by Seth Fineberg

New York — The issue of using the same set of reporting standards for private and public companies is one that goes beyond the accounting profession, but CPAs, for one, are pleased that it is finally getting the necessary attention.

Questions surrounding traditional generally accepted accounting principles have clearly come to a head after the passage of the Sarbanes-Oxley Act. As such, the American Institute of CPAs has responded to this mounting concern by appointing a special task force to study whether there are indeed issues with private company financial reporting — a move that has been embraced by many CPAs and state societies alike.

Ted Flynn, executive director at the Massachusetts Society of CPAs, admitted that the issue of GAAP for private companies and public companies — or the “Big GAAP-Little GAAP” debate — is not new, but the passage of Sarbanes-Oxley has prompted a closer look at financial reporting for private companies.

“There have always been questions for small clients about these reporting standards being relevant. Should they have to jump through same hoops as public companies?” Flynn asked. “These days you hear more grumbling about how the current standards apply to small businesses. Many in the profession think they’re overkill, and it is time to take a fresh look.” Flynn added that he was pleased that the AICPA was being proactive about the matter, and looks forward to working with the newly formed task force.

In March, the AICPA formed the Private Company Financial Reporting Task Force, comprised of 16 AICPA members and non-members. They will spend the next several months trying to determine — among other things — if there is indeed an issue with traditional GAAP in financial statements, particularly among those who rely on the statements when making lending, investing or other business decisions.

The task force will also enlist the help of a number of stakeholder organizations, including the American Bankers Association, Financial Executives International, the National Federation of Independent Business and state CPA societies.

Among the key concerns to be researched by the task force are: frustration with the relevance of the current body of GAAP literature to smaller, private companies; the belief among some CPAs that lenders don’t appear to be using all of the GAAP information required in financial statements; the cost/benefit equation for private companies of certain reporting and disclosures, which may have been designed primarily for public companies; and a trend on the part of the Financial Accounting Standards Board toward convergence with international accounting standards and fair-value accounting.

James Castellano, former AICPA chairman and managing partner at St. Louis-based CPA firm Rubin Brown Gornstein & Co., heads up the task force. Like Flynn, he too believes that the matter of having the same set of GAAP standards for private and public company reporting can no longer be ignored, and the current AICPA chairman is aware of that.

“As [AICPA chairman] Scott Voynich has traveled around the country speaking to members, the question he’s heard quite often is, ‘Is financial reporting for private companies meeting the needs of users of financial statements as it should be?’” Castellano said. “He appointed this task force for the sole purpose of doing research and outreach to really discover the issue or issues and, if needed, to recommend solutions to the [AICPA] board.”

Castellano said that he expected that the task force would issue a fact-finding report to the institute board at its September meeting. In addition, he noted that the task force is still working on exactly how to go about its research, and is exploring “a wide range of methodologies.”

Tom Hood, executive director of the Maryland Association of CPAs, is also anxious to work with the AICPA and his own membership on the issue. His association has already held town meetings to gauge the importance of private versus public company reporting given the current GAAP standards. He found that an overwhelming majority of members are in favor of two sets of standards — though they realize that that won’t be easy to achieve.

“In some cases, two sets of standards won’t make sense, especially if you get into litigation. Will the courtrooms litigate or decide on differential standards if you are dealing with a large private company and there’s a problem and you use the ‘lesser’ of the standards?” Hood asked. “It clearly needs to be thought about. The time is right to have this debate, and clearly membership needs to open our collective eyes.”

Tony Delevati, managing partner at Woodland, Calif.-based Ullrich Delevati CPAs, already has had to deal with the difficult issues of having one set of GAAP standards for both private and public companies. Recently, a small nonprofit client was to receive funding from the United Way — but the cost of the kind of audit that had to be done, given the current reporting standards, was more than the funding the organization would have received.

“If we are going to do an audit now for a private company, under current GAAP I’ve got to do the same level of work that an auditor has to do on Microsoft. It’s the same processes and procedures,” Delevati said. “What we end up doing now [in the case of a loan] is go to the bank and try to do a limited engagement, find out exactly what they need and try to avoid the volume of work we have to do. Otherwise, it’s not advantageous for the client.”

Practice management consultant and president of PDI Global Allan Koltin is familiar with Delevati’s dilemma, and believes that the situation with public and private company reporting will only become more complex if something is not done. That said, he is hopeful about the AICPA’s efforts for a number of reasons.

“CPAs are outraged that this is even on the table, because they are still holding the bag from mistakes the Big Four made, and private companies just don’t have anywhere close to the resources public companies have,” Koltin said. “The good news thus far is that we haven’t seen major litigation having to do with faulty financial reporting in a large private company. I am hoping that the AICPA’s research will be the white paper needed to present to the Public Company Accounting Oversight Board and other government agencies to show them we are taking care of this.”

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