Cover Edge Summer 2006 Cover Story:
Go Beyond The Red Tape
By Ann M. Gynn / Illustration by Brian Willse

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Small vs. Large

Private reporting requirements not necessarily one size fits all

The Financial Accounting Standards Board, which sets the standards for private company accounting, hears the cries that a one-size-fits-all approach to accounting standards ends up hurting the smaller companies.

In June, the FASB and the American Institute of Certified Public Accountants issued a joint proposal intended to improve the financial reporting process for private companies. More than 20 million companies in the United States are privately held.

"Under the proposal, the FASB would implement certain improvements to enhance the transparency of the standard setting process for private companies and consider input from private company consultants," the two organizations reported.

The full 13-page proposal can be found at www.pcfr.org. The comment period ends Aug. 15, 2006.

Known as differential accounting, and previously as Big GAAP, Little GAAP, the concept involves the creation of different standards based on size, use and cost. Bill Balhoff, a partner at Leading Edge Alliance firm Postlethwaite & Netterville, is a proponent of differential accounting and has been active in the differential accounting standards discussions.

He says the needs of users of private company financial reports as well as the cost effectiveness for the companies should drive the differences. For example, the FASB now treats equity the same for all companies, no matter the size. Its Statement 150 was changed to require a buy back of equity from a departing partner be treated as a liability, not equity. The change has a bigger impact on smaller companies, which use buy backs as a way to capitalize themselves with partner equity. Instead, the accounting treatment creates an overwhelming liability.

Family-owned standards and industries such as construction also are particularly affected by the uniform approach of accounting standards, Balhoff says. e

Mandate or not, businesses and organizations discover Sarbanes-Oxley Act serves as best practices guide

When the Sarbanes-Oxley Act debuted four years ago, the way of doing business in the United States as a public company changed. In the wake of the catastrophic collapse of Enron, WorldCom and others, investors (and non-investors) wanted public companies and their executives to be more accountable. The ensuing federal regulations were the most dramatic since the 1933-34 legislation in response to the 1929 stock market crash.

"It's a masterful job of one of the most sweeping, comprehensive pieces of legislation in modern times," says Hank Boerner, managing director of Rowan & Blewitt, an issues and crisis management consulting firm.

Four years later, businesses—public AND private—as well as certain nonprofits operate in a regulatory world like none other. But while they cut through all the red tape—for some mandated by law, for others required de facto and for still others voluntarily—businesses and organizations are more accountable to their "shareholders," to the public interest and the overall demand for transparency of detailed information. As such, they foster accountability within their organizations and cultivate sound operations, which all can spell success for their businesses and organizations.

Boerner compares Sarbanes-Oxley (SOX) to Y2K, which became the battle cry that led businesses to make major improvements in technology even though most of them were not likely to be impacted by Y2K itself.

"Almost no company is untouched by Sarbanes-Oxley and the regulations swirling around it," Boerner explains. "Check-box governance compliance won't work. You've got to go beyond the boxes.

"The difficult question is how far do you want to go? You could lose talent, attract talent, keep out of lawsuits, etc.," Boerner says.

"Compliance with SOX is being taken very seriously across the board as the potential impacts of not complying are significant," says Jim Hietala, director of product marketing for ControlPath, which works with companies to develop tailored compliance software. "Companies are settling into the idea that this isn't going away."
 

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