State Board Report
The power of the pen is interesting. Despite being only a single page in a monthly newsletter, I have been surprised by the number of comments I receive around the country from readers of the NASBA State Board Report who specifically reference issues raised in my “Memo.” Often my articles have a subtle message delivered in my conversational style. On occasion (such as the “Photos on the Wall” September 2012 Memo about diversity) the message is direct, more critical and may not be equally appreciated by all readers. I suspect this month’s Memo will fall into that category.
If you travel around the country you may see traffic signs that warn you to “Watch Out for Falling Rocks” or maybe of a “Moose Crossing.” It is also quite likely that you have never actually seen a rock fall or a moose cross the highway; however, the diligent thing to do is to exercise increased caution. There are currently some warning signs in the accountancy regulator’s path.
I recently attended a meeting in Washington, DC, with several leaders of the U.S. financial and accounting communities. In a discussion about the soon-to-be-released “Financial Reporting Framework for Small- and Medium-Sized Entities” (Framework), one leader referred to it as “GAAP Lite” and another as “GAAP for dummies.” I realize that these comments were tongue-in-cheek; however, these remarks clearly infer that the bar is being lowered from the current GAAP standards.
As reported (see SBR 2/13), NASBA has not supported the proposed Framework and, in a letter to the AICPA, requested that the release of the Framework be delayed to allow the newly formed Private Company Council an opportunity to develop or conside authoritative standards to address the issues and concerns raised in the AICPA/FAF/NASBA Blue Ribbon Panel on Standard Setting for Private Companies’ findings. While NASBA and AICPA agreed then, and today, that changes were needed in GAAP to address small and medium entities (SMEs), we continue to disagree on how that is to be done.
I have heard many conversations ascribing petty reasons for the rush to release the proposed Framework. However, I work closely with the good folks on both sides of this issue, and I choose to believe that despite strong differences of opinion and positions on the issue, the motivation of all involved is to get to a high quality result and provide an alternative to current GAAP. So what are NASBA’s concerns?
One of our biggest concerns is the precedent this sets. Currently, accounting standards are established by the Financial Accounting Standards Board. There have been several OCBOAs (Other Comprehensive Basis Of Accounting – cash basis and tax basis) that have been extensively used for a number of years, with no standards in place and some “guidance,” but they are pretty clear cut. One is based on the movement of cash, and the other on the Internal Revenue Code. The proposed Framework appears to be a mix of the Canadian Financial Reporting Framework, GAAP and tax basis OCBOA, for the most part, and will be confusing at best. The fact that it is nonauthoritative is problematic, as it will be difficult to regulate. What if other organizations decide to start developing and issuing their own versions of what they call OCBOA for general use? This could create chaos. How is this in the public interest?
Secondly, the Framework does not define “SME” (small or medium-sized entity), and, even with many comments regarding the issue, AICPA does not appear to intend to define what falls within that term. The result is that any non-public entity could use the Framework, regardless of size or complexity. This provides much opportunity for abuse by companies who want to avail themselves of the “pick and choose” nature of the Framework to optimize the view of their financial condition.
Finally, we are very concerned with the way the proposed Framework was developed. It was essentially written before it went to the appointed task force. It was only briefly exposed, and the resulting objective suggestions and concerns (including NASBA’s) appear to have been ignored. AICPA has indicated plans to have its staff, assisted by a task force, revisit the Framework every three to four years. How can this be launched and regulators asked to stand by and watch it being used with no formal monitoring of what is not working, where there are abuses, or how the investor/lending communities react to it? As a non-authoritative alternative to GAAP, the Framework will be essentially unregulated, can be used by non-CPAs and, we believe, be potentially harmful to the public.
The NASBA Board of Directors spent most of their April meeting discussing the Framework, the denial of their request that the release be stopped, and what action NASBA should take. Ultimately, the discussion evolved into a wider policy discussion as to whether professional associations should be allowed to issue alternatives to authoritative standards and, more importantly, should Boards of Accountancy have a voice in what is clearly a public protection issue. Beginning at our Regional Meetings in New Orleans and Chicago, we will discuss a proposal for developing model rule language for the Boards of Accountancy that would empower them to consider the appropriateness, validity and risks associated with any proposed non-authoritative standard before approving its use in the state.
As of this writing, a rock has not fallen, nor has a moose been sighted. However, there are certainly warning signs. State Boards need to pay attention to these important issues. NASBA will be there to provide support. In the meantime, “Look out for falling rocks!”
Semper ad meliora. (Always toward better things.)
— Ken L. Bishop
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