Panel Expresses ‘Broad-Based Concerns’ for Private Company Financial Reporting

There are legitimate, broad-based concerns about whether current U.S. GAAP and the underlying standard-setting process are meeting the needs of private companies, and it is time to start exploring alternatives that have surfaced in other countries, the chairman of a blue ribbon panel told panel members Friday.

“There’s a reason why we are here. There’s clearly a need to continue on this process,” Rick Anderson, the panel’s chairman, said of the group’s task, which is tomake recommendations regarding private company accounting standards by year end.

Users are the ones who must benefit if a new set of standards for private companies is to emerge, although they are not necessarily going to be the ones to lead the charge to the strategic change, Anderson said, addressing concerns by some users about whether the benefits would be worth the costs.

Complex GAAP standards that have been introduced over the past few years too often do not help users of private company financial statements, and in those cases, the benefits don’t justify the costs associated with complying with those standards, according to many of the panel members and guests who testified Friday.

In particular, many accounting requirements and disclosures such as those associated with goodwill and uncertain tax positions don’t often matter to users of private company financial statements.

Joyce Joseph, a senior director at Standard & Poor’s and a guest speaker to the panel, said that managerial discussions are an integral part of her organization’s rating process but S&P has not studied the cost-benefit issue of current GAAP standards for private companies.

Some panel members and guest speakers expressed concern about the consequences that might surface if a completely separate set of standards were to be introduced for private companies.

“Adding dual standards into the mix could put undo strain on users to learn new standards and revise their systems for analyzing data,” said William Schramm, of PricewaterhouseCoopers, who was a guest speaker Friday. There are also ongoing costs associated with funding the standard setting process and education, he noted.

“A better approach may be to devote resources for simplifying complexities for all companies—public and private,” Schramm said.

S&P prefers a single set of global financial standards established by a global accounting standard setting body, Joseph said, but added: “We will survive with two sets of GAAP as long as we can obtain the information from financial reports or directly from the company.”

Another point that surfaced was the ability to give private companies the choice of whether they want to comply with a separate set of standards or to report as a public company under U.S. GAAP, regardless of the size of the company, especially those with an eye on going public.

“I’m comfortable with the market making the decision of private company GAAP and public company. Then we don’t have to deal with the issue of size complexity,” AICPA President and CEO Barry Melancon said. “As long as we don’t put a requirement that a private company must use private company GAAP, we put the power in the hands of the users.”

Panel member William Knese, vice president of finance administration for Angus Industries, agreed.

“I believe there’s no size criteria that will work. It’s the use of the financial statements that matter,” he said.

Whatever the panel decides, members will try to identify undesired consequences, Anderson ensured the panel. Any of the issues that surfaced Friday may be brought up at future meetings, he said.

The 18-member panel, which was announced in December as part of a joint effort by the AICPA,the Financial Accounting Foundation, FASB’s parent organization, and the National Association of State Boards of Accountancy, will hold its third meeting July 19 in Chicago. The goal of that meeting will be to narrow down the list of alternative structures, Anderson said.

An archived recording of Friday’s meeting can be found here.