n 2003 small companies made up 99.7% of the 23.7 million businesses in the United States, according to the federal government, and research shows CPAs are among the top professionals to whom small businesses turn for professional and personal financial advice. AICPA members long have maintained important relationships with small business owners, counseling them on how to cope with changing standards and providing services tailored to their individual situations. The Institute makes an ongoing effort to understand and meet the needs of members and their clients in this market segment. In this article, I’ll discuss some of the benefits AICPA initiatives offer members working in this area—from advocacy on critical issues to useful new products and services.
MONITORING STANDARD SETTING
It’s difficult for small-business clients to understand and implement the seemingly endless stream of new and complicated accounting standards. Although guidance typically is written with large public companies in mind, both public and private small businesses often must adhere to standards when lenders or business partners require GAAP-compliant financial statements. Standards can be extremely costly and time-consuming for smaller organizations to implement, and the associated requirements and disclosures may not offer them tangible benefits. CPAs help their clients sort through these standards and requirements, and the AICPA supports them not only by monitoring guidance as it is developed but also by ensuring standard setters consider the local and regional firm perspective in critical discussions on areas such as differential standards and independence.
To examine the challenges standards pose to small businesses and devise possible solutions, the Institute formed the Private Company Financial Reporting Task Force ( www.aicpa.org/members/div/acctstd/pvtco_fincl_reprt/index.htm ), which conducts objective research on topics such as whether the general purpose GAAP financial statements of private, for-profit organizations meet the needs of all constituents who use them. A related question is whether it’s cost-effective for private companies to meet all the requirements for GAAP financial statements. To better understand these issues, the task force conducted a survey of various participants in the financial reporting process—CPA firms, small companies themselves and users such as bankers. Analysis of the results of that research will help the task force plan its future activities.
|A Dynamic Market
Source: U.S. Small Business Administration.
While the task force is looking at the big picture, the Institute initiates practical solutions to specific challenges. In one example, PCPS: the AICPA Alliance for CPA Firms, working with the AICPA Professional Ethics Division, helped develop practical guidance for firms in a list of frequently asked questions (FAQs) on Interpretation 101-3, “Performance of Nonattest Services,” of the AICPA Code of Professional Conduct ( www.aicpa.org/members/div/ethics/intr_101-3.htm ). In view of certain independence-related aspects of this interpretation, the Institute feared practitioners might feel obligated to implement the standard in a way that would unnecessarily restrict their activities as trusted advisers to their small business clients. Moreover, without clearer guidance clients might feel compelled to establish relationships with several CPA firms—a costly, gratuitous strategy. The Institute’s FAQs clarify the standard’s meaning in the areas of greatest concern to small firms.
Both the PCPS Executive Committee and the PCPS Technical Issues Committee (TIC), collaborating with the AICPA professional standards team, regularly review and comment on guidance that affects small firms and their clients. In fact, Financial Accounting Standards Board (FASB) chair Robert Herz said in congressional testimony that the board relies on TIC to keep it informed about how proposed standards will affect small businesses.
In one recent instance, TIC was instrumental in influencing FASB’s decision to defer a planned exposure draft (ED) related to the ongoing convergence of its standards with those of the International Accounting Standards Board (IASB) that would have imposed hardship on small businesses without providing a commensurate benefit. The ED required classification of debt as current if violations of debt covenants had not been waived before the balance sheet date. TIC members surveyed bankers who serve small business clients to find out whether they believed such a revision would truly add value to financial statements. The survey, in which many expressed a preference for, or satisfaction with, current GAAP, was a key factor in FASB’s decision to defer the ED.
With the best interests of small businesses in mind, TIC also successfully advocated, during the exposure draft stage, for modifications to pronouncements such as FASB Statement no. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity; FASB Interpretation no. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34; FASB Interpretation no. 46, Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51; and Proposed Revisions to the AICPA Standards for Performing and Reporting on Peer Reviews.
In many other cases TIC has identified areas in which standard setters ought to provide additional examples or implementation guidance specifically written for small companies.
AICPA’s Guide to Reporting and Disclosure Problems for Small Businesses (# 7343333JA).
Analytical Procedures for Small Business Engagements (# 730509JA).
Small Business Audits: Balancing Risk, Effectiveness and Efficiency in Today’s World (# 732430JA).
AICPA’s Guide to Financing the Growing Small Business: Sources, Strategies and Disclosures (# 730482JA).
Profit-Building Techniques for Small Businesses (# 732410JA).
Estate Planning Strategies to Protect Small Business Wealth (# 736785JA).
Innovative Tax Planning for Small Businesses: Corporations, Partnerships & LLCs (# 745517JA).
