The Big Risks of Little GAAP

Private U.S. companies and their stakeholders may soon get the "little GAAP" they have long sought. Could this dream-come-true turn into a nightmare?

What Are the Risks?

There are two kinds of risks associated with the solution being contemplated by the panel: goal-setting risks and process risks. Furthermore, there are two specific risks of each kind, for a total of four key risks. In my next several columns, I’ll explore each of the risks in turn and explain how each can be mitigated. But for now, here’s a brief summary of the risks.

The first goal-setting risk is solution-suitability risk. That is the risk of defining a target solution that inherently cannot solve the problem it is intended to solve. In essence, this is a risk of setting the wrong goal — one that is ineffective or otherwise unfit for the purpose of solving a particular problem. For example, in rejecting the “one-size-fits-all” GAAP, the panel has ironically embraced the concept of “one-size-fits-all-private-companies” GAAP, despite the vast diversity of users’ information needs and preparers’ capabilities in the private-company realm. Such a solution could be at least as onerous as the problem it is intended to solve.

The second goal-setting risk is solution-acceptance risk — the risk of defining a target solution that will be rejected by stakeholders whose voluntary acceptance of the solution is necessary for success. So far, the panel has received input from very few of the key stakeholders in this matter; namely, users of private-company financial statements. And what input the panel has received has been largely anecdotal and rife with contradictions. As explained above, private U.S. companies can easily ignore standards that they don’t have a say in, don’t understand, or simply don’t like.

The first process risk is solution-development risk. In this case, it’s the risk of employing a solution-development process that inherently cannot produce the defined solution. In other words, it’s the risk of using a development process that is ineffective or otherwise unfit for its purpose. As contemplated by the panel, a separate standard-setting body would likely employ a standard-setting process similar to FASB’s current process and thus replicate the existing dysfunctions of that process, which are particularly notable with regard to setting standards for private U.S. companies.

The second process risk is solution-implementation risk, which is the danger of employing an implementation process that inherently cannot succeed at deploying the developed solution. Because the millions of individual and corporate users of private-company financial statements are far removed from the influence of the panel’s sponsoring organizations, implementation challenges of any solution loom large.


Without risk management, a move toward little GAAP for private U.S. companies is likely to turn into a fiasco. Fortunately, there are several specific steps that can be taken to foster success and avoid failure. And if you’re a private-company CFO, you can play an important role — be sure to watch for my upcoming columns.

Contributor Bruce Pounder is president of

Leveraged Logic

and is the immediate past chair of the Small Business Financial and Regulatory Affairs Committee of the Institute of Management Accountants (IMA).
He is also the lead developer and presenter of the Webcast series

“This Week in Accounting.”


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