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FEI CPC-S Comments on FAF Private Co. Proposal; Over 6,600 Letters Filed On FAF Plan

In a comment letter filed last week on the Financial Accounting Foundation’s (FAF – the parent of the FASB)  Plan To Establish the Private Company Standards Improvements Council (PCSIC) (the “FAF Plan”), FEI’s Committee on Private Company Standards (CPC-S) stated: “While we agree with the general idea of the PCSIC, we would like to suggest improvements to the FAF’s plan that may address our concerns.”
 
The FEI CPC-S letter, (shown in the FAF comment letter file as Comment letter 242) signed by CPC-S Chairman George Beckwith, noted, “Our committee has been debating the relative merits of the existing standard setting process for private company standards for a number of years. As a committee, we do not always agree on every detail. However, we are unanimous in our support for improvement in the standard setting process with respect to private companies. We also are unanimous in our views on some of the main concerns that need to be addressed.”
 
The FEI CPC-S letter also acknowledged, “In the last year, we have noticed substantial improvement in the approach the FASB has taken with respect to private company issues and we have noted the process changes underway to address private company concerns by improving the existing processes. We also recognize and appreciate the attention the Board of Trustees of FAF has placed on private company concerns. We believe the proposed PCSIC is a logical step in the evolution of the standard setting process.”

As noted above, FEI CPC-S “agree(s) with the general idea of the PCSIC,” but also “suggest(s) improvements to the FAF’s plan that may address our concerns.”

FEI CPC-S Suggests Improvements to FAF Plan in Seven Areas
The FEI CPC-S letter then lists seven of the committee’s largest concerns with the FAF Plan, and makes recommendations related to those concerns, which are:  

1. As proposals for private company alternatives are addressed by a group focused on private company issues, there should be a high hurdle for those proposals to not be ratified (i.e. regarding a FASB veto).

2. The group that addresses private company standards should be allowed to set its own agenda.

3. Any changes to the structure of the standard setting process to address private company concerns should incorporate enough checks and balances to allow the new process to be effective regardless of the individuals on the PCSIC or FASB.

4. The effort to address future GAAP proposals as well as a review of existing GAAP will require significant time and effort and may require some form of remuneration.

5. The PCSIC should be sized in a way that allows it to reach timely and well informed decisions.

6. It will be important for the PCSIC to develop a conceptual framework to guide its decision making process.

7. FAF should take an active part in monitoring the effectiveness of any changes as part of its governance role over the standard setting bodies.

Read the complete FEI CPC-S letter for further detail.

Thousands Of Comment Letters Reflect AICPA Letter Writing Campaign

NOTE:
The remainder of this blog post includes direct citations from various comment letters filed on the FAF Plan, and my personal commentary as well; please note the disclaimer that appears on the right side of this blog.

Over 6,600 comment letters have been filed to date on the FAF’s Plan To Establish the Private Company Standards Improvements Council (PCSIC), so far including (as of 8:00 am EST this morning) 291 individual (non-form) letters representing a variety of views, and 6,330 form letters opposing the FAF Plan..

As noted in earlier posts in this blog, the now-massive number of ‘form letters’ received by the FAF opposing their Plan (see generic ‘form letter’ received, as posted by FAF) resemble the position of the AICPA, and the AICPA’s related letter-writing campaign (and as further reflected in the AICPA’s Private Company Financial Reporting (PCFR) Toolkit, which includes suggested form letters for members from specified industries to file))

The AICPA’s position and related letter writing campaign oppose the FAF Plan because, as noted AICPA’s Oct. 4 Statement:We are profoundly disappointed that the Financial Accounting Foundation (FAF) is not proposing to create a new independent board to set differences in U.S. GAAP standards, where appropriate, for privately held companies.”
 
“Over the years, FASB’s main focus has understandably been on the needs of constituents of publicly traded companies,” continued the AICPA Statement. “The pent up frustration we are witnessing by the private company constituency is a direct result of that public company focus and not seeing that differences can be and are appropriate for private companies and their financial statement users.”

The AICPA (and the thousands of form letters closely resembling the AICPA’s letter writing campaign) states they would prefer to see an entirely independent board formed to set accounting standards for private companies (in essence, creating a sibling for FASB and GASB under the FAF umbrella), as reflected in the supermajority view included in a report issued by a Blue Ribbon Panel (BRP) on Standard-Setting for Private Companies last year.

