Private Company Audit Standards - Finally a Resolution?

by Kevin McGarry 2. August 2012 11:30
There are many stakeholders in the decade-long debate over financial reporting standards for privately held companies, including lenders, assurers, venture capitalists and the companies themselves. Now, a recently enacted measure may be bringing the debate to conclusion.   Currently, private companies follow U.S. Generally Accepted Accounting Principles (GAAP) when issuing reports, which are viewed as the gold standard for financial reporting; however, private company managers view GAAP as unnecessarily complex and lacking relevance to external users. In 2009, a panel was formed as a joint effort between the Financial Accounting Foundation (FAF), the AICPA, and the National Association of State Boards of Accountancy (NASBA) to determine the future of the standards-setting process for private companies.   Just a few months ago, the FAF Trustee Working Group announced its final decision to create a Private Company Council (PCC) to improve the standards-setting process for private companies. Although all decisions of the PCC are subject to FASB approval, the differences include: The PCC is a nine to twelve-member committee, including a non-FASB chairperson. A FASB board member will be assigned as a liaison to the PCC. The PCC is encouraged to set its own agenda without FASB approval. The PCC and FASB are encouraged to mutually agree on a set of criteria to identify possible exceptions and modifications to existing Generally Accepted Accounting Principles (GAAP) for private companies. Any such exceptions and modifications raised by the PCC are subject to FASB endorsement and a public comment period; FASB makes the final endorsement decision based upon a majority vote (four of seven members). In the instance of non-endorsement, the FASB chairperson will present written documentation to the PCC chair, providing a reason for the non-endorsement and possible changes for the PCC to consider that could lead to FASB endorsement. The endorsement process must be completed within a specified time frame, and all endorsed decisions will be issued as Accounting Standards Updates to the Accounting Standards Codification.   The PCC will provide reports to a newly established committee of the FAF Board of Trustees for the first three years, at which point the PCC will be re-assessed to determine whether further changes to the overall standards-setting process for private companies are necessary. With the creation of the PCC, the FAF trustees will try to avoid two sets of GAAP (one for private companies and one for public companies). The AICPA subsequently announced the development of a financial reporting framework to support self-contained, other comprehensive basis of accounting (OCBOA), intended for use by privately held small- to medium-sized entities preparing financial statements.   To understand how and why the PCC committee was formed or additional information on the newly announced final decision, please see The Controversy over Private Company Reporting Standards in The CPA Journal.
Categories: Assurance