Spring 2014 issue of Horizons

It’s been more than 40 years since the Financial Accounting Standards Board (FASB) was established. And it’s been almost that many years that rousing complaints have been heard about the complexity of U.S. generally accepted accounting principles (GAAP) it has created. “Developed for public companies, U.S. GAAP is too complicated for nonpublic entities” is the sentiment often heard by accountants and company executives alike. Private companies have financial information needs that are much different from those of large public entities. Their financial statement users need straight forward, understandable information. Despite these protests, efforts to streamline GAAP over the first 30 years since the FASB’s creation have resulted in very little change. In fact, various efforts undertaken by the AICPA and the FASB resulted in conclusions such as the following in response to the complaints:

∙ Certified public accountants perceive financial statement users’ needs differently than the financial statement users.

∙ Creditors’ needs and decision-making processes are basically the same for private and public companies.

∙ The solution to these concerns already exists within the GAAP framework, and small firm input into the standard-setting process should be increased.

∙ The use of accounting frameworks other than GAAP is encouraged.

Post-Enron Changes The accounting scandals of the early 2000s spurred the creation of the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board (PCAOB). The PCAOB oversees the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in independent audit reports. The implementation of Sarbanes-Oxley brought about more complex regulatory compliance, and tighter controls over financial reporting, as well as a system of accountability for leaders of public companies. Without a doubt, the result of implementing Sarbanes-Oxley for public companies has been costly—in resources, time and money. The wide-reaching changes that came about from Sarbanes-Oxley and the changes to GAAP that followed the accounting scandals of the early 2000s once again directed a spotlight on private company financial reporting and renewed interest in evaluating the standard setting process for private companies.

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FASB created

Decades of studies and reports on GAAP for private companies

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