Of interest is that the triad that jointly sponsored the formation of the BRP, the FAF, AICPA, and NASBA, has somewhat split views on how to move forward. Although the AICPA opposes the FAF’s Plan to form a PCSIC rather than an entirely new board, NASBA supports the FAF Plan (Comment Letter #54, filed by NASBA), with the following qualification: Regarding the need for continued monitoring and accountability with respect to the achieving the objectives of the FAF Plan (“position number 4” in NASBA’s letter), NASBA states:
 
We must emphasize the pivotal point contained in position number four relating to accountability. The principal parties engaged in the vigorous and healthy debate on private company accounting standards do agree that there are significant issues with the current standard setting processes involving the private community which must be addressed. We in NASBA believe you have set forth a plan which if monitored closely, evaluated frequently, subjected to well documented accountability measures, and adjusted as necessary to ensure the highest quality application of accounting standards to the private sector will be responsive to the accounting profession, regulatory concerns and the public interest.

The crux of the opposition to the FAF Plan, as stated in the ‘form letters,’ appears to be primarily over the FAF’s proposal included in the Plan, that recommendations formed by the PCSIC for exceptions to GAAP be subject to FASB ratification (informally interpreted and referred to by some as FASB ‘veto power’). As outlined at the beginning of this post, FEI’s CPC-S addresses this concern by suggesting, among other things, that a ‘high hurdle’ be established for non-ratification by the FASB.

I have not tallied up how many of the 291 individual (non-form) letters support the FAF’s proposed PCSIC vs. how many of them call for a separate board or suggest some other way forward on this issue, but I have noticed that the individual (non-form letters) reflect a range of views.  

Highlights From Selected Comment Letters: Koch Industries, CGF Private Equity, Chatto (CPA)

I am sure there are many interesting letters in the comment file on this issue; highlights from a few of them I personally chose to read, provide examples of views from some individual members from the preparer, investor/user, and auditor constituencies.

Koch Industries

One such letter is the comment letter filed by Koch Industries (Comment Letter 262). I was particularly interested in this letter because the discussion over the years of whether there is a need for a ‘big GAAP/little GAAP” (i.e., a simpler set of private co. GAAP viewed as less complex and more useful to the users of their financial statements, separate and apart from public company GAAP, which some view as driven by the SEC (which authorizes FASB as the acknowledged independent accounting standard setter for purposes of SEC reporting using U.S. GAAP) and public company analysts). Some of these points are made in the other two letters analyzed further below, and have been part of lively discussion on this issue for years.  

The Koch Industries letter, signed by Chief Accounting Officer and Controller Richard Dinkel, states (bulleted format for purposes of posting highlights here):

·        
We fully support the efforts of the FAF and the FASB to put more emphasis on the needs for private company financial reporting within the accounting standard-setting process.  

·        
We generally agree with the proposal including the need for maintaining a single standard setter for U.S. GAAP and the formation of a separate body to address the need for exceptions or modifications of accounting standards for private companies.

·        
However, there are certain aspects of the proposal that I would ask the Board to consider as it advances the formation of a new Council. [See Koch Industries’ letter for details on these points, one of which is that the Chairman of the Council (referred to as PCSIC in FAF’s Plan) should be independent of the FASB, akin to the independent chairmanship of the Financial Accounting Standards Advisory Council (FASAC)]

·        
The governance process by which the FAF oversees the FASB and the new council will be an extremely critical aspect in ensuring that progress and momentum continues in a positive direction.
Koch Industries’ letter also alludes to the flood of comment letters (in particular the over 6,600 ‘form letters’ that appear to have been triggered mainly by the AICPA’s letter-writing campaign) which oppose the FAF’s Plan, and indirectly suggests how to be responsive to the opposing point of view:     

·        
With so many constituents strongly believing the proposal does not go far enough, the FAF should strongly consider how it will define success and how it will report on the effectiveness of the chosen alternative.  

Significantly, the Koch Industries’ letter adds:  
·         The opinions expressed in this comment letter are based on the expectation that the FASB will continue to stay focused on the issues of complexity, relevance, and cost-benefit in their desire to better serve the interests of private companies. 

