I feel compelled to reiterate the standard disclaimer that my post in no way represents the views of the FAF or the FASB. I have not consulted with the Board, staff, or FAF employees prior to this posting, and the opinions expressed are my own.
The AICPA’s response to the FAF’s proposal for the creation of a Private Company Standards Improvement Council (PCSIC) has been predictably unsupportive. The organization has made its preference for a separate private company standards-setting board widely known, and intends to organize another letter-writing campaign among its membership expressing this view. A similar campaign by the AICPA prior to the release of the FAF’s proposal resulted in hundreds of form letters being sent to the FAF.
A previous FASRI post (with comments) outlines some of the basic aspects of the PCSIC proposal. Basically, the PCSIC will act in a similar fashion to the EITF with a fundamental difference that the PCSIC will have authority to set its own agenda. The AICPA particularly objects to the veto power granted to the FASB on any decisions made by the PCSIC. In an Accounting Today article (here), AICPA representatives give several arguments in support of a separate board, but state they “do not want to control private company financial reporting” (quote from article).
However, just yesterday, the AICPA’s governing council approved a resolution that if the FAF does not create a separate private company standard setting body, the AICPA will consider other options, which explicitly includes the establishment of such a board by the AICPA. The entire resolution can be read here. Clearly, the AICPA is frustrated over this issue. But, I think the FAF is making the correct move, and I briefly explain why.
The AICPA’s primary objections to the FAF proposal can be summarized as follows,
1) US standard setting does not adequately address the needs of private companies, and
2) the FAF’s current proposal will almost certainly maintain the current inadequacies becauseFASB has oversight of the PCSIC and veto power of any decisions,private company interests are not adequately represented on the FAF and FASB,the FASB moves too slowly on issues, and this perceived weakness is exacerbated for private companies because the FASB has higher priorities, especially with international convergence, andthe PCSIC is not fundamentally different from the Private Company Financial Reporting Committee (PCFRC).
The FAF has acknowledged the validity of point 1) above (at least, implicitly), and several steps have been taken to address it, including, the creation of the PCFRC, increasing private company representation on the FASB, and the establishment of the Blue Ribbon Panel. Ultimately, the FAF followed almost all of the Blue Ribbon Panel recommendations – except the significant recommendation of establishing a separate board.
With respect to point 2), the EITF provides a useful model for how the PCSIC is likely to function, and serves to contradict many of the objections of the AICPA. Similar to the FAF’s proposal for the PCSIC, the FASB monitors the progress of EITF projects and must ratify all EITF decisions prior to implementation into GAAP. In spite of this FASB veto power and oversight, the EITF has proven capable of establishing accounting guidance that is widely accepted. Furthermore, EITF action is relatively quick, even though public exposure of their decisions is required.
I don’t understand the AICPA’s argument that the FAF’s proposal will fail due to a lack of private company representation in the FAF and the FASB. Of course, the PCSIC will be comprised entirely of private company advocates. Just as the FASB closely listens to all their constituents through various outreach activities, I’m confident the FASB would similarly listen to the input of the committee. Moreover, a member of the FASB (likely with private company experience) will chair the PCSIC, which increases the probability that the FASB will be sympathetic to the committee’s views.
The AICPA has argued fervently that the FASB is too slow in its decisions. The standard setting process certainly takes time – sometimes excessive amounts of time, it would seem. However, our profession has learned through experience that it’s extremely important to both regulators and preparers to get things correct the first time. Preparers do not like having to keep changing their reporting systems, and regulators, obviously, do not like being criticized for getting things wrong. Thus, a slow and deliberate process with ample opportunity for public feedback is necessary. I don’t see how a separate board would somehow be able to get around the requirement of due process.
Finally, important aspects of the proposal that will facilitate its success are that the PCSIC can establish its own agenda, and the committee will be guided by a framework that establishes criteria for when deviations from GAAP can be justified for private companies. These aspects are important differences from the current PCFRC, and the AICPA does not appear to be giving adequate consideration to them. Overall, I think the FAF’s proposal balances the needs of private companies with the needs of financial statement users who want comparability.
Is the AICPA really serious about establishing their own board? Haven’t we already “been there, done that”? Will it really be independent? How will the board be financed?
FASRI has a Roundtable scheduled on November 1 to discuss issues surrounding private companies. Daryl Buck will be the discussion leader, a Board member with significant private company experience. Put it on your calendar if you are interested in these issues. More details will follow.