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.
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
CFO.com’s Stuart notes: (bulleted below for emphasis):
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
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.
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.
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