Time for Action on Private Company Financial Reporting

I wrote [the following] letter to Chairman Leslie Seidman of the Financial Accounting Standards Board after I read her Questions & Answers in the May 2011 JofA (“FASB Prepares to Reprioritize: An Interview With Chairman Leslie Seidman,” page 32). I was disappointed that she did not embrace the recommendations of the Blue Ribbon Panel concerning private company financial reporting. I was mostly distressed that she wanted to study the issue more, since I believe this issue has already been studied enough over the last 35 years.

Dear Chairman Seidman:

I read your Q&A in the May 2011 Journal of Accountancy, and I must write that I am deeply disappointed in your reluctance to adopt the recommendations of the Blue Ribbon Panel concerning private company financial reporting. Toward the end of the article you ask a series of questions that one should ask in order to decide how to proceed. Every one of those questions has been answered for years. But, since you do not agree, I will repeat the answers for you.

“Have we heard the concerns accurately?” Read the 1975 Accounting Standards Division of the AICPA report or the results of every other study from then until the Blue Ribbon Panel issued its report this year. They all recognized the same concerns. The users of private company financial statements are not interested in the vast majority of the disclosures and financial statement presentation rules issued by FASB. Consequently, when private companies try to adhere to those standards, it costs them money while yielding no benefit.

“Assess whether people agree widely that these are the right things to focus on in establishing a differential framework.” Every study done on this subject has come to the conclusion that private companies should be not be required to follow FASB’s framework in its entirety. In 2005, the AICPA Council instructed AICPA staff to work with FAF (the Financial Accounting Foundation) and FASB to explore GAAP for private companies. The Blue Ribbon Panel conducted a lengthy, in-depth study of the subject and concluded that private companies should have a different framework. To use your own words, “People agree widely.” There is no more need to ask that question.

“Determine what form it should take. Should it be some sort of a conceptual framework? Should it be just some guiding principles that we would use in approaching this?” The Blue Ribbon Panel has answered those questions. “The Panel believes that, at least in the near term, the system should focus on making exceptions and modifications to U.S. GAAP for private companies that better respond to the needs of the private company sector rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP,” according to the panel’s report to FAF in January.

Your answer: “I don’t know at this point in time, but that’s something we can think about down the road.” After 35 years of study of the issue, it is time to move forward immediately. We do not need to think about it down the road. Six years ago, the AICPA Council urged FAF and FASB to work with it to explore GAAP for private companies. You state that you are “planning to establish a resource group of private companies and the users of their financial statements.” You are planning to establish such a group? What took you so long? The time for more study is over. It is time to do something about this very real problem. I urge you to end your opposition to the Blue Ribbon Panel’s recommendation.

Thomas G. Malkoch, CPA

Lafayette Hill, Pa.