American Institute of CPAs president and CEO Barry Melancon has written to the leaders of the state CPA societies in response to an announcement from the National Association of State Boards of Accountancy urging private companies not to use the AICPA’s recently unveiled Financial Reporting Framework for Small and Medium-sized Entities.
The AICPA unveiled FRF for SMEs on Monday, saying it provided an Other Comprehensive Basis of Accounting, or OCBOA, system for private companies that aren’t required to use U.S. GAAP (see AICPA Releases Non-GAAP Reporting Framework). However, NASBA chair Gaylen Hansen warned private company accountants that using a non-GAAP system could weaken the financial reporting of private companies (see NASBA Tells Private Companies: Don’t Use AICPA Financial Reporting Framework). NASBA argued that FRF for SMEs represents non-authoritative guidance and would be difficult to regulate or enforce. It prefers that accountants instead rely on the work of the Private Company Council, which is working with the Financial Accounting Standards Board under the auspices of the Financial Accounting Foundation to come out with modifications to U.S. GAAP that can be used by private company accountants. FASB endorsed three of the PCC’s proposals on the same day that the AICPA released FRF for SMEs (see FASB Backs Proposals for Simplifying Private Company Accounting).
The AICPA defended its new framework. In a letter to state society CEOs Thursday that was obtained by Accounting Today, Melancon wrote, “As you may have seen earlier today, NASBA has issued a press release indicating its support of GAAP for private companies and its opposition to the AICPA’s recently released FRF for SMEs. This announcement was not a surprise, as NASBA had previously raised objections to our efforts to offer this alternative, non-GAAP option to the small business community. However, since you may be asked by your state boards of accountancy as well as members about the recent press release, I want to share with you some key points that may be relevant to conversations you may have on this matter.”
Melancon pointed out that FRF for SMEs is essentially a next generation type of OCBOA. “OCBOAs are a long established alternative to GAAP,” he added. “Companies have used various OCBOAs for over 40 years without any objections raised by NASBA or other parties. The AICPA’s recently released OCBOA for small and medium sized enterprises—Main Street businesses—is in line with this long tradition of alternative accounting options available to private businesses. Its purpose is clearly identified to ensure that it is not confused with GAAP, as even the Financial Accounting Foundation has noted.”
NASBA’s Hansen said Thursday that concerned Boards of Accountancy would be provided with information and guidance to address the use of non-authoritative OCBOAs issued by private-sector organizations. This may include communication to all CPAs and CPA firms that the use of the FRF does not have the support of the Board, nor NASBA, and that they should consider the risks of using or recommending the use of the FRF, or any other non-authoritative options, to clients or employers.
In the interest of furthering public protection, NASBA said it is also developing recommended rule language prohibiting the use of non-authoritative standards unless it is acceptable to Boards of Accountancy. In addition, a study group has been appointed to analyze the standard-setting structure and processes for accounting, auditing and professional ethics for services provided to private entities. The study group will include State Board regulators from around the country.
AICPA CEO Melancon countered that as a trade association for state boards of accountancy, NASBA does not issue authoritative guidance on state policy. “The use of the FRF for SMEs is a decision to be made between private companies and users of their financial statements,” he added. “Owners of private companies, working with users of their financial statements, will decide what reporting framework best answers their needs. Any binding limitation on CPAs reporting on a form of OCBOA would have to be subject to a rule by a state board of accountancy and no board has ever taken action to prohibit CPAs from utilizing OCBOAs (including the FRF for SMEs). It is not clear why any board of accountancy would want to interfere in the decision-making process between owners of private companies and users of their financial statements.”
Melancon also addressed three of the principal concerns that NASBA cited about FRF for SMEs. In response to NASBA’s concern that FRF for SMEs represents non-authoritative guidance and therefore would be difficult to regulate or enforce, Melancon argued that the FRF for SMEs designation as non-authoritative is no different than other OCBOAs that have been issued and are also non-authoritative, such as modified cash, tax basis. “CPAs remain regulated by boards of accountancy for the work that they do and will be expected to comply with the high expectations of their regulators and their clients,” said Melancon.
In response to NASBA’s contention that the scope of the term “small and medium-sized entities” is undefined, and any private company, regardless of size or financial backing, could potentially adopt FRF for SMEs, Melancon pointed out that the private market can determine which basis of accounting is appropriate. “They do not need a regulatory trade group making that decision,” he wrote. “For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.”
NASBA had also warned that FRF for SMEs allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse. “The FRF for SMEs framework does not use the term balance sheet nor income statement in the framework,” said Melancon. “In fact, the framework uses titles that are not typically considered GAAP. Additionally, the framework requires disclosures that very clearly state that it is not GAAP and therefore will not be confused by a user—whether that user is a private business or a potential lender. Also, because any report (audit, review or compilation) on the framework by a CPA will also state in the report that the FRF for SMEs is not GAAP, it is difficult to understand what NASBA means when it says this will ‘cause confusion and invite fraud and abuse.’”
Melancon said the AICPA would continue its dialogue with NASBA and state boards of accountancy about FRF for SMEs. “We believe it is an important new initiative and one that will prove to be very beneficial to the marketplace,” he added. “We hope that NASBA will ultimately come to share our perspective on this matter.”
He noted throughout the process, the AICPA has also been in conversation with the Financial Accounting Foundation as it moves ahead with modifications to GAAP for private companies. “When the AICPA announced, in May 2012, its plans to develop a non-GAAP financial reporting framework for small, owner-managed, for-profit entities, the FAF called the project ‘important and complementary’ to its own efforts to modify GAAP for private companies,” Melancon pointed out. “FAF and FASB did not review or comment on the technical aspects of the FRF for SMEs, but they and the AICPA have the same objective of recognizing private companies’ unique circumstances. We strongly support the FAF’s work on their project to modify GAAP where appropriate for private companies. Together, we can meet the needs of private businesses looking for solutions to their reporting needs.”