The kickoff meeting of the Blue Ribbon Panel on Standard Setting for Private Companies showed there isn’t a lot of agreement among privately held companies and their accountants on exactly what constitutes generally accepted accounting principles.

In fact, the majority of private companies and their bookkeepers are not really set up to cope with the 25,000 or so pages of U.S. GAAP, much less actually read through them. Even though the AICPA says it’s OK for them to use the shorter set of International Financial Reporting Standards or IFRS for SMEs instead, few if any small and midsized entities could be expected to know what that is, or care. It should be enough to have them run an accounting software package to help them keep track of their books, make their regular tax payments, and provide reports to their lenders when needed.

But of course, not complying with GAAP exposes them to risks even if they’re not trading on any stock exchanges. Legal authorities can still go after them for cooking the books, even inadvertently. Banks and other lenders are well aware that privately held businesses tend to stretch the definition of GAAP, and their financials are often replete with GAAP “exceptions.” While not quite as big an issue as the so-called “carve-outs” demanded by public companies in the European Union to International Financial Reporting Standards, such exceptions could prove to be a problem when and if U.S. GAAP eventually converges with IFRS.

“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,” said AICPA president and CEO Barry Melancon at Monday’s meeting (see Panel Looks to Improve GAAP for Private Companies).

The panel hopes to eventually find a way to make GAAP more generally accepted among private companies and their owners, or at least a form of GAAP that they can use to satisfy their lenders, not to mention their own accountants.

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