Closing the GAAP

Will small, private companies finally get their own accounting standards? Many entrepreneurs certainly hope so.
Magazine Contributor
4 min read

This story appears in the January 2006 issue of Entrepreneur. Subscribe »

For decades, private-company CEOs have clamored for an alternate accounting standard. The Generally Accepted Accounting Principles that govern public companies, they argue, are both irrelevant to their businesses and too onerous to maintain. Until recently, not much had changed. But a number of factors, Sarbanes-Oxley chief among them, have pushed the "Big GAAP vs. Little GAAP" debate back to center stage, and more small businesses, lenders and investors have been loudly voicing their dissatisfaction with the status quo. This time, something may actually come of it.

For one thing, the American Institute of Certified Public Accountants decided it was time to take an active role. "The major complaint we were hearing was that people just weren't using the information coming out of GAAP standards and the resulting financial reporting," says Dan Noll, director of accounting standards at the New York City-based AICPA. So the association's Private Company Financial Reporting Task Force conducted a survey of private-company key constituents, such as lenders, business owners and shareholders, to find out how relevant GAAP-based reporting was. The task force's report, released in March of last year, found that quite a few respondents found at least parts of GAAP not particularly useful.

Lenders--certainly as important a constituent for private companies as institutional investors are for public companies-need the financial information to make lending decisions, but with more small-business borrowers forgoing audited financial statements because of the hassle and expense, and many more filing with multiple exceptions, they're finding themselves in a difficult spot. "As a lender, we don't want a watered-down GAAP, but we also recognize that it has become a matter of economics with these small firms," says Michael Cain, senior executive vice president of Frost National Bank in San Antonio and a member of the Financial Accounting Standards Board Small Business Advisory Committee. And because of the increasing complexity of accounting regulations, small businesses are taking longer to file their year-end audits, which can affect their loan structures and the amount banks are willing to lend them.

Often with a staff of just one accounting person, many small businesses are at a loss to keep pace with changing regulations. "Someone with a $5 million business doesn't have the expertise or time to sit down and say 'I wonder how this new standard will affect me,'" says Eric P. Wallace, partner with Carbis Walker LLP, a small CPA firm based in New Castle, Pennsylvania, with thousands of small-business clients. The solution, he and others say, is a separate standard for private companies-one that takes their needs specifically into account.

Others argue that two standards is one too many, both for small businesses and their CPAs. "It would be chaos in the accounting world," says Richard Forrestel Jr., treasurer and secretary of Cold Spring Construction Co. in Akron, New York and a member of the FASB Small Business Advisory Committee.

Whatever side one takes, the critical question, says Wallace, is whether the FASB has a solid understanding of small-business needs on which to base its decisions. "They don't quite get it," he says. But they may be learning. In September, the FASB began recruiting for a project manager to spearhead its financial reporting and accounting initiatives related to privately held companies. The new role was created "to lend further consideration to the real-world differences that exist in financial reporting and accounting between private and public companies," according to the job description. Says Russ Golden, senior technical advisor at the FASB, "We felt the more experience we could have, that would enhance our existing capabilities to focus on our constituent base."

Right now, Golden says, all the options are on the table--from a separate standard to one-off changes to current GAAP rules. Most agree the latter is far more likely. The FASB is currently working with the AICPA to decide on the criteria it will use to evaluate whether GAAP rules need to be changed for private companies. Those who've watched once-fevered initiatives languish in Washington may be skeptical about whether this one has real legs, but says Golden, "This is not something on the corner of our desk that we're ignoring."

C.J. Prince is executive editor of CEO Magazine.
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