Listening to wiser-than-me OSCPA Accounting & Auditing Committee members shape a response to the AICPA Accounting and Review Services Committee’s Reliability exposure draft, I’ve noticed that we often circle back to the same discussion: relevance of standards for the smallest of business entities.
Micro-entities comprise more than 50% of the U.S. gross domestic product, and numerous CPAs specialize as trusted advisors to the smallest businesses that collectively drive a significant portion of our economy. Part of our mission in serving the public interest includes looking out for the relevance of the profession’s rules to this important, overlooked segment of the economic picture.
The proposed “reliability” SSARS is a good step in allowing financial statement users to distinguish between independence impairments caused by helping the client prepare more reliable statements and impairments caused by other relationships. (Whether independence impairments for assisting the client should be allowed in a review is a separate debate, and the primary concern of the committee’s response.) In many cases, users of small business financial statements will be better served knowing that the statements were prepared by a CPA, even if the CPA is not independent due to their level of involvement in the underlying accounting.
The discussion of usability arose again in a review of the FASB preliminary views document on financial statement presentation – a joint IASB/FASB vision of the future of what financial statements will look like. While organization of financial statements by type of business activity may prove useful to analysts of the largest public companies, the committee’s perception was that the benefit to the vast majority of users by no means justifies the costs of conversion and ongoing preparation (The standard should be optional for private companies.)
Reliability, consistency, independence, comparability, relevance –what’s most important in determining the applicability of accounting standards? Most important to that decision is the usefulness to the consumers of the information. As we consider the future of accounting for small business, let’s look behind the doors of three of the most common options under debate.
Behind Door #1: GAAP
Supporters of U.S. generally accepted accounting principles for small business cite research findings that the marketplace values GAAP for its consistency and comparability. An increase in GAAP departures, due to users and preparers frustrated by the irrelevance of requirements such as FIN 48 or FIN46(R) to their specific situation, indicates that some alternative version of GAAP may be preferable for private entities. Whether that will be exceptions to existing GAAP requirements, or a separate “little GAAP” for small business, some users continue to ask for GAAP – as a “known” standard (after all, it’s “generally accepted!”) or “gold standard” (although the U.S. may be losing that status as the rest of the world adopts a combined alternative).
Behind Door #2: IFRS for SMEs
In July 2009, the International Accounting Standards Board issued long-awaited International Financial Reporting Standards for Small and Medium Entities. In issuing a separate set of standards for small business, the IASB recognized the cost/benefit imbalance of more complex disclosures for this segment’s users. IFRS for SMEs presents another alternative for small business owners who:
- Desire separate standards for private entities
- Have no need for more complex disclosures required by U.S. GAAP or full IFRS
- Recognize that sources for capital are increasingly global
- Recognize the potential for future business growth or acquisition internationally
And Lastly, Door #3: The OCBOA Option
One argument for IFRS, presented particularly by accountants in business and industry, is reducing the necessity to maintain separate sets of books when conducting business internationally. For many micro entities, the only set of books maintained is for the purpose of internal business management (possibly a modified cash basis) or tax compliance. Reporting under an Other Comprehensive Basis of Accounting (OCBOA) is an option for the small business user to maintain only one set of books and prepare financial statements on that basis (such as cash, modified cash, or tax basis).
Arguments against OCBOA include a lack of market recognition (the market “values GAAP”) and a lack of consistency, due to the absence of “generally accepted” standards. A frequent discussion of the OSCPA committee is the opportunity to provide greater education and consistency/comparability in OCBOA reporting to maximize value to the profession’s many micro- business clients.
Many lenders to the smallest of businesses would benefit more, the discussion goes, from tax basis financial statements and an agreed-upon procedures engagement verifying cash, accounts receivable and inventory balances, for instance. Such statements would be far more relevant to business owners, for whom the two overriding questions about any action are, “How will this affect my taxes?” and “How much cash do I need?” Many CPAs who serve micro-businesses state that increasing education to lenders and the user public regarding such alternatives would be a public service.
Achieving acceptance of OCBOA statements would be responsive to the “standards overload” issues for practitioners serving small business, and, frankly, address many frequent peer review findings. As the number of practitioners performing attest services continues to decline, directing the full attention of small business specialists to the needs of their clients and the third parties with whom those clients deal would be a win for all.
The profession can serve a role providing presentation and disclosure guidance to practitioners to provide greater comparability and consistency in practice regarding OCBOA engagements. Current professional guidance in this area is dated, and in the absence of such guidance, we run the risk of PPC, CCH or other provider becoming the “standard-setter” in this arena. More importantly, it would help resolve the very real, and very stubborn, application problems many firms face on a daily basis.
The micro-business market and current trends in practice should not be overlooked in shaping the future of private company accounting – we have multiple choices to make in what best serves our public.