Creation of Private Company Financial Reporting Standards

| Audit and Accounting

Letter to Board of Trustees of the Financial Accounting Foundation

Dear Financial Accounting Foundation:

I am writing in support of the Blue Ribbon Panel’s recommendations on the creation of Private Company Financial Reporting Standards (PCFRS) for privately-held companies. A new set of meaningful and pragmatic standards and a separate standard-setting body are critically needed as soon as possible in order to assist the real engine of our economy – closely-held businesses – in spending less wasted time on reporting meaningless information and more time reporting information that can be used by readers of the financial statements.

I just recently completed my 40th year of public accounting, all in the areas of auditing and financial reporting. I have worked for an international firm (Price Waterhouse – 8 years), a large regional SEC Practice firm (Blue & Co. -19 years) and in a 30-person, local audit-based practice (Alerding & Co.) for the past 13 years. I have had the opportunity to work on audits of companies ranging in size from large publicly-held, international companies to small businesses with less than $500,000 in sales per year. Although I certainly do not always agree with all of the pronouncements promulgated by the FASB, I do understand the need for most of the accounting and disclosure requirements that become effective. However, I do not see how public company complex financial reporting standards have any relationship to the needs of the users of privately-held companies. The system needs to bifurcate and focus on serving both types of users instead of attempting to make one size fit all.

Although standard-setters may want to believe that privately-held businesses religiously follow the current standards when preparing financial statements under U.S GAAP, the real world is that many – if not most – do not. These smaller companies do not have the financial or professional resources necessary to understand the current standards and usually rely on the outside accounting firm to ensure that their financial statements conform. Those independent accountants that do assist, risk impairing their independence by providing too much information, and must charge the client for the significant amount of time necessary to educate the client where possible and make certain that the statements conform to GAAP.

As a result, what often happens is that the primary users of the financial statements resist requiring the companies to conform to GAAP and are willing to accept other forms of information in making credit decisions. It would be interesting to know whether any of the Foundation standard setters really understand that a significant – if not majority – of credit decisions are made today based on income tax returns, cash-basis internal financial statements and other completely inappropriate information. Banks, the U.S. Small Business Administration and other secured lenders in the U.S. today seldom require U.S. GAAP financial statements when making credit decisions because of the real or perceived notion that GAAP financial statements do not add enough value to warrant the cost. And we wonder why there is a banking crisis in this country.

The Foundation has a real opportunity to make a genuine impact on our economic development in this country and to forge a path that other regulatory agencies – both private and public – can look to as a model for change. I am not recommending that the Foundation change its approach toward financial reporting standard setting for public companies that have sophisticated financial reporting personnel and users. I am recommending that the Foundation relieve itself of the burden of attempting to understand and react to the unique needs of privately-held companies and focus its resources where it gets the best return on its investment. A separate standard setting body, likewise, can then focus its resources on matters that affect its constituency and not waste time on matters that are irrelevant, unnecessary and burdensome to closely-held companies.

Thank you for your consideration.

Mike Alerding is a co-founder and Senior Director at Alerding CPA Group, an Indianapolis-based public accounting firm. Visit our website: www.alerdingcpagroup.com.

This post was written by:

Michael Alerding, CPA
Senior Director

Mike has over 40 years of experience in public accounting. He is a prior columnist for The Indianapolis Business Journal and serves on multiple boards throughout Indianapolis. He currently focuses his time on litigation support, business valuations, succession planning consulting and audit and accounting engagements.
See Michael Alerding’s Full Bio ►

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