A private company accounting panel formed by standard setters and the accounting profession has called on the Financial Accounting Foundation to form a new board and start writing exceptions and modifications to existing rules for private companies.
The “blue ribbon” panel says current accounting rules are too complicated and too focused on the needs of investors in public companies, leading to plenty of irrelevance and unnecessary burden for private companies. The panel submitted its final report to the FAF, calling on FAF trustees to create a new board that would begin writing carve-outs and modifications for private companies. The panel also called for a new framework, or a new set of decision criteria, for how to write accounting rules that would be appropriate for private companies.
The FAF established the panel in December 2009 with the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy to study the question of how U.S. Generally Accepted Accounting Principles should apply to private companies that are not regulated by the Securities and Exchange Commission. The panel's report says it is not calling for an entirely new GAAP rulebook for private companies. Instead it is recommending a new board to look at immediate or short-term changes with a re-evaluation in three to five years to determine what should come next.
Leslie Seidman, the recently appointed chairman of the Financial Accounting Standards Board, acknowledged criticisms that FASB's process and standards give too little credence to the concerns of private entities. In a recent Webcast to update board activities, Seidman said the board is committed to doing a better job of hearing and responding to private company concerns.
In FAF's recent expansion of FASB from five to seven members, appointee Daryl Buck brings nearly two decades of private company experience in financial reporting to the board room. Seidman said Buck's private company perspective will improve the board's rulemaking process.
The panel's report acknowledges those moves but says they don't address “the need or the urgency for a new standards board for private companies.” AICPA President Barry Melancon, a member of the panel, said in a statement the profession has been debating the merits of separate or modified standards for private companies for more than 30 years. “This is an important day for the 50 percent of the U.S. economy in private business,” he says.
While the report was issued with majority agreement, dissenter Teri Yohn, an associate professor at Indiana University, says she saw no convincing evidence that private companies have different objectives in financial reporting than public companies or that current GAAP fails to meet private company objectives. She cautions against modifying standards just to make it easier for companies to follow them. “There is no reason to modify the standards so that companies can get unqualified opinions,” she wrote in her dissenting view contained in the panel report. “This is like writing an exam so that every student gets 100 percent.”
Billy Atkinson, chairman of the National Association of State Boards of Accountancy (NASBA), didn't sign on to the dissenting view, but he has his doubts. “In our view, a separate accounting standard-setting body for private companies would lead to differential standards and result in other unintended consequences,” he said in a statement. “We urge the FAF to carefully consider the potential effect on the financial reporting system.”