CGF Private Equity

A very interesting letter, notable for its frankness, is Comment letter #256 by John Exline of CGF Private Equity. I would view a private equity firm/investor as being in the investor or ‘user’ category of FASB’s constituents.

The CGF Private Equity letter speaks of a sense of longstanding disappointment in FASB’s attention to private companies, similar to some points in the AICPA’s statement, but goes on to state that their views became more positive in light of more recent efforts by FASB to address private company reporting issues, particularly in the period since the formation of the Blue Ribbon Panel. Thus, the author of the CGF Private Equity letter notes he supports the FAF proposed PCSIC, with some suggested improvements. 
Some highlights from the CGF Private Equity letter (bulleted format for purpose of posting some selected highlights here), which is quite interesting in its entirety:
 
·         I agree with the plan as it was presented. I am concerned with how all the additional people will be funded, but I have faith in the Trustee’s judgment to answer those and other tough questions as they arise. I understand that just a statement of agreement tells you little or nothing so please allow me to expand a bit.
 
·         I agree with leaving the Financial Accounting Standards Board (the “Board”) as the ultimate authority for US GAAP. This helps to maintain a single set of accounting standards for all (non-governmental) companies. As soon as there are two groups the probability of divergence increases exponentially.
 
·         Not only myself, but everyone that I have talked to about the needs of non-public companies has indicated that they believe that there should only be one underlying “true” accounting; that exceptions could be accommodated through differences in measurement, disclosure requirements or presentation as long as the underlying accounting does not change or unless there is sufficient evidence of reason to support the divergence.
 
·         The Board demonstrates what is, in my humble opinion, the best standards setting process in the world. They deliver high quality accounting standards with a proper process of “daylight” (e.g. exposure drafts, public comments, town hall meetings, round tables, etc.). I don’t always agree with everything promulgated, but I feel that I get my fair chance to express my opinions and have them seriously considered.
 
·         I agree with the Trustee’s demonstration of the importance of private company financial reporting. Although the capital markets command a lot of dollars, clearly the majority of companies and jobs in the US economy come from private companies. Their significance is huge, but their voice remains mostly unheard because they do not typically have the resources to champion causes such as accounting standards.
 
·         A few years ago, when the Blue Ribbon Panel was formed I had lost faith in the Board; recent exposures [Exposure Drafts of proposed accounting standards] were so complex and theoretical that they were philosophically “fun” to talk about but they were conceptually very difficult to explain to private company owners, managers and the local bankers and insurance companies which use their financial statements to make decisions.
 
·         I did not think the Board could or would be able to come up with a single set of accounting standards which would be workable for private companies or they even felt they should.
 
·         I had resigned myself to the fact that the Board was becoming a puppet for day traders and market analysts who were only after monetizing their own transactions not the accurate communication of value creation and position. I think many of the people that I have spoken with that were on the Blue Ribbon Panel would alter their recommendation after seeing what has been done [more recently by the FASB] and I believe, at this point, their recommendation would be very similar to the Trustees Plan. Most everyone that I talked to even though not entirely aware of the changes made by the Trustees, still hoped for a single set of standards.
 
o    Private company financial reporting needs are significant. Their resources are typically limited. Their financial skills and knowledge are typically limited. The sophistication of the users of private company financial reports is lower and their understanding of complex, theoretical concepts is limited. Preparers and users of all financial reports are in favor of a single set of accounting standards. This facilitates comparability, consistency, knowledge transfer and even migration (as from a private company to a public company or vice versa).
 
o    The establishment of a [conceptual] framework [for private company standards, or exceptions to public company standards] is probably the single most important point in the process. We all must be grounded on the fundamentals and agree before we can begin to tackle the individual issues.
 
o    Lastly, complexity in general is unfavorable to the preparer community as it requires additional costs and resources to accommodate. Rarely [d]o preparers feel that the cost justifies the perceived benefit. The framework helps guide the maintenance of a single set of standards.
An especially key point in the letter authored by CGF Private Equity’s Exline, in my view, is where he notes that during times of frustration with FASB standards:
 
o    Discussions amongst my peers at this time were around “how many exceptions before we are out of GAAP compliance?’”  This basically means that if private companies felt that certain GAAP standards were too complex and or non-useful to implement, they could, if the users of their financial statements such as lenders and others would accept them, and if their auditors concurred, issue financial statements that state they are in accordance with GAAP, with certain specified ‘exceptions.’
 
