A “blue ribbon panel” looking to improve the accounting standards for private companies wants to find out why so many are not strictly complying with GAAP.

The panel, sponsored by the American Institute of CPAs, the Financial Accounting Foundation and the National Association of State Boards of Accountancy, held its inaugural meeting at the AICPA’s offices in New York on Monday. The 18-member panel includes a cross-section of financial reporting constituencies, including lenders, investors, owners, preparers, auditors and surety companies.

“The question at the end of the day that we have to address is whether or not the process is giving the right answers for private companies, and if the answer is no, then what would be a better solution to get to the better answer?” said Moss Adams chairman and CEO Rick Anderson, who is chairing the panel. “That’s what this is about.”

Judy O’Dell, who chairs the joint AICPA-FASB Private Company Financial Reporting Committee, talked about the history of various task forces that have looked at issues related to private company reporting over the past 40 years. She noted that some of the earlier task forces found that as companies grow and require more capital, their lenders often need them to provide GAAP reporting as opposed to simpler forms of reporting, such as on an income tax basis or modified cash basis.

“As companies get larger and as their needs for more capital grow, they’re almost forced into GAAP reporting, at sometimes a pretty high cost,” she said. She noted that previous studies and task forces had identified a need for GAAP of some variety, but not necessarily a strict form of it.

“Users of private company financial reports want GAAP,” said O’Dell. “They see that as the Good Housekeeping seal of approval. The auditors and accountants’ report says, ‘Prepared in accordance with GAAP.’ The users don’t necessarily always care what GAAP is. They just want the words GAAP on those financial statements. That’s done so that there’s consistency among the industries so they can do comparisons and statistical analyses. They may not necessarily understand all of those provisions of GAAP, especially when those financial statements are given to lower-level staff at the banks and other users who are putting it into a statistical analysis program.”

Her committee was formed in 2007, and so far has written 31 recommendations and comment letters to Financial Accounting Standards Board, often asking for carve-outs to various standards that are seen as costly or problematic for private companies. She noted that her committee has succeeded in getting some disclosure relief for uncertain tax positions in FIN 48 and additional guidance for not-for-profits and pass-through entities, “but not a lot of traction on the other standards.” The move to International Financial Reporting Standards has also led to anxiety among private companies.

Russ Golden, technical director of the FASB staff, described the approach to setting standards. He noted that in the past, FASB has relied on a “push system” in which constituents sent implementation questions to the board and proposed the kinds of changes they would like to see. In the future, however, FASB will adopt more of a “pull” approach and will review standards two or three years after they go into effect to understand the benefits and costs that companies incurred as a result, and what changes need to be made.

Jim Castellano, who chaired a task force in 2005 on private company standards, talked about the results of his research. “The AICPA and FASB were hearing from constituents of private company financial reporting discomfort and displeasure with its usefulness and relevance for private companies,” he said.

The task force found that the attribute of GAAP reporting had a high value to all constituents because users like having a generally accepted body of accounting knowledge, but that too many GAAP-specific requirements lacked relevance and “decision usefulness” for private companies. Many believed that it would be useful for private company standards to be different from public company reporting.

Castellano's task force also found that it was becoming commonplace for private companies to issue financial statements with exceptions to GAAP, principally related to consolidation standards, oftentimes in consultation with their lenders. The trend has spread even more widely in the intervening five years.

“What I’m hearing from firms that are opining or compiling or reviewing GAAP departures is that has ratcheted way up,” said AICPA president and CEO Barry Melancon. “GAAP is supposed to mean generally accepted, but when you start to have all these variances and departures, then you no longer have a generally accepted notion. The fundamental question here is, is there a way to have a set of private company GAAP that is relevant and cost effective for these millions of private businesses so there is a common standard set and you don’t have all these GAAP departures that are occurring. That’s the fundamental reason why we’re here.”

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