Information Overload in Financial Reporting for Closely Held Businesses – Part 2

| Audit and Accounting

If a tree falls in the forest and no one hears it, did it really make a noise?

By Mike Alerding     I have been reviewing, drafting and analyzing financial statements for closely held businesses for almost 40 years. I have had the opportunity to see basic financial statements and disclosure requirements change markedly, probably a half a dozen different times, usually as a result of some malady in the US economic markets. Beginning with the formation of the Financial Accounting Standards Board (FASB) in 1973 through the current efforts to converge US Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS). Although the players have changed through the years and the speed with which standards have been promulgated has certainly increased, the story is always the same – react not anticipate and error on the side of providing more vs less information.

The Securities and Exchange Commission has had responsibility for accounting and disclosure requirements for publicly traded companies since its inception in 1934, but for closely held businesses, the American Institute of Certified Public Accountants (AICPA) was the sole standard setter until the FASB was formed. During its tenure as the standard setter, the AICPA issued a total of 31 “Opinions” from 1962 through June of 1973 when the FASB took over. That is 31 opinions in 11 years, or an average of about 3 opinions per year. From its inception in 1973 through today, the FASB has issued many hundreds of statements, interpretations, staff positions, technical bulletins and concept statements, including 29 statements in 2010 alone. The overload in technical requirements for financial reporting has become epidemic.

The soon-to-be converged international standards are, in theory, only applicable to publicly traded companies. However, in the past, these standards have trickled down to all companies, including closely held businesses and even not-for-profit entities. There is no reason to believe that this trickledown effect will not happen again.

The questions have to be asked, “Is more information really better?” and “Who benefits from these new requirements?” In my last blog I addressed the former question, but now it is time to address what may be the more relevant question about cost benefit.

I make numerous presentations, both formal and informal to “readers/users” of financial statements of closely held businesses as part of my role in our firm. I discuss accounting and disclosure updates with investment bankers, commercial bankers, governmental units, business owners and seminars and other accountants/CPA’s. My experience in the past decade or so has been that there is a general lack of knowledge about accounting and reporting requirements for closely held businesses by almost every segment of the reader/user group. More importantly, and somewhat sadly, there is a general feeling of apathy and frustration by most of the reader/user groups who, at least in theory, are supposed to be using these new standards to make informed investment, credit, operating or professional decisions. The only thing that seems to be more rampant than ignorance is apathy.

So if the readers/users are not really paying attention to the majority of these new pronouncements, do they really add any value to the business, the owners or, for that matter, our economy in general? If few understand them and even fewer really care about them, why are they being promulgated in such rapidity and with such arrogance? If a tree falls in the forest and no one hears it, did it really make a noise? I have to wonder.

Mike Alerding is co-founder and Senior Director of Alerding CPA Group, an Indianapolis-based public accounting firm. Visit our website:

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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.
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