The potential increase in such ad hoc, and yet increasingly widespread, ‘exceptions’ to GAAP, used as a coping mechanism by some private companies and presumably acceptable to the users of their financial statements (particularly if those users do not need to see certain complex calculations, estimates, disclosures and other measurement techniques required by GAAP, if the resulting information does not reflect key metrics that the user relies on for their purposes, such as, e.g., cash flow, or if alternative information available directly from management would suffice to make the user comfortable with the exceptions taken by the company to GAAP, even as that results in a qualified audit opinion, when considered by the company and the user on the basis of cost-benefit and usefulness).
 
Of particular concern is that if there is an increasing prevalence of ad hoc ‘exceptions’ to GAAP, expressing a preference for taking those exceptions even at risk of a qualified (rather than an unqualified) audit opinion. This raises the question as to the meaning or value of having one purported set of ‘GAAP,’ vs. the potential for a more generally agreed-upon set of exceptions to GAAP that better meet the needs of private companies and their users, such as may be possible through the FAF’s Planned PCSIC, subject to the FAF’s redeliberation following their analysis of comment letters and feedback received at a series of public roundtables on the FAF Plan,  (The first of the public roundtables took place yesterday; archived recordings will be posted on FAF’s website.
 
Carl Chatto, CPA
 
This very issue of the willingness of private companies and the users of their financial statements to take and accept exceptions to GAAP, even as resulting in a qualified audit opinion, was addressed in another letter, Comment letter #269, by Carl Chatto, a CPA.
 
Chatto’s individual (non-form) letter includes some of the form letter wording, but differentiates itself in some of the detail provided on particular points, including the issue of the use of ad hoc exceptions to GAAP today resulting in unqualified audit opinions.  
 
Referencing the ‘systemic problem’ in standard setting and calling for formation of an entirely separate standard setting board for private company standards, akin to the AICPA and form-letter position, Chatto, a CPA, concludes that ‘Differential standards and an autonomous standard-setting body dedicated exclusively to private company financial reporting are needed now.”
 
Here are some highlights from Chatto’s letter (bulleted below for ease of reading):
 
o    It’s telling that in my firm’s practice covering much of New England, we have clients who have taken qualified audit opinions rather than incur the time and expense to comply with standards that have no discernible benefit, such as variable interest entities and goodwill impairment reviews.

o   
Also, lenders and owners are increasingly unconcerned about qualified audit opinions.

o   
If accounting standards become diluted in this way, the entire profession runs the risk that standard will not be ‘generally accepted’ but rather ‘generally unacceptable.’
 
The points above add urgency to the need to address private company standard setting in some manner, and cogently express some of the driving forces behind why the FAF, in conjunction with NASBA and the AICPA,  cosponsored the Blue Ribbon Panel, and why, as a follow-on measure to their study of the Blue Ribbon Panel report and other feedback received (such as through the FAF’s earlier ‘listening tour’) the FAF released its Plan to form a PCSIC to improve standard-setting for private companies, and has been actively seeking feedback through comment letters, the public roundtables, and other input.

U.S. Senate Subcommittee Weighs In
As noted in an article by Alix Stuart published in CFO.com on January 13, Senate Subcommittee Opposes Private Company GAAP, a comment letter on the FAF Plan was filed by Senator Carl Levin, Chairman of the Subcommittee on Permanent Investigations of the Senate’s Committee on Homeland Security and Government Affairs. See: Comment Letter #201 filed by Sen. Levin.
CFO.com’s Stuart notes: (bulleted below for emphasis):
 
o    According to the letter, accounting exceptions for private companies would undermine GAAP, create less transparency, and conflict with international accounting standards, and “could even increase compliance costs for small businesses.
 
o    In sending the missive, however, the Senate has opened up a new debate about to what extent the government can regulate and oversee the financial statements of private companies.
 
o    “I’m speechless,” says John Hepp, a partner with Grant Thornton and a former FASB staff member. “This letter is exploring new territory.”
 
o    Implicit in the letter is the notion that government regulators have some jurisdiction over the financial statements of private companies, which turns on its head the commonly held principle that SEC oversight is confined to publicly listed companies. In fact, the line between public and private has become much blurrier in the past year”
 
State CPA Societies Signal Varying Points of View
 
Tom Hood, Executive Director and CEO of the Maryland Association of CPAs (MACPA) is also quoted by CFO.com’s Stuart in response to some points made in Senator Levin’s letter.  
 
