Private-Company GAAP: Can We Get a Do-Over?

Private U.S. companies need a much better solution for their financial-reporting problems than one recently proposed by a blue-ribbon panel.

Managing Solution-Implementation Risk

It’s especially important to manage solution-implementation risk in the case of private-company financial reporting because partial success at implementing the panel’s solution would actually be worse than complete failure. As I have pointed out previously (see “The Big Risks of Little GAAP”), successful implementation among only some private U.S. companies and only some stakeholders would increase the diversity of standards used by private U.S. companies. This would in turn reduce comparability across reporting entities while increasing the complexity and cost of financial-statement preparation, auditing, and analysis.

So how can solution-implementation risk be minimized? Primarily by taking a realistic look at who must do what when, and why. Doing so may lead to the realization that we can’t solve the problems of private-company financial reporting through an alternative set of private-company standards for general-purpose financial reporting. For example, to implement the panel’s proposed solution, users of private-company financial statements would have to be ready, willing, and able to accept general-purpose financial statements prepared in accordance with standards other than existing GAAP. This would in turn require user education, IT system changes, other business-process changes, reviews of contractual provisions that are based on accounting metrics, and changes to state accountancy laws and regulations, among many other daunting-and potentially prohibitive-tasks.

Conclusion

The risk-blind solution the blue-ribbon panel has proposed has no realistic chance of solving the problems of private-company financial reporting in the United States. We need to try problem-solving again, this time paying attention to risk management from the start. Only by doing so will we have a chance of producing a much better solution than what the panel has proposed.

Contributor Bruce Pounder is vice president, accounting programs, for SmartPros Ltd. and is the immediate past chair of the Small Business Financial and Regulatory Affairs Committee of the Institute of Management Accountants (IMA). He will be a featured speaker at the 18th annual CFO Rising Conference & Expo in March. Bruce is also the lead developer and presenter for the Webcast series “This Week in Accounting.”

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