After considering the thoughtful comments and candid concerns of hundreds of interested constituents, the Financial Accounting Foundation Board of Trustees recently took action that will have a far-reaching—and I believe beneficial—impact on private company financial reporting.
At a meeting in Washington, DC, the Trustees voted to create a new group—The Private Company Council—that is intended to improve the process of setting accounting standards for private companies.
The new Council—which will report to the Trustees—will have two principal responsibilities.
The Council’s initial work will involve identifying those areas of existing U.S. GAAP that could be modified to better serve the needs of the users, preparers and auditors of private company financial statements. Once those areas are identified, the Council will research, consider, and propose changes, which will then be provided to the Financial Accounting Standards Board for endorsement.
The Council also will serve as the principal advisory body to the FASB for issues related to private companies on its current technical agenda.
(The complete plan establishing the PCC, including background materials, key discussion issues considered by the Trustees, and PCC responsibilities and operating procedures, is available here.)
Creation of the Council is the latest and most substantial effort to address the concerns of users, preparers and auditors of private company financial statements, who have suggested in the past that their needs sometimes were not given due consideration during the standard-setting process.
In my view, the plan to establish the PCC strikes an important balance—one that reflects the feedback that the Trustees received during their extensive outreach effort. On one hand, the plan recognizes that the needs of public and private company financial statement users, preparers and auditors are not always aligned.
But at the same time, the plan seeks to promote comparability of financial reporting among disparate companies by putting in place a system for recognizing differences that will avoid creation of a “two-GAAP” system.
This balance was achieved through the Trustees’ commitment to objectively consider all views—and many of those views suggested improvements to the original plan, which was released last October. To my mind, the willingness of everyone involved to share ideas, learn from the dialogue, and ultimately consider changing their initial opinions represented the most significant part of this process.
The Trustees received more than 7,000 comment letters, conducted four roundtable discussions with more than 60 attendees and hosted a webcast with more than 300 participants. They heard from a wide swath of private company financial statement preparers, auditors, and users—including lenders and investors. (Roundtable summaries, individual comment letters and comment letter summaries can be found on the FAF website.)
Constituents’ thoughtful insights and well-considered recommendations resulted in significant improvement in the plan. While the final PCC plan announced by the Trustees follows the outline of the initial proposal, it includes several significant changes based on constituent feedback.
Much of that feedback focused on concerns that the FASB might be in a position to wield too much influence over the Council’s agenda-setting and deliberations. To deal with those concerns, the Trustees decided to:
The evolution of the endorsement process, in particular, is worth some additional discussion. Some stakeholders said that the ratification process, as originally outlined, seemed to give the FASB the ability to effect a “pocket veto” of Council recommendations and also seemed to leave little room for further consideration if the FASB ultimately did not ratify a recommendation.
In the final plan, the Trustees made changes responding to these concerns. The endorsement process differs from the original proposal in a several important ways.
To address concerns about a pocket veto, the Trustees established a presumption that the FASB will take action to consider a PCC proposal within 60 days. If the FASB needs more time, then a written public explanation must be provided.
Second, the process allows for a “recycling” mechanism. In other words, if the FASB does not endorse a PCC proposal, the FASB Chairman will provide the PCC Chair with a written explanation, including possible changes for the PCC to consider that could result in FASB endorsement, thereby “recycling” the recommendation.
Stakeholder comments also reinforced the importance of Trustee oversight as a key to the success of the new Council. To that end, the Trustees created a special-purpose committee of Trustees, the Private Company Review Committee, which will have direct oversight responsibility for the Council for its first three years of operation.
The Review Committee will hold both the PCC and the FASB accountable for achieving the objective of ensuring adequate consideration of private company issues in the standard-setting process. The PCC will provide periodic in-person and written reports to the Review Committee. The PCC also will provide quarterly written reports to the full FAF Board of Trustees. Oversight and monitoring activities will be ongoing, and will include monitoring of PCC meetings, among other activities, by members of the Board of Trustees.
The Trustees established this committee and appointed its members the same day they approved the final PCC report. The Review Committee will be chaired by Trustee Mack Lawhon, who is chairman of the Board of Partners for Weaver, LLP, one of the largest independent accounting firms serving private companies in the Southwest. Other members are Trustees Paul G. Camell, Michelle R. Seitz and Mary S. Stone.
All of the changes approved by the Trustees are intended to ensure the development of a collaborative process between the PCC and the FASB. Key to the process is having the FASB members at the table when the PCC is deliberating issues. The presence of FASB members during PCC deliberations provides the opportunity for a mutual understanding of views and will enable a more efficient endorsement process by the FASB.
The FAF Board of Trustees has issued a call for nominations for membership on the PCC. The nominations process will conclude on June 30. Details are available on the FAF website. We look forward to reviewing nominations from any candidate who is committed to improving the standard-setting process for private companies.
On behalf of the FAF Board of Trustees, I want to thank all who participated in this lengthy but ultimately successful process. The most important message I take away from this effort is that “due process” works. We learned a great deal from the comments and concerns that you shared with us, and, in the end, you helped us create a better plan. Now, the hard work of implementation begins. We look forward to the next phase, and will be telling you about it here in this space in the weeks and months to come.
FAF President and Chief Executive Officer
Have a question or comment? Contact Terri directly at email@example.com.