The American Institute of CPAs has thrown down the proverbial gauntlet to the Financial Accounting Foundation, passing a resolution giving its board the option to create a separate body to develop accounting standards for private companies.
The measure, which was overwhelmingly passed during the institute's Fall Meeting of Council last month, came in response to a plan by the FAF to establish a new council to propose and vote on improvements to GAAP for private companies, while remaining under the auspices of the Financial Accounting Standard Board.
The AICPA, however, had been lobbying for the creation of a separate standards board independent of FASB. A separate board had been one of the primary recommendations in a report compiled by the Blue Ribbon Panel on Standard-Setting for Private Companies earlier this year.
"FASB has proven over many years that it cannot deliver meaningful improvement to private company reporting standards," said AICPA president and CEO Barry Melancon at the fall meeting. "FASB's primary focus has been and should be on the public company sector and on international convergence. Fifty percent of the U.S. economy comprises private companies. This critical sector of our economy deserves a board focused solely on their specific needs."
As proposed by the FAF, the new entity, which would be known as the Private Company Standards Improvement Council, would include between 11 and 15 members, appointed by the FAF trustees. Members would include investors, lenders, auditors, accountants and others with experience in using and preparing private financial statements. It would supplant the Private Company Financial Reporting Committee, which was established in 2006 and would be disbanded upon the creation of the council. Any decisions made by the PCSIC could still be overruled by FASB.
Critics of the FAF plan maintain that the proposal basically leaves the 30-plus-year debate on differential standards at status quo.
"[The FAF] basically just dealt with the fringe elements of our recommendations and ignored the cornerstone, which was the separate standards board," declared Rick Anderson, chief executive of Moss Adams and chair of the Blue Ribbon Panel. "History has shown they've had many opportunities to make changes, and they haven't in any significant way."
"The path they are now proposing essentially replicates the existing Private Company Financial Reporting Committee structure," explained Anderson. "That structure has not been successful in the eyes of private companies, and I believe FAF is proposing to put a new title on it, make a few modest changes, and expect private companies to be happy."
In its resolution, the AICPA instructed its board of directors to submit a comment letter to the FAF stating its disagreement with the proposal for the new council while restating its support for the recommendations of the Blue Ribbon Panel. It also directed its board to "consider all options, including consideration of other established independent standard-setting bodies as the standard-setter for U.S. GAAP for private companies."
Responding to the resolution, FAF spokesman Robert Stewart contended that that the FAF proposal "strikes the right balance."
"The trustees' proposal for a new Private Company Standards Improvement Council, which incorporates nearly all the recommendations made by the Blue Ribbon Panel, represents a significant improvement over, and departure from, past practice," said Stewart. "The plan strikes the right balance by creating an independent, deliberative body that would, in effect, set the agenda for modifying accounting standards for private companies - without creating a 'two GAAP' system that would most likely result from the establishment of a second standard-setting board. ... The trustees believe this plan is in the best interests of all constituents - and in the best interests of financial reporting in the U.S."
FAF chief executive Teresa Polley pointed out that while the council is not a separate authoritative board, it does have the authority to set its own agenda, as well as the ability to vote. "The expectation is that they will meet jointly with the FASB, so all of the FASB members would be in attendance at their meetings to facilitate general communication and understanding of the different perspectives, whether from the PCSIC members or the FASB members," she explained.
Melancon insisted that the AICPA is not aiming to take over the standard-setting process for private companies.
"This resolution clearly says let's continue to work it through the system," he said. "We owe it to the system and the process to do everything we can to get the system to evolve in the exposure [draft] process, but the system will make a determination sometime after January 14, and [then we will] consider other options. But our first priority is to do it within the system."
Polley, for her part, does not anticipate any Little GAAP-Big GAAP dichotomy in the standards, similar to International Financial Reporting Standards for SMEs, once a new council was established. "The plan would be that any exceptions or modifications would be assimilated into the codification of authoritative U.S. GAAP, versus the creation of a Little-GAAP-versus-Big-GAAP," said Polley. "That, frankly, is one of the reasons not to have a separate board."
Joanne Barry, executive director of the 28,000-member New York State Society of CPAs, said that while the FAF's proposal was a step in the right direction, her organization was disappointed with the decision not to opt for the separate board.
"The foundation's decision to propose a council that answers to FASB, instead of a separate, independent board for authorizing modifications and exceptions to GAAP, is misguided and is not what the NYSSCPA recommended. I am extremely concerned about the independence of the proposed Private Company Standards Improvement Council, which will be supported by FASB staff, meet in FASB's offices, and be led by a FASB member. FASB has struggled with this issue for a long time; I am skeptical that this new structure can get private companies to where they need to be."
Officials from NASBA lauded the strategy, while Financial Executives International is adopting a wait-and-see position. "We applaud the Financial Accounting Foundation for actively soliciting the views of all interested parties," said NASBA chair Michael D. Daggett. "Complex and irrelevant accounting standards need to be reined in, for both private and public companies. Recent efforts by the Financial Accounting Standards Board have demonstrated that they are aware of the need to give added attention to private companies, and we look forward to further progress in that direction."
Marie Hollein, president and CEO of the 15,000-member FEI, said that while the FAF plan was an important step in the process, it was too soon for her organization to take a formal position. "We have been monitoring developments, including the positions of other organizations and members of the community, expressed in their comment letters and through direct conversations with us," she said. "Even within the private company community, there are diverse views. And our Committee on Private Company Standards is currently reviewing the plan, whether the plan meets that objective, as well as studying the fine print."
The FAF is seeking comments on the proposed plan by Jan. 4, 2012, and is planning to conduct roundtables across the country in early 2012. The council would be established by sometime next year.
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