MACPA has been among the state societies of CPAs taking a leadership role in actively supporting formation of a separate board for private company standard setting. Read more in MACPA’s comment letter (Comment letter #216) on the FAF Plan. Additional background material and links to related materials can be found in Hood’s post earlier this week in MACPA’s CPA Success blog, in a post entitled: Will They Listen This Time?
 
I thought I’d check out a couple other bell-weather state societies of CPAs known for their highly technical and thoughtful comment letters on accounting proposals. In an admittedly small sample of two – the New York State Society of CPAs and the Illinois CPA Society, I found a split in views. Since I only checked 3 State Societies in total, I do not know what the tally is in terms of aligning with the views of the AICPA and the resulting 6,600 form letters or not.
 
Akin to the AICPA and MACPA letters, Comment Letter 105, filed by the NYSSCPA opposes the FAF Plan and calls for formation of a separate board.
 
In contrast, CL 223, filed by the Illinois CPA Society, while carefully characterizing it as a ‘majority’ (not unanimous) view of their Accounting Principles Committee, supports the FAF Plan. Also of interest is a direct reference to the AICPA’s letter-writing campaign. Here are some highlights from the Illinois CPA Society’s letter (bulleted format for emphasis): 
  • We applaud the FAF for focusing on the merits of the responses for and against its proposal without being unduly influenced by the political firestorm created by the AICPA’s letter writing campaign on this topic.
  • As a Committee, we ourselves have historically participated in lively discussions on the topic of private company reporting, and most recently the FAF’s plan.
  • The Committee understands that this is an extremely difficult, if not impossible, topic to obtain unanimous agreement on, and our letter reflects both majority and minority views of our Committee members.
  • The majority of the Committee [concurs with] the FAF’s plan … However, it should be noted that there is a minority view on the Committee that opposes the FAF’s proposal and believes that a separate Board should be established outside of the oversight of the FASB, as proposed by the Blue Ribbon panel.
The Illinois letter also alludes to the rapidly changing environment surrounding standard setting for private companies, which another commenter above noted includes more attention from FASB to private company issues, in tandem with the timing of the release of the FAF’s Plan following publication of the Blue Ribbon Panel report, and states (bulleted for emphasis):

·        
While this letter reflects the views of the Committee and is based on the FAF’s Plan to Establish the Private Company Standards Improvement Council, issued on October 4, 2011, it may not necessarily reflect the views of the Board of Directors of the Illinois CPA Society.

·        
In support of the Blue Ribbon Panel’s recommendations issued in December 2009, the Society’s Board approved on March 16, 2011, a resolution supporting the implementation of a different U.S. GAAP model for private companies as determined by a separate private company accounting standards board.

·        
While that resolution supports the Blue Ribbon Panel’s recommendations issued in December 2009, it may not reflect its current views of the plan issued by the FAF on October 4, 2011.

Public Roundtables

The first in a series of public roundtables being conducted by the FAF to gain additional feedback on the FAF Plan took place yesterday in Atlanta.

Among the panelists speaking at the FAF’s Atlanta roundtable was Andy Thrower, a member of FEI’s Committee on Private Company Standards (CPC-S) and former Chairman of that committee. Although I did not observe yesterday’s roundtable and Andy’s particular comments thereon, I have long been impressed with not only his technical and practical knowledge, but also his deep knowledge regarding FASB’s Conceptual Framework, as well as the interconnectedness and working style between some of FAF and FASB’s advisory committees vis-à-vis the boards they serve; he is a former member of FASAC and FASB’s Small Business Advisory Committee.  

Additional roundtables are slated to take place on January 26 in Dallas, February 7 in Palo Alto, and March 1 in Boston. Read more about the roundtables in the FAF’s press release.  
 
Posted: 1/19/2012 1:43:48 PM by Edith Orenstein | with 0 comments
Filed under: Andy Thrower,Barry Melancon,comment letters,George Beckwith,private companies,private company,Tom Hood,Beckwith,CPC-S,FAF,FASB,FEI,Thrower,AICPA


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ABOUT THE AUTHOR

Edith Orenstein