Just because Jim Smith oversees the finances at a private company doesn’t mean he’s immune to the rules and regulations specifically designed for his colleagues at publicly traded companies.
In fact, Smith, the CFO of Phonon Corp., has also felt the same sting of higher audit fees that public companies began feeling once they started to comply with the internal-control provision of the Sarbanes-Oxley Act. Calling it a “flow-down effect,” Smith became privy to auditors’ more intense look into his company’s internal controls last year, resulting in a 10-percent hike in his audit fees.
It’s just one example of how small, private companies can sometimes get swept up into rules that either don’t apply to them, or should be modified in some way to accommodate for their different needs and lack of resources, according to members of the a new small business committee formed by the Institute of Management Accountants.
The 13-member committee — which includes three CFOs, two controllers, and a chief accounting officer — intends to opine on accounting rules in the standard-setters’ pipeline that could possibly affect small companies, such as the changes in store for revenue recognition. The idea is to stop the “one size fits all” mentality that has gone into setting GAAP over the years, according to J. Donald Warren, director of the masters of accountancy in financial accounting program at Rutgers Business School.
Smith doesn’t support the concept of a separate set of accounting rules for smaller companies, but he is open to the idea of modified sections of the rules targeted toward smaller companies. Without some concessions, smaller businesses are unduly burdened. “We end up having to do things that in my mind do not add value for us,” he told CFO.com.
Private companies’ stakeholders don’t need all the disclosures required to be included in public companies’ financial statements, Smith says. In the case of private companies, the stakeholders are often employees or other individuals who have close contact with the business and those who run it, he explains.
The group met for the first time earlier this month, and plans to meet again in June. It will likely focus on the needs of small private companies but will also consider smaller public companies as well. To do that, the members will set up liaisons with several organizations, including the Financial Accounting Standards Board, the International Accounting Standards Board, and the Securities and Exchange Commission. At its first meeting, the group got advice from Judith O’Dell, who heads the Committee on Private Company Financial Reporting, which FASB and the American Institute of Certified Public Accountants created last year.
“One of the primary attributes of this committee is to be not just one that responds [to rulemaking] but to be an advocate for small companies,” Warren told CFO.com.