[IMGCAP(1)]Many of us on the Blue Ribbon Panel on Standard Setting for Private Companies believed we were on the verge of an historic change that would have relieved millions of private companies of accounting standards geared more to the needs of public companies and their financial statement users.

That’s why there is so much disappointment over the fact that the recent proposal by the Financial Accounting Foundation rejected the cornerstone of the Panel’s recommendations—to create a new standard-setting board that would have the authority to establish modifications in Generally Accepted Accounting Principles that reflect differences for private companies.

The Panel, formed by the American Institute of CPAs, the FAF and the National Association of State Boards of Accountancy, had 18 members who represented a top-level cross-section of financial reporting constituencies, including lenders, investors, owners, preparers and auditors. It proposed a new private company standard-setting board that would report to the FAF, just like the Financial Accounting Standards Board and the Governmental Accounting Standards Boards.

A solution like this has been a long time coming. For many decades, CPAs who work for private companies in the United States have recognized that the financial information needs of private businesses and their financial statement users are very different from those of large public entities. Historically, the problem has often been referred to as “standards overload,” and has been of particular concern to small and midsized private businesses, since they are least able to bear the substantial costs of complying with increasingly complex U.S. GAAP.

As far back as 1980, the AICPA’s Special Committee on Small and Medium-Sized firms found that about 90 percent of all CPAs agreed there was an accounting standards overload problem, with most believing it was particularly burdensome for non-public companies. Even back then, many professional standards were designed for the public securities market and were irrelevant, or at least not cost effective, for smaller private companies which did not rely extensively on outside unsecured credit. This sentiment has been repeated often over the years by a variety of independent experts and committees, until finally the accounting profession seemed to be on the verge of an historic breakthrough, with the Panel’s recommendations.

Two examples of existing standards that are not appropriate or relevant for private companies are the standards formerly known as FIN 48, on accounting for uncertainty in income taxes; and FIN 46R, related to consolidation of variable interest entities. In addition, the FASB’s push to incorporate more fair value measurement in financial reporting is simply not as relevant to the users of private company financial statements, who can generally access whatever additional information they need from the company they are evaluating, versus public companies who must make all information public at the same time for every user. These examples highlight how the needs of private company financial reporting users differ substantially from the needs of their pubic company counterparts. In fact, the needs between those two groups of financial reporting users will continue to diverge more and more.

The recent FAF proposal largely retains the status quo, and the status quo is not working. It proposes to create a new Private Company Standards Improvement Council, which really is just an enhancement of the existing Private Company Financial Reporting Committee, which has met with only limited success, having not seen its major recommendations (such as a private company exemption from FIN 48) approved by FASB during its five years. There is no reason to think that the PCSIC would fare any better. Under the FAF proposal, the FASB would retain complete authority over any recommendations to modify GAAP for private companies. In fact, all FASB members would participate in every PCSIC meeting; even its chair would be a FASB member. The dominance of the FASB over any decision made by the new PCSIC would mean that private company constituents would lack sufficient power in determining accounting standards relevant to private companies.

FASB members are smart, dedicated and keenly aware of the issues facing public companies and the users of their financial statements, and we all should appreciate that. But to get that perspective they have to have predominantly public company backgrounds, and devote their full attention to public company issues. They are much less experienced, however, in deciding what information is going to be relevant to the users of private company financial statements.

A new, independent standard-setting board made up of people with private company constituent experience is urgently needed. That is what was recommended by the Blue Ribbon Panel, as well as by more than 3,000 letters to the FAF and a sizeable majority of state CPA societies. Without such an independent board, our current financial reporting standards will continue to be out of touch with vast reaches of the U.S. private-sector economy. Only about 15,000 companies are registered with the SEC, yet the setting of financial reporting standards for millions of private companies is driven by what’s happening at public companies. The result is that too much of what’s included in private company financial statements is not useful to their owners, lenders or investors. That won’t change under the FAF proposal.

This is not just a CPA profession problem. Small businesses, which tend to be privately held, drive our economy. They account for more than half of total employment, and during the past decade have generated between 60 and 80 percent of new jobs annually. Private companies also represent about half the nation’s nongovernmental GDP.

As long as the FASB maintains authority over the PCSIC, or has to ratify its decisions, real and effective modifications to GAAP for private companies will continue to elude us. Private companies have struggled long enough with unnecessarily complex and burdensome standards. There is still time to do something about it. The FAF has set Jan. 14, 2012 as its deadline for receiving comments on its proposal. I urge people to express support for an independent board.

David Morgan, CPA, served as a member of the Blue Ribbon Panel on Standard Setting for Private Companies and is managing partner at Lattimore Black Morgan & Cain, PC (LBMC), Tennessee’s largest regional accounting and financial services family of companies. In 2008 he was named by Accounting Today as one of the Top 100 Most Influential People in Accounting.

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