Closing the GAAP Will small, private companies finally get their own accounting standards? Many entrepreneurs certainly hope so.
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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.