When the fallout from the Enron scandal first heightened the scrutiny on corporate accounting, few observers realized that private-company CFOs were feeling the heat too. Indeed, private-company finance chiefs have publicly said that preparing financial statements to satisfy the needs of lenders and investors has become more costly and complex since the Enron debacle raised the price tag of preparing financial reports under generally accepted accounting principles (GAAP).
Whether the cost and complexity issue is addressed sooner — or later — is still not clear, says Judith O’Dell, the newly appointed chairman of the Committee on Private Company Financial Reporting. But her committee, born in 2005 as a task force under the American Institute of Certified Public Accountants, aims to figure out whether new and current accounting standards should differ for private companies.
“In a sense, we’re deciding once and for all to either keep discussing this topic or put it to bed,” Daniel Noll, AICPA’s director of accounting standards, told CFO.com. The 13-member board will act independently of its co-sponsors, the AICPA and the Financial Accounting Standards Board, and periodically present its recommendations to FASB, which will hand down final decisions.
Both the AICPA and FASB have said they don’t want to spawn a miniaturized version of GAAP. “The objective of the change is not to create a separate, new set of GAAP requirements for private companies,” they said in an invitation for comment. Instead, they have a more modest goal: FASB should get better input from a private-company perspective when it sets standards.
Still, at this early stage, it is difficult to tell which committee recommendations will rise to the top of the priority pile, contends O’Dell, who has served on AICPA’s board and worked with FASB’s overseer, the Financial Accounting Foundation. To be sure, during the next two months, she will work to recruit 12 other committee members. “I don’t want to preset the agenda for them; this is something that we will take up at our first meeting as we try to prioritize,” she told CFO.com. “I think we’ll see what’s coming down the pipeline and see how that will affect the private-company constituency.”
Nevertheless, O’Dell points out that while working as an accounting practitioner, certain issues caught her eye; namely, how private companies should account for variable-interest entities (called special-purpose entities before Enron’s collapse), as well as share-based compensation expenses. For example, she recalls situations in which the banks lending to private companies preferred that corporate borrowers avoid consolidating VIEs onto the parent company’s financial statements. Currently, some companies consolidate VIEs under FASB’s FIN No. 46, Consolidation of Variable Interest Entities.
Regarding shared-based compensation, O’Dell points out that nonpublic companies don’t use the same metrics as public companies to measure share value. Absent publicly traded stocks, and the attendant market, private companies have to hire a consultant to annually value their shares, and generally don’t have a consistent metric to follow.