Fasb Issues

For over 20 years there has been some disgruntled rumbling in the trenches of the accounting profession. As the Financial Accounting Standards Board (FASB) issues ever-more complex and arcane standards, financial executives of nonpublic companies have been groaning under the weight of onerous accounting requirements that often just don't seem to apply for them.

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The thing they groan most is, "Why?" Why, they want to know, should Mom-n-Pop's Coffee Shop have to meet the same generally accepted accounting principles (GAAP) as giant General Motors Corp.? All Mom-n-Pop want is a bank loan for a new grill, while GM needs to justify several billion dollars in stock market investments.

From such questions came the concept of Big GAAP-Little GAAP -- a system that would require big companies to meet one set of standards while little companies meet another. The idea kicked around in the 1980s and died out; it was revived in the 1990s, only to fizzle again.

Here in 2004, it's back -- with its now politically correct term: "differential accounting." The division isn't between big and little companies, but rather between public and nonpublic companies.

Bill Balhoff, CPA, a partner with Postlethwaite & Netterville and an accounting activist who has held positions on the American Institute of CPAs' governing council and FASB's advisory council, and whose voice has been heard at Congressional hearings, believes the time for differential accounting has come.

"Over the years, I've defended the concept of a single set of accounting rules for all companies, public and private," Balhoff says. "But over the past year, decisions at FASB, the creation of the Public Company Accounting Oversight Board (PCAOB) and the drift of the International Accounting Standards Board (IASB) have led me to the conclusion that GAAP for public companies is less than ideal for private companies, sometimes even less than tolerable."

Balhoff points out that half of America's economic output is generated by millions of nonpublic companies, yet FASB writes standards primarily for the complex finances of about 15,000 public companies, establishing the GAAP that the SEC requires for listing on U.S. stock exchanges.

The Sarbanes-Oxley Act may also worsen the situation for privately held companies. The Act mandates that public companies provide funding for FASB. Formerly, funding came from a variety of sources, including accounting firms, investment companies, trade associations and nonpublic companies. While the change in funding may relieve FASB of implicit pressures, Balhoff says, it may also orient the board more toward standards for public companies, to the detriment of the rest.

The problem may be exacerbated by a joint project of FASB and IASB to converge U.S. and international standards. Because international standards inevitably apply mainly to big, international companies, those standards can often be less than appropriate for smaller, nonpublic companies. And since international standards have to apply in scores of national jurisdictions, they tend to apply to the most ponderous common denominator -- again, the international public companies that sell equities in other countries.

Keeping the small company in mind when writing standards or converging with international standards is made more difficult by FASB's difficulty in finding accountants from small companies or auditors from small firms to serve on its board or work on staff. For the past several years, there have been none. Everyone at FASB headquarters in Norwalk, Conn., comes from a public company or Big Four audit firm.

AICPA Chairman and President Barry Melancon says the institute has issued a call for a nationwide discussion on the feasibility and advisability of differential accounting. Actually, AICPA is already working on a similar concept that relates to auditing standards. The Auditing Standards Board (ASB), which set audit standards for all companies until the creation of the PCAOB, has decided to shift its mission. Now that PCAOB is setting the standards for audits of public companies, the ASB intends to set standards that apply to private companies.

The 'Cons' Are Plenty

"We need to have this debate, and we need to not be fearful about the outcome," Melancon says. "We have to be open enough to say, 'No, we're not going to do it,' or 'Yes, we are going to do it.' There are pros and cons to the question."

The cons are plenty, and raise plenty of questions: Who would set the new standards, and how long would it take? Would division be drawn along the public-private line or by company size? Can transactions really be accurately recorded by two means of measurement? How would this affect the U.S. acceptance of international standards? What happens to the comparability of private and public companies and between U.S. and offshore companies? What happens to the books when a private company goes public? Will investors and other users of information respect one kind of accounting more than the other? Are there really two correct ways to account for transactions?

Any such change would affect every part of the accounting profession. Many auditors would have to learn two different sets of accounting standards, or possibly two specialties would develop. Changing jobs or moving up the audit firm ladder would get tricky.

If financial statements came in two forms, financial analysts would have to assess private companies one way, public companies another. Corporate accountants and financial executives would often have to juggle two kinds of accounting as their careers moved between private and public companies, or as their private company went public. In fact, all companies to which the new standards applied would have to convert their books, and their auditors would have to verify that it was done right. To many, that doesn't sound like much of a simplification.

The difficulties are not only technical but political. The new entity designated to set private company accounting standards would