The AICPA’s Financial Reporting Framework: How Low Should a Professional Go?

The AICPA, in its spat with NASBA over its recently released Financial Reporting Framework for SMEs (my very own critique is here), has loudly and often declaimed that the purveyors of GAAP are supportive of  their new non-GAAP option.

That is, until last week when finally, FAF president Terri Polley set the record straight.  She clearly denied that any such support ever existed, and added a number of concerns with the AICPA’s action.  Her major concern seemed to be that OCBOA should be reserved for things that bear no close resemblance to GAAP; otherwise, it could be misleading.

But, one concern that Ms. Polley did not express – and it is one that really gets my goat – is the (false) premise that the market should be left to decide which basis of accounting is appropriate for investors.  Here’s an excerpt from an Accounting Today article that covered AICPA President Barry Melancon’s rejoinder to NASBA:

“Melancon pointed out that the private market can determine which basis of accounting is appropriate. ‘They do not need a regulatory trade group making that decision,’ he wrote. ‘For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.‘” [emphasis added]

The irony, which I am sure escapes Mr. Melancon, is that he owes his job to a legislative decision made eighty years ago (Securities Act of 1933) that accounting should not be left to market forces.  Too often – in both regulated and unregulated markets – innocent investors without sufficient say in the basis of presentation will get the shaft; and with the AICPA’s laissez faire attitude toward defining an SME, it’s a sure thing that the AICPA’s FRF will become an instrument for more of the same.

It seems that the AICPA’s conception of ‘market’ is its dues-paying segment that is not willing to take on much more  beyond auditing GAAP for dummies.  Surely, that must be different from what users of financial statements expect, and what the public expects, from CPAs. I am unable to conceive of users that care nothing about off-balance sheet financing risks, derivative financial instruments, non-cash compensation paid to insiders, overstated assets, understated liabilities, etcetera, etcetera, etcetera.

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In a completely free market, any two parties could agree to anything.  But, there are always ethical constraints.  In particular, when one party holds itself out as a professional dedicated to public service, there must be limits on the acts the professional may agree to perform.

NASBA, in so many words, is telling the AICPA that the FRF is beneath the dignity and responsibilities of the CPA.  In different words, it seems that the FAF has echoed those sentiments.