAAP versus little GAAP, and I think the AICPA'S current draft is a good resolution that makes [reporting financials] for small and midsized businesses more efficient and saves them time and money."
- Private Companies Finally (May) Have Their Own Standards
- AICPA FRF for SMEs Exposure Draft Available for Comment