Goldilocks Three

Goldilocks Three

Will Goldilocks find her "just right" fit for private company standards?

Will Goldilocks find her "just right"fit for private company standards?
            The Industrial Revolution brought with it many changes to the way people did business, especially for those in the financial world. Instead of mostly small, independent artisans and craftsmen working out of their homes, ever bigger companies were formed to make use of new and innovative equipment that needed more and more people to run them, along with more money to invest in them. This need would result in the forming of corporations and their need to provide their potential investors with reports showing their financial position and results of operations.
            Two acts, created in the early 1930s gave the Securities and Exchange Commission (SEC) the authority to create accounting principles for those companies whose securities had to be registered with the SEC. Over the years, the standard-setting process was handed over to other organizations.
            The Financial Accounting Foundation (FAF) was created and established the Financial Accounting Standards Board (FASB) as the standard-setting body within the accounting profession. This began a long period of ever-more "principles" for public companies to adhere to.
            Over the years, the FASB has issued 159 Statements of Financial Accounting Standards. These standards are known as "generally accepted accounting principles" or GAAP for short and have spilled over to include private companies. These regulations became more and more cumbersome and hard to understand, especially to those most likely to use the financial reporting information of these businesses, including lenders. Goldilocks would probaby say that these regulations were not a good fit and just "too hard" to use and understand for most small, private businesses. Change was needed.
            In December 2009, the American Institute of Certified Public Accountants (AICPA) and the FAF created a "blue-ribbon panel" to look at how US accounting standards would be able to best meet the needs of users of private company financial statements.
In January of 2011, the panel came back with recommendations that would mean important changes to the future of accounting standard setting for private companies, and would include the creation of a separate standard-setting board. The panel concluded that "there are urgent and growing systemic issues that need to be addressed in the current system of US accounting standard setting."
            The report stated that the panel felt the main focus should be on making exceptions and modifications to the GAAP for private companies that better respond to their needs rather than move towards a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP, at least in the near term.
            Reaching out to stakeholders through roundtable meetings, surveys and meetings with advisory and constituent groups to obtain input on improvements, including any solutions that are recommended by the "blue-ribbon panel" will be their prime focus. According to FAF spokesperson, Christine Kilmek, a working group will issue an action plan in six to eight months on how to create rules that will differ from those of public companies. Many in the business community feel they couldn't come soon enough.
            According to the US government, small and medium sized US companies pay 44% of the total private payroll, with over half the US workforce being employed by these privately-owned businesses. Roughly 52% of small businesses are home-based. For the past 20 years, these businesses have generated 64% of net new jobs for this country. They create over half of our non-farm GDP (Gross Domestic Product) and hire 40% of high tech workers. According to US government statistics, small businesses make up 97.3% of all identified exporters and produce 30.2% of known export value.
            Considering just how important private entities have become to the success of our economy, this "blue-ribbon panel" should have been created a long time ago, along with what is being called, Baby GAAP. Only time will tell if the recommendations issued by this panel will help make it more user-friendly for both private companies and their financial partners; however, for now, Goldilocks is hoping for the "just right" fit for those needing it the most. After all, when businesses are freed from spending huge amounts of money on accounting, they aren't spending it on products, services or creating more jobs. And, that is something this country needs the most!

 

About the Author

Betsy Heckman

MBA student at West Chester University in Pennsylvania

FTT (S3) - "Goldilocks & The Three Bears" pt.1/5