The concept of generally accepted accounting principles for private companies has generated controversy every time it has surfaced over the past 35 years. Now, with the Financial Accounting Foundation’s proposal to create a Private Company Standards Improvement Council within the Financial Accounting Standards Board out for comment, the movement has encountered an unexpected obstacle: the U.S. Senate.

Amid a last-minute flurry of comment letters from accounting firms, CPA societies, and other interested parties, the Senate’s permanent subcommittee on investigations sent its own letter earlier this week, expressing a vehement opposition to the proposal that has taken some experts by surprise.

According to the letter, signed by Carl Levin (D-Mich.), 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.

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.

“I’m speechless,” says John Hepp, a partner with Grant Thornton and a former FASB staff member. “This letter is exploring new territory.”

In the letter, Levin asserts the subcommittee “has a longstanding interest in U.S. accounting principles that support transparent and useful financial reports needed to . . . combat fraud,” noting its past investigations into Enron’s collapse, among other corporate scandals. The letter then points out that “misleading accounting practices are not limited to public companies,” citing convicted Ponzi schemer Bernard Madoff’s firm as a prime case in point.

The “inevitable consequence” of a private-company GAAP would be to create two different sets of GAAP, and “common sense dictates that the resulting accounting rules would be more lenient,” says the letter. Since there are more than 22 million private companies and only 17,000 public ones in the United States, a new regime could skew the financials of a majority of companies, warns Levin. Furthermore, many private companies “are of substantial size,” including Toys “R” Us, Mars, and Cargill, and many private-equity firms are also privately held. (Not mentioned in the letter: most investment-related firms are already regulated by and required to report to the Securities and Exchange Commission and other regulators.)

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, as the SEC has started looking into private exchanges such as SecondMarket, where private-company shares can be traded, and has even set up its own committee to explore capital-raising options for private companies. The regulator has also taken action recently against at least two companies, Life Partners Holdings and Bixby Energy Systems, for practices that occurred before they went public.

On a more tactical level, accounting experts say the subcommittee’s idea of “common sense” may not be so common. Their counterpoints “imply that the new private-company standards would allow companies to pick and choose which standards to use,” says Tom Hood, president of the Maryland Society of CPAs, which has been actively promoting a separate, non-FASB–controlled board to govern private-company standards. “Our understanding is the exact opposite. Companies would have to choose which set of standards they would follow and stick to that format. It is also assumed that very large entities would be encouraged or even required to use full GAAP by investment banks, large creditors, and other critical stakeholders,” says Hood.

An FAF spokesperson says the foundation does not comment on individual letters. The comment period closes Saturday, January 14. The FAF is also holding a series of live roundtables between January 18 and March 1 to solicit feedback.

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