The American Institute of CPAs is facing opposition from the National Association of State Boards of Accountancy and PricewaterhouseCoopers on its proposal to create a non-GAAP financial reporting framework for small and midsize businesses.
NASBA’s board of directors unanimously voted last Friday to adopt a resolution urging the AICPA to either table or withdraw its proposal for setting up a Financial Reporting Framework for Small- and Medium-Sized Entities, or FRF-SME. NABSA said the AICPA should instead allow the Financial Accounting Foundation’s Private Company Council adequate opportunity to develop standards for private companies that could be authoritative and part of U.S. GAAP.
The AICPA framework was supposed to provide a face-saving way for the Institute to retain influence over the accounting standard-setting process for private companies after the Financial Accounting Standards Board’s parent organization, Financial Accounting Foundation, decided to set up the Private Company Council in response to a Blue-Ribbon Panel Report on Standard-Setting for Private Companies (see New Private Company Standards Council Established). The AICPA had wanted the PCC to be completely independent of FASB. After a letter–writing campaign by CPAs and state CPA societies, the FAF ultimately agreed to make changes in the PCC’s name, structure and processes, but the new council would still coordinate its work closely with FASB.
However, as a kind of consolation prize, the AICPA was supposed to be free to develop an “other comprehensive basis of accounting,” or OCBOA, financial reporting framework to meet the needs of some privately held small- and medium-sized enterprises, as well as the users of the financial statements of these entities. The FRF-SME framework was supposed to provide a less complicated and costly alternative system of accounting than U.S. GAAP for SMEs that did not need U.S. GAAP financial statements.
But NASBA still sees a potential conflict. “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 Gaylen Hansen in a statement. “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. The FASB and the PCC deserve our undivided support in their mission to improve GAAP for this critical sector of the U.S. economy.”
NASBA cited the Tenth Amendment of the U.S. Constitution and Section 209 of the Sarbanes-Oxley Act in arguing that State Boards of Accountancy are vested with “significant authority in the development, adoption and enforcement of standards.” It said this authority was particularly relevant as it relates to the private sector and the topic of the AICPA’s FRF-SME proposal.
Under this authority, the NASBA board of directors sent a letter to the AICPA’s director of private company financial reporting, Robert Durak, expressing its concern regarding the current proposal.
“The NASBA board has significant concerns that AICPA’s initiative to develop a non-authoritative financial framework will confuse practitioners, preparers, users and the public at large for many reasons and at many levels,” NASBA chairman Hansen and NASBA president and CEO Ken Bishop wrote. “Most importantly, the board supports the Financial Accounting Foundation’s formation of the Private Company Council (PCC) and firmly believes it must be given the opportunity to develop exceptions or modifications to generally accepted accounting principles for private companies through properly sanctioned and recognized standard-setting processes.”
The PCC is chaired by former NASBA chairman Billy Atkinson (see Atkinson: PCC Marks 'Cultural Change' in Standard-Setting). The AICPA did not respond to a request for comment.
PwC also sent a letter to the AICPA urging the Institute to reconsider. The firm cautioned against encouraging companies not to use U.S. GAAP. “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,” PricewaterhouseCoopers wrote in a letter signed only by the firm’s name. At a minimum, PwC recommended the AICPA expand its due process with respect to the framework’s development, make targeted changes to minimize some aspects that might cause confusion, and clarify the types of situations in which the framework might be suitable. PwC also encouraged the AICPA to provide further assistance to stakeholders in understanding the implications of using a non-GAAP framework. But the firm’s comment letter made it clear where its preferences lie.
“We believe the PCC working with the FASB provides the best opportunity to enhance financial reporting for private companies,” PwC wrote. “In our view, the collaborative efforts of the PCC and the FASB will benefit a broader population of private companies than the Framework. For these reasons, we believe the best course of action is to allow the PCC and the FASB time to make progress.”