A GAAP of Their Own

Private companies seeking a wholesale exemption from FASB's accounting rules are likely to be disappointed.

Oh, to be a private company, with no need to file Securities and Exchange Commission reports and able to grow your business unfettered by the Financial Accounting Standards Board or interrogations from auditors.

Think again. Private company CFOs say they are getting the short end of the stick when it comes to financial reporting. Although not subject to SEC rules, about 70 percent of private companies end up preparing GAAP financial statements to satisfy lenders and investors, according to the American Institute of Certified Public Accountants (AICPA). That exercise is getting increasingly expensive and irrelevant, say executives at such companies, as public-company reforms push up both the cost of auditors’ time and the complexity of GAAP.

“We’re getting caught in rules and regulations that were designed for Enron, not for us. As the costs start to go up, you question whether the benefit of reporting is worth the cost,” says Jeanne Henry, CFO of Waltham, Massachusetts-based Atlas Venture. A survey of private-company executives by law firm Foley & Lardner LLP shows a 34 percent increase in compliance fees over the past year.

As a result, a growing number of private firms are beginning to call for an alternative version of GAAP tailored to the typical structure and resources of a private company. Leading the charge is the AICPA’s Private Company Financial Reporting Taskforce, which includes Henry, along with other private-company CFOs, venture capitalists, bankers, and auditors. “There needs to be a dedicated process to focus on the needs of accounting for private companies,” says Dan Noll, director of accounting standards for the AICPA and staff leader for the task force. Some members even advocate a separate standards-setting board.

What are the chances of success? FASB is currently disinclined to go as far as the task force wants. And, of course, the SEC has nothing to say about the question, since private companies don’t raise capital from the public. Not everyone, for that matter, is convinced that GAAP has serious gaps for private companies. Many bankers, auditors, and watchdogs like the accounting setup as is, or prefer only ad-hoc exceptions. “The financial statements should reflect the worth of the assets and liabilities,” says Jack Ciesielski, publisher of the Analyst’s Accounting Observer newsletter. “If it’s a good idea for a public company, it’s a good idea for a private company.”

Other users of financial statements share that view. A survey commissioned by the AICPA last year of about 1,000 private-company executives, auditors, and financial-statement users found that bank lenders, venture capitalists, and surety lenders rated GAAP high — 2.5 on a scale of 1 to 3 — for its utility in making credit or investment decisions. When respondents were asked why they required GAAP, the highest ranking answers were the standardized language it provides and the fact that it permits easy comparison among many companies. Sixty-eight percent of lenders said GAAP provides useful information; 77 percent of investors and surety/bonding firms agreed.

“The financial industry needs some type of standard comparative basis, so that a machine shop in Massachusetts looks the same as one in California,” says task-force member David Maraman, who is also chief credit officer and a senior vice president at First Indiana Bank.


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