Senate Comes Out Against Private Company Standards Proposal

The U.S. Senate has entered the debate over whether there should be a separate standards setting body to oversee Generally Accepted Accounting Principles (GAAP) with modifications and exceptions for private companies, with a letter signed by Sen. Carl Levin, (D-Mich.) coming out squarely against the idea.

The FAF’s proposal came in reaction findings that came out of a multi-year outreach effort with the National Association of State Boards of Accountancy (NASBA) and the AICPA, together forming what came to be known as the blue ribbon panel. Written about in a previous issue of the Trusted Professional, The group concluded there were significant systemic issues, in the way that private companies used GAAP in their own accounting, as many of the requirements in the standard simply didn’t apply to them and only served to make financial reporting unnecessarily complex.

The Jan. 11 letter, sent to the Financial Accounting Foundation’s Board of Trustees, was sent through the Senate’s permanent subcommittee on investigations and expressed concern that the creation of a private company modifications and exceptions to GAAP, as proposed by the Financial Accounting Foundation this past October, would inevitably create two different versions of U.S. accounting standards, despite the FAF stating it does not intend to do so. The letter noted that there are far more private companies than public ones and that GAAP with exceptions and modifications (or “special rules” in the letter) would necessarily undermine the public company standards because of this. Further, the letter also expressed concerns that GAAP with modifications and exceptions for private companies would reduce transparency for private corporations, which are already much more opaque than public companies. Finally, the letter said that GAAP with modifications and exceptions for private companies would conflict with International Financial Reporting Standards (IFRS), which does not recognize exceptions for private companies and therefore cause problems with convergence. While IFRS does not recognize standards with modifications and exceptions for private companies, it does have IFRS for Small and Medium Entities, a simplified set of rules designed to meet the needs and capabilities of small and medium-sized entities.

The letter also opposed the creation of a separate standards-setting council to oversee the creation of private company exceptions and modifications to GAAP, though mainly because it would encourage the acceleration of private company standards.

The FAF’s proposal is actually quite scaled back compared to what had been originally suggested by the blue ribbon panel composed of the FAF, National Association of State Boards of Accountancy and the AICPA, tasked with looking into improving private company financial reporting. The panel’s report eventually recommended the creation of GAAP with private company modifications and exceptions, but also said that there should be an independent board to oversee it. Under the FAF’s proposal, the board would be housed within the Financial Accounting Standards Board and would require the FASB’s approval before any of its proposals could be implemented.

This proposal itself was met with opposition by the NYSSCPA, which said in a comment letter that having an independent board was essential if the panel’s original mission of understanding and addressing the unique financial reporting challenges faced by private companies were to be fulfilled, and felt that having the board be housed within the FASB itself didn’t go far enough.