CPAs can be forgiven for thinking there are more standards, and standards setters, to follow than ever before. The recent proliferation has come at the expense of any sense of uniformity or universality. Thus, professionals are presented with a dilemma when trying to decide which set of standards applies in any given context.
For example, in auditing, there are the international auditing standards (ISAs issued by the IAASB). The AICPA’s Accounting Standards Board issues its own Statements on Auditing Standards (SAS), which were just recently revised in the AICPA’s Clarity Project. (This author was on that task force.) And then there are the SEC’s auditing standards issued by the PCAOB. Three sets of standards, which present the auditor with the following dilemma: which ones apply? To determine this, auditors need to know what kind of entity they are auditing and which regulator it’s governed by.
The same dilemma exists with accounting frameworks. It has been debated for decades whether there should be a “big GAAP” and a “little GAAP,” tailored to the size of the business. Most of the time the answer was “no.” A few years ago, however, a blue-ribbon panel including people from the National Association of State Boards of Accountancy (NASBA), the AICPA, and other end users recommended that there be a separate body to create the accounting for private companies. This proposal was rejected by the Financial Accounting Foundation (FAF). Instead, it founded the Private Company Council (PCC) to recommend to FASB specific changes to the accounting framework for the benefit of private companies. The AICPA, however, was not particularly happy with this approach, and it created its own, non-authoritative Financial Reporting Framework (FRF) for small and medium-sized entities (SMEs). Thus, auditors now have the FRF for SMEs, the PCC for small firms, U.S. GAAP, and international standards (IFRS and IFRS for SMEs) all cluttering up the landscape. If an accounting firm has clients doing business internationally—and even small firms and businesses are increasingly doing so today—the question of which set of standards to prepare and audit the financial statements under becomes a veritable Gordian knot.
Seeking Uniform Standards
Ideally, this author feels there should be one set of international standards. There is no reason why, for example, goodwill should be amortized over 15 years in one set of standards, over 10 years in another, and not amortized at all in yet another. As a profession, CPAs should be able to come together and set a generally accepted standard. In most cases there is no good reason for the differences in auditing standards between companies.
In reality, however, agreement on certain difficult topics can difficult to achieve. In the case of leases, for example, after many, many years of different exposure drafts, FASB and the IASB finally said, “We’re just not going to make it together.” Another example comes from the author’s experience on the Clarity Project task force. An IASB member also served on the task force, and while there was often conflict between the U.S. approach and the international one, sometimes the difference was sensible. One example was management representation letters, which are required in the United States, but not in the international standards. This is because in certain countries, such as Germany, management is already required to submit to the government the information that is required in a representation letter in the United States. So in this case, the task force decided that requiring companies to submit this same information to the auditor would be redundant.
It’s hard to recommend that a company adopt the FRF for SMEs for its financial statements. It is a non-authoritative set of standards.
Returning to goodwill, however, the rules are obviously just a convention. There is no study that has definitively concluded that goodwill goes away in 10 or 15 years. The time frame is just for the sake of simplicity, rather than having GAAP state that goodwill is indefinite and needs to be tested for impairment periodically. In this case, it would have made more sense to adopt the FRF for SMEs standard of 15 years, which is the same as the IRS’s standard for tax purposes. Why have more than one standard for the amortization of goodwill where the whole thing is arbitrary in the first place?
Different Standards for Different Users?
Proponents of the newer sets of standards often contend that different audiences of financial statement users necessitate different sets of standards or different frameworks. But in the author’s opinion, such goals can be accommodated by modifications to an existing framework. That’s what the PCC did, starting with normal GAAP and authorizing modifications on specific issues.
A historical example can help illuminate the point. Earnings per share have been a requirement of financial standards under GAAP for some time. The author had a client that was a family-owned business controlled by three brothers; eventually, one brother bought out the others and became the sole owner. When the earnings per share requirement was explained to him, he replied that since he owned the whole company, he could issue shares and then turn some in, making the per-share measures irrelevant. He had a point; there are differences between privately and publicly traded companies. In most private companies, the owners are intimately involved with the business, and the users that are furthest removed from operations are the bankers. In a publicly traded company, the users that are of greatest concern are the shareholders.
At the same time, it’s hard to recommend that a company adopt the FRF for SMEs for its financial statements. It’s easier for companies to follow; they don’t have to accrue for taxes or worry about differences in service cost for pension plans. But it is a non-authoritative set of standards. If a company ever does decide to go public, they would have no GAAP background. Ultimately, there are so many alternatives that it becomes confusing for a banker to understand what he’s looking at. In fact, the Risk Management Association for the bankers requested that the AICPA not issue the FRF for SMEs.
What to Teach?
The proliferation of different sets of accounting and auditing standards presents a dilemma for academia as well. Which set should be taught? How many different standards can fit into a three–credit hour auditing course? Textbooks typically focus on U.S. GAAP and then review the differences between the U.S. and international standards at the back of the chapter. Will they expand to note the differences between GAAP and the non-authoritative standards as well? Because the FRF for SMEs was created by the AICPA, it may well wind up on the CPA exam, so it would presumably need to be taught. As confusing as multiple sets of standards may be for current practitioners, students may face even greater difficulties trying to master such a wide variety of knowledge before they even enter the profession.