Widening the gap: big GAAP vs. little GAAP.

• Author: Sayther, Colleen
• Position: President'sPage - Generally Accepted Accounting Principles

Half of the United States' economic output is driven by nonpublic entities. There are more than 22 million private businesses in the U.S., and approximately 17,000 public companies. Every so often, the debate arises as to whether separate accounting and reporting standards should be set for small and medium-sized enterprises (SMEs).

This time, it seems to be gaining momentum as recent trends in standard-setting have increased the differences between the needs of users of financial statements. Many small companies feel that as the Financial Accounting Standards Board (FASB)'s rulemaking has become more complex, they simply don't have the wherewithal to keep up, particularly as they look at some of the far-reaching projects on FASB's agenda, such as the evident move towards fair value accounting. (Truth be told, many large companies feel the same way!)

[ILLUSTRATION OMITTED]

To limit compliance costs, some companies chose to depart from certain GAAP requirements and to have qualified audit or review reports, or moved from audited or reviewed statements to compilation engagements. Several factors have influenced this renewed interest and momentum in developing separate standards for SMEs:

* The IASB issued "Preliminary Views on Accounting Standards for Small and Medium-sized Entities" in June ("the PV"). The PV reacts to concerns from countries that have chosen to adopt the International Financial Reporting Standards (IFRS) that SMEs need to be separately addressed. Since many of these countries already have differential standards for SMEs, the alternative is to have separate SME accounting standards, inconsistent with IFRS, that are set by individual country accounting standard-setters. Many believe that this is an inefficient way to set such standards.

* Many other countries, including Canada in 2002, already have established differential GAAP for SMEs.

* The Sarbanes-Oxley Act of 2002 mandates that funding for the FASB, as well as the Public Company Accounting Oversight Board (PCAOB), come from public companies only.

* The needs of financial statements users are different for nonpublic entities and public entities.

Another issue is that FASB is now funded by public companies only. Formerly, funding came from a variety of sources, including accounting firms, investment companies, trade associations and nonpublic companies. The change has many SMEs concerned that FASB standard-setting will be principally focused on those companies from which...