NASBA Tells Private Companies: Don’t Use AICPA Financial Reporting Framework

The National Association of State Boards of Accountancy has advised private companies not to use the American Institute of CPAs’ recently released Financial Reporting Framework for Small and Medium-sized Entities.

The AICPA released its FRF for SMEs on Monday, emphasizing that it provided an alternative reporting option for small and midsize businesses that aren’t required to use GAAP (see AIPCA Releases Non-GAAP Reporting Framework). The same day, the Financial Accounting Standards Board endorsed three proposals from its Private Company Council to simplify the accounting for privately held companies (see FASB Backs Proposals for Simplifying Private Company Accounting).

NASBA said Thursday that it reaffirmed its support of Generally Accepted Accounting Principles as modified by FASB to meet the financial reporting needs of private companies. NASBA said it believes significant progress is being made by the Private Company Council of the FASB.

“Consequently, private companies should not consider adopting the Financial Reporting Framework (FRF) for Small and Medium-Size Entities released by the American Institute of Certified Public Accountants (AICPA) on Monday,” said NASBA in a press release.

“At a time when accountability and transparency of those in authority is scrutinized, it is troubling that a non-authoritative proposal to significantly weaken the financial reporting of private companies and public protection is even being suggested,” said NASBA chair Gaylen R. Hansen, CPA, in a statement.

The AICPA responded to NASBA by arguing that many businesses use OCBOA frameworks. “As the largest professional accounting organization in the US, the AICPA shares with NASBA a commitment to serving the public interest. The use of an Other Comprehensive Basis of Accounting (‘OCBOA’), also known as a Special Purpose Framework, has long played an important and vital role in fulfilling the financial information needs of small businesses across the country,” the AICPA said in a statement forwarded by a spokesman. “Thousands of smaller enterprises, from attorneys, to doctors to small business owners on Main Street use OCBOA based financial statements to run their practices and businesses.  OCBOA based financial statements, which includes the cash basis and income tax basis of accounting, are frequently used by Main Street and users of those entities’ financial statements.

“To further improve upon existing OCBOA, the AICPA has recently released guidance on the use of the cash basis and income tax basis of accounting,” the AICPA added.  “On Monday, June 10, the AICPA  launched the Financial Reporting Framework for Small- and Medium-Sized Entities – another form of OCBOA that further meets the needs of Main Street. The AICPA has carefully developed the FRF for SMEs working with a group of experts that followed due process, including exposure of the proposed Framework for public comment. Moreover, the AICPA promulgates robust and effective professional audit, compilation, and review standards that govern how a CPA reports on OCBOA-based financial statements. These standards have long been recognized by state boards of accountancy. As always, the AICPA stands ready to work with other organizations and state boards to give priority to those areas where public reliance on CPA skills is most significant."

When FASB’s parent organization, the Financial Accounting Foundation, created the Private Company Council last year, it expressed its support for the AICPA's plan to create its own OCBOA framework (see New Private Company Standards Council Established). In turn the AICPA dropped its campaign to push for creation of a separate standard-setting board for private companies that would not be controlled by FASB (see AICPA Says It Supports FAF’s New Private Company Council).

NASBA noted that it is the national organization for the 55 U.S. Boards of Accountancy which have a Constitutional responsibility to protect the public, including ensuring that high quality standards are upheld by certified public accountants and their firms. Forty years ago, both the Securities and Exchange Commission and the AICPA agreed that FASB, which is independent of special interests, would be the single, duly-authorized body to promulgate accounting standards, NASBA pointed out. The PCC was formed in 2012 as the result of deliberations of the Blue-Ribbon Panel on Standard Setting for Private Companies, a group sponsored jointly by the AICPA, the Financial Accounting Foundation and NASBA. 

This past year, the AICPA created the FRF as an Other Comprehensive Basis of Accounting, or OCBOA, sometimes recently referred to as a special-purpose framework, but NASBA contended that it was created “without appropriate due process, and despite the decision of the FAF to continue to vest all standard-setting authority with a single body, the FASB, and without substantial support from many stakeholders, including accounting regulators.” In January, NASBA requested that the FRF initiative be tabled or withdrawn until the work of the PCC could be evaluated (see NASBA and PwC Oppose AICPA Plan for SME Framework). Subsequently, on June 10th, the same day the FRF was released, FASB endorsed the first three proposals of the PCC.

NASBA said it had previously pointed out some “glaring deficiencies” in the FRF: It represents non-authoritative guidance and therefore will be very difficult to regulate or enforce. The scope, “small and medium size entities,” is undefined.  As such, any private company, regardless of size or financial backing, could potentially adopt the FRF. It allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse.

“The State Boards’ responsibility to ensure quality service from the CPAs they license makes any potential weakening of the standards of practice a matter of great concern to Board members across the country,”  NASBA president Ken L. Bishop said. “We will continue to assist the State Boards in fulfilling their public protection role by only backing standards that come from authoritative sources.”

Hansen announced that concerned Boards of Accountancy will be provided information and guidance to address the use of non-authoritative OCBOAs issued by private-sector organizations. This may include communication to all CPAs and CPA firms that the use of the FRF does not have the support of the Board, nor NASBA, and that they should consider the risks of using or recommending the use of the FRF, or any other non-authoritative options, to clients or employers.

In the interest of furthering public protection, NASBA said it is also developing recommended rule language prohibiting the use of non-authoritative standards unless it is acceptable to Boards of Accountancy. Further, a study group has been appointed to analyze the standard-setting structure and processes for accounting, auditing and professional ethics for services provided to private entities. The study group will include State Board regulators from around the country.

NASBA representatives met at the Western Regional Meeting June 5-7 in New Orleans and will meet again at the Eastern Regional Meeting June 26-28 in Chicago, to discuss the progress of the PCC, concerns over the FRF, as well as changes to the Uniform Accountancy Act, the Code of Professional Conduct, the Uniform CPA Examination and financial statement compilation services. More information about the meetings can be found on www.nasba.org.