The CPA’s Guide to Retirement Plans for Small Businesses (# 017237JA).
How to Prevent, Deter and Detect Fraud in Your Business (# 018200JA) helps clients understand key fraud concerns and how CPAs can help address them. Firms can download this brochure free at the PCPS Web site ( www.pcps.org/pdf/fraud_brochure_bw.pdf ) or the AICPA Antifraud Resource Center ( http://antifraud.aicpa.org/ ). A print version is available (in bulk) at www.cpa2biz.com or by calling 888-777-7077. (AICPA members receive a discount; PCPS members, an even lower price.)
Articles in the Journal of Accountancy that inform members of practice opportunities related to the Sarbanes-Oxley Act of 2002 (see “ Small Firms: Think Big! ” JofA , Jun.04, page 22) and the Practicing CPA ( www.aicpa.org/pubs/tpcpa/index.htm ).
For more information about any of the above products or to order, go to www.cpa2biz.com or call the Institute at 888-777-7077.
Audit Committee Effectiveness Center
PCPS: the AICPA Alliance for CPA Firms
AUDITING LITERATURE FOR NONISSUERS
Because the Institute understands the economic challenges facing small businesses and the firms serving them, it has made available—free of charge at www.aicpa.org/members/div/auditstd/auth_lit_for_nonissuers.htm —AICPA authoritative literature and interpretations related to the audit reports of nonissuers. This guidance applies to companies that don’t issue financial statements subject to PCAOB standards and includes
Statements on auditing standards.
Statements on standards for attestation engagements.
Statements on quality control standards.
RESPONDING TO SARBANES-OXLEY
The Sarbanes-Oxley Act has affected small businesses and the CPAs serving them. In one effort to support them, the AICPA formed a special committee on state regulation to focus on problems that occur when federal legislation and regulation cascade to the state level ( www.aicpa.org/statelegis/index.asp ). For example, certain states may pass legislation—closely modeled on federal laws—that makes sense for large, public companies but has few benefits for smaller businesses and burdens them with unnecessary costs. The committee monitors such developments and advises states on the possible consequences of their actions.
THE GOAL: HIGH-QUALITY SERVICES
The AICPA takes a multifaceted approach to addressing the issues facing small business clients. Its committees monitor developing issues and confer with standard setters to ensure new guidance acknowledges and reflects small companies’ actual business needs. While members regularly benefit from the Institute’s activities in the regulatory arena, I encourage them also to actively use the programs and products the AICPA staff creates to help practitioners offer the highest quality services to their small business clients.
S mall business clients, in particular, can benefit from a CPA’s services, which range from advice on setting up and maintaining accounting systems to adding value to audits.
The basics. “With a small business, teaching basic accounting helps both the client and the CPA firm in the long run,” says Martha Feldman, CEO of Drug & Device Development in Redmond, Washington. CPAs need to advise small companies on how to set up and maintain files, how long to retain documents, how to separate personal and business expenses, how to categorize capital vs. expensed equipment, which business meals and entertainment are deductible and when to use employees vs. contractors. Helping a small company answer these questions enables the owner to plan, make better management decisions and run the business more efficiently, she adds, and makes it easier for the CPA to get appropriate records for tax purposes and keep track of inventory and employee information.
Feldman, whose company consults mainly with start-ups seeking Food and Drug Administration approval for their products, has relied on her CPA, Bea L. Nahon, for advice since starting her business 20 years ago. Feldman has turned to Nahon for counsel on setting up a C corporation, keeping expense records, addressing state wage and compliance issues and, when necessary, providing insights on downsizing. “I’m very interested in getting the best use of my money,” she says, citing issues such as buying vs. leasing, cash management, expense reduction and benefits. “Cash flow is a major concern for all small companies.”
Value added to audits. “When a CPA firm submits a management letter in an audit, it should include practical, concrete solutions to financial concerns and potential breakdowns in internal controls,” says Scott Terhaar, CFO of Perry’s Ice Cream in Akron, New York, a family-owned regional ice cream manufacturer and distributor with $70 million in sales. “The letter should not simply restate issues noted by client management.”
Terhaar suggests practitioners use inquiry and analytical procedures to explore important issues and to demonstrate a clear understanding of the client’s business. “Because CPA firms work with so many different companies, they can offer ideas based on developments they’ve seen at other businesses,” he notes. “It’s an opportunity for them to show their grasp of critical factors affecting the business and to make forward-looking recommendations.”
The audit process requires a great deal of time and effort, he says, “and I like being able to say I’ve gotten something out of the process besides the audited financial statements. CPAs should be performing enough procedures to put together a management letter that really adds value.”