When the fallout from the Enron scandal first heightened the scrutiny on corporate accounting, few observers realized that private-company CFOs were feeling the heat too. Indeed, private-company finance chiefs have publicly said that preparing financial statements to satisfy the needs of lenders and investors has become more costly and complex since the Enron debacle raised the price tag of preparing financial reports under generally accepted accounting principles (GAAP).
Whether the cost and complexity issue is addressed sooner — or later — is still not clear, says Judith O’Dell, the newly appointed chairman of the Committee on Private Company Financial Reporting. But her committee, born in 2005 as a task force under the American Institute of Certified Public Accountants, aims to figure out whether new and current accounting standards should differ for private companies.
“In a sense, we’re deciding once and for all to either keep discussing this topic or put it to bed,” Daniel Noll, AICPA’s director of accounting standards, told CFO.com. The 13-member board will act independently of its co-sponsors, the AICPA and the Financial Accounting Standards Board, and periodically present its recommendations to FASB, which will hand down final decisions.
Both the AICPA and FASB have said they don’t want to spawn a miniaturized version of GAAP. “The objective of the change is not to create a separate, new set of GAAP requirements for private companies,” they said in an invitation for comment. Instead, they have a more modest goal: FASB should get better input from a private-company perspective when it sets standards.
Still, at this early stage, it is difficult to tell which committee recommendations will rise to the top of the priority pile, contends O’Dell, who has served on AICPA’s board and worked with FASB’s overseer, the Financial Accounting Foundation. To be sure, during the next two months, she will work to recruit 12 other committee members. “I don’t want to preset the agenda for them; this is something that we will take up at our first meeting as we try to prioritize,” she told CFO.com. “I think we’ll see what’s coming down the pipeline and see how that will affect the private-company constituency.”
Nevertheless, O’Dell points out that while working as an accounting practitioner, certain issues caught her eye; namely, how private companies should account for variable-interest entities (called special-purpose entities before Enron’s collapse), as well as share-based compensation expenses. For example, she recalls situations in which the banks lending to private companies preferred that corporate borrowers avoid consolidating VIEs onto the parent company’s financial statements. Currently, some companies consolidate VIEs under FASB’s FIN No. 46, Consolidation of Variable Interest Entities.
Regarding shared-based compensation, O’Dell points out that nonpublic companies don’t use the same metrics as public companies to measure share value. Absent publicly traded stocks, and the attendant market, private companies have to hire a consultant to annually value their shares, and generally don’t have a consistent metric to follow.
Other issues discussed by the AICPA task force during the past two years include the benefits and disadvantages of fair value accounting, lease accounting, and guarantees, as they pertain to private companies.
If FASB decides to adopt the task force’s recommendation to differentiate a standard for privately held firms, the rule would likely be embedded in an existing FASB standard, says Noll, adding that compliance with a private-company GAAP would be voluntary. “Private companies that are thinking about going public [may want to] stick to the same GAAP that’s required of public companies” to make it easier to launch an initial public offering, muses Noll. But for a family-owned business that’s been private for generations — and has no interest in going public — an alternative accounting standard may be “more useful,” he adds.
A major consideration for the committee will be whether the banks and investor firms backing private companies call for change. Lenders and investors often have easier access to the owners of private companies and can get questions answered more quickly by directly contacting senior officers, O’Dell notes. “The myriad layers of [financial-statement] disclosures aren’t that important,” because lenders and investors have access to management. “Even in large, privately held companies that are multigenerational, people can call up the grandson and say, ‘Hey, what’s going on?’” In a public company, investors don’t have that luxury, says O’Dell, “so the disclosures have to be more detailed.”
The push for more private-company guidance also arises out of company size. Indeed, a mom-and-pop shop just doesn’t have the time or the staff to pay attention to every new standard and keep reports updated based on the new rules. Furthermore, lenders, for instance, rarely ask for GAAP-type statements from companies worth less than $5 million, but rather rely on tax returns, O’Dell says. “Ideally, everybody would be reporting on the same basis of reporting, and that would be GAAP. But to what extent does GAAP meet users’ needs?” She asserts: “Why go through the time for reporting on GAAP if those [perceived benefits] are not needed?”
However, before debate about the prospects of a separate GAAP can commence, O’Dell’s committee will need to fill its roster. “We’re going to try to get out to the masses here, and that’s the main mission of this committee,” Noll declares. To that end, O’Dell is looking for three sets of experienced people: four users of private-company financial statements, such as bankers and venture capitalists; four practitioners, including CPAs from various size firms; and four preparers, including CFOs. The unpaid positions will rotate in length of time served, and likely last three to five years. O’Dell hopes to have the 12 committee members in place by the first week of February, and convene the first meeting in late April.