Tag Archives: American Institute of Certified Public Accountants

Financial Statements

Momentum builds to soften accounting standards for private companies

Private companies say they need to stop being treated like public companies. And now the accounting world has begun to listen to their complaints.

The debate about whether to soften accounting standards for private companies has gone on for years, but this time it seems to be moving toward action, although slowly. But this past summer, the parent organization of the Financial Accounting Standards Board (FASB) created a new Private Company Council to discuss possible changes in the U.S. Generally Accepted Accounting Principles, better known as GAAP.

The theory behind the move is that the GAAP standards may not always be necessary for private companies, particularly small and medium-size businesses. The council will develop a framework for deciding whether the users of private company financial statements have unique needs and will look at ways to reduce the complexity and cost of preparing private company financial statements as is now the case under GAAP.

Private companies contend that since they don’t raise capital from the public, they shouldn’t have to meet the same expensive accounting standards that publicly traded companies do. In many cases, they are also much smaller than public companies.

Right now, the FASB is seeking feedback on possible changes that could be proposed by this new council.

“They’re only at the talking stage in these standards,” said Ralph Nefdt, managing partner in the Phoenix office of the accounting firm of Grant Thornton. “But it’s a very important debate for standard setters.”

At the same time, the American Institute of Certified Public Accountants has issued its own proposed Financial Reporting Framework that small and medium-size privately held businesses could use to prepare their financial statements when U.S. GAAP is not required. The AICPA is seeking comments on this proposal and expects to finish this framework by 2013.

In the case of the AICPA, a company’s management would have to decide whether or not to use the framework, and the institute would not have authority to require its use, said Ron Butler, Arizona managing partner for Ernst & Young.

“Auditors’ reports for financial statements prepared under the proposed framework would indicate that they were prepared on a non-GAAP basis,” Butler said.

Among major concerns about softening standards for statements is that many companies might report a very different financial performance under the new framework. And whether lenders, creditors and other users of financial statements would accept statements prepared under the AICPA’s proposed framework remains to be seen. “Many contracts, regulations and laws require the use of U.S. GAAP,” Butler said.

In other words there might be risks for businesses in using the AICPA framework because banks and investors might not accept anything other than GAAP standards. Some accountants might also resist the change.

But the AICPA’s plans could bring changes sooner. “This new framework could speed up the processes where an accounting change could occur,” said Richard Goldenson, managing partner of CliftonLarsonAllen’s southwest region based in Phoenix.

He also said that the framework could simplify standards for small and medium-size businesses but not reduce them: “The accounting principles comprising the framework for small and medium-size entities are intended to be the most appropriate for the preparation of the financial statements based on the needs of the financial statement users. Financial institutions in many cases do not require GAAP-based statements.”

Many small and medium-size businesses could realize cost savings because often they do not have the resources and expert staff to implement complex accounting requirements.

Some of the other key features of the AICPA proposal:
    It would be a principles-based framework, available for incorporated businesses and unincorporated.
    It is based on accounting principles commonly used or previously used for financial reporting.
    Historical cost would be the primary measurement basis.
    Fewer disclosures would be required than under U.S. GAAP.
    Fewer adjustments may be needed to reconcile tax return income with book income.
    It is intended to be used regarding issues that face small and medium-size businesses.

If the framework moves ahead as proposed, accountants, companies and regulators would have to go through an education process so that financial reports would be carefully executed. A company that wants to use the framework would need substantial lead time to switch over.

Employee Theft

Employee Theft: Is It Happening To You?

Employee theft is rampant in small to mid-sized businesses. It never ceases to astound people that a trusted employee could steal from you. It angers you and makes you sad, but it is happening every day. Large amounts are being stolen from businesses both small and large.

After the Enron debacle, Congress passed the Sarbanes-Oxley Act (SOX) to tighten the responsibility of the accountant to detect fraud. Talk to someone in the accounting community about SOX and they will roll their eyes and heave a large sigh. In all levels of the attest function performed by accountants (compilation, review and audit), SOX has had an effect. The result of this increased testing is that more employee theft than ever before is being uncovered.

In fact, the American Institute of Certified Public Accountants (AICPA) released a recent study that has some astounding statistics. According to their survey of members, up to 82 percent of small- to mid-market businesses have or will experience employee theft. Of the incidences of theft uncovered, the average theft amount equals $125,000. And believe it or not, most of these thieves are not prosecuted.

Are you a victim? Most of us would immediately say, “No, all my employees are completely trustworthy.” But, what about the next employee you hire? What about the employee who has had an unexpected life change (divorce, death or other experience) that has affected his/her financial stability? What about that employee’s spouse who you might not quite trust? Could that person have undue influence to convince your employee to do something?

Employee theft can come in many forms. Look at the following ways employees can steal from you:

Cash

Does the employee who collects the cash also make the deposit and reconcile the bank statements?

Payables

Does the employee who makes the vendor payments reconcile the bank statement? Does this employee have access to online accounts or a signature stamp?

Time

Do your employees steal time by running personnel errands or spending excess time on the phone as you are paying them for doing the company work?

Company credit cards

Do your employees have company credit cards? Are the expenses charged to these cards reviewed by someone other than that employee?

Computer access

You would be amazed at how many employees run a small business on your computer and on your company time.

How can you stop this? First of all, have a policy that strictly forbids the above activities (and other similar activities). Second, look at your business functions and determine where you are vulnerable. Third, make sure there is a separation of duties between employees who handle areas where theft could occur. Fourth, consider monitoring where employees spend their computer time.

There are many ways an employee can steal from their employer; it isn’t always financial theft. There are also many ways an employer can prevent this activity. Being aware is the first step.

Interested in learning more about employee theft? Download B2B CFO’s free, 27-page book “Top 10 Ways Your Employees are Stealing From You” at B2BCFO.com.