PCC Chairman Makes Interesting Comments

The AICPA, through the Blue-Ribbon Panel, tried to get the Financial Accounting Foundation (FAF) to create a separate board to create private company standards, but was refused. Rather than a separate board, the FAF created the Private Company Council (PCC). The chair of the PCC is Billy Atkinson, a former Big Four partner who opposed differential standards.

The FAF designed the PCC with a FASB liaison (a FASB board member) to facilitate discussion between the FASB and the PCC. The PCC can only recommend exceptions to FASB standards which must be “endorsed” by FASB in order to become effective.

Mr. Atkinson recently spoke to the AICPA Council saying, “if we do have fixes, we should first evaluate the fixes from the standpoint of all the users, not just the private company users.” He went on to say,  “I’m not going to be a rebel or a deviant to that approach,” meaning FASB’s approach to standard setting.

This is not a good sign.

I thought the whole purpose of the PCC is to find exceptions to GAAP, those that accommodate private companies. If it does not do this, then is the PCC necessary?

Robert R. Harris, a former AICPA chairman stated, “this Council overwhelmingly endorsed this concept of differentiation…ten thousand of our members contacted FAF. You say you want input. We give input. And honestly I would tell you I would bet that all 10,000 members feel that we were not listened to by FAF.”

The PCC has not even met yet, and the chairman is speaking about a holistic approach – meaning making changes that affect all companies, both public and private – rather than creating exceptions for private companies. This sounds like more of the same FAF/FASB mindset.

I’m thankful that the AICPA is working on its Financial Reporting Framework for Small and Medium Sized Entities. This framework will provide private-company accounting relief; this framework should be available by mid-year 2013.

AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities

The First Volley – The FAF

As I previously posted, the Financial Accounting Foundation (FAF) – the parent body of the Financial Accounting Standards Board (FASB) – did not create a separate board with authority to issue small-GAAP standards. Instead, the FAF has created the Private Company Council which will propose exceptions to FASB standards; these exceptions will be the basis for private-company standards relief – FASB’s version of small GAAP.

The Second Volley – The AICPA

At the time the FAF made its announcement about the Private Company Council, the AICPA returned the volley stating it would create a private-company special purpose framework.

The new special purpose framework is formally titled: Financial Reporting Framework for Small- and Medium-Sized Entities (FRF-SME). 


The AICPA issued a frequently asked questions (FAQ) document to clarify the purpose of the special purpose framework (the new term for OCBOA). 

The FAQ states that the AICPA does not define small- and medium-sized entities (SMEs), but the document states “estimates put the number of SMEs in the United States at approximately 20 million.”


The FRF-SME will allow the development of financial statements in a more efficient manner.

Don’t We Already Have This?

Many argue that CPAs already have available special purpose frameworks (OCBOA) options in the form of tax-basis and modified-cash bases of accounting, but as the FAQ states, “there have been no definitive requirements for SPF financial statements” and “the FRF-SME will undergo public exposure and professional scrutiny.”  The significant differences in FRF-SME and the tax-basis or modified-basis of accounting  are (1) the conventions of the modified-basis of accounting are more or less pick and choose and (2) the tax-basis of accounting is not subject to public exposure and professional scrutiny.

The hope is that the FRF-SME “will result in a reliable and consistently applied financial framework.”

The FAQ also states that the FRF-SME, once approved, will not change for “three to four years.”

Who Will Use the New Standards?

I anticipate that the FRF-SME will largely be used for compiled and reviewed financial statements, just as OCBOA (e.g., tax-basis) has been used in the past.

And I believe the Private Company Council exceptions (GAAP for private companies) will mainly be used by private companies that are audited.

Differences in U.S. GAAP and FRF-SME

We don’t know all the differences between U.S. GAAP and FRF-SME (since FRF-SME is in development at this time), but here are few differences specified by the FAQ:

  • The FRF-SME will use historical cost and depart from the increased use of fair value
  • The FRF-SME will not require complicated accounting for derivatives, hedging or stock compensation
  • The FRF-SME will greatly reduce disclosure requirements

Key Consideration

If you intend to use FRF-SME, you may want to check your client’s loan and other legal agreements to see if they require financial statements in accordance with U.S. GAAP. The FRF-SME is not GAAP; therefore, its use may run afoul of loan (or other) agreements.

When Will FRF-SME Be Available?

The FAQ states that a draft will be available in the fall of 2012 with the final document being issued in the first half of 2013.

What About Your Firm?

Will your firm use the FRF-SME? How do you feel about this option?

The Clarity Project – Key Changes

The Clarity Project audit standards are effective for audits of entities with fiscal year-ends after December 15, 2012.

Here are a few posts that will help you make the transition to these new auditing standards.

The New Auditor’s Report

The New Engagement Letter

The New Representation Letter

The New Guidance on Audits of Group Financial Statements

Planning for Implementation of the Clarity Project Standards

These posts, while not comprehensive, represent some areas that I have found of interest.

Click here to see my Clarity-Project-presentation slide deck.

Are there other parts of the Clarity Standards that are of interest to you?

The Clarity Project – Audits of Group Financial Statements

Audits of Group Financial Statements (AU-C 600) provides guidance for group audits – those audits of entities consisting of multiple components; it is effective for audits of entities with fiscal years ending after December 15, 2012.

When is AU-C 600 Applicable?

AU-C 600 applies whenever there is an audit of group financial statements (meaning financial statements that include the financial information of more than one component). A component is an entity or business activity whose financial statements are required to be included in the group financial statements under the applicable reporting framework (e.g., U.S. GAAP).

A component includes:

  • Subsidiary
  • Joint venture
  • Division of a company
  • Geographic or functional activity (e.g., program in a not-for-profit organization)
  • Equity-method investment

The Big Decision: Referencing Another Audit Firm

While AU-C 600 applies to group audits when the same firm audits all components. It also applies to group audits where the firm that issues the group audit opinion does not audit a component – for example, the group audit firm audits the parent company and another audit firm audits a subsidiary (a component) included in the group financial statements.

The group engagement partner (the partner responsible for the group audit) will need to decide if he or she will make reference to the component auditor in the auditor’s report on the group financial statements.

If reference is made, the auditing standards state:

  1. The auditor’s report on the group financial statements should clearly indicate that the component was not audited by the auditor of the group financial statements but was audited by the component auditor.
  2. The group auditor’s report should also communicate the magnitude of the component audited by the component auditor.

If reference is not made, then the group audit firm is basically responsible for the full audit and related audit evidence (even though the group audit firm may use the work of another firm). This means the group audit firm will need to plan the group audit to include the risks of the group financial statements including all components.

The group auditor has the option to name or not name the component audit firm. Typically the group audit firm will not name the component audit firm, but will reference the other firm with opinion language such as “those statements were audited by other auditors.”

Requirements to Name a Component Audit Firm

If the group audit partner decides to name the component audit firm in the group auditor’s report, two things must occur:

  1. The component auditor’s express permission must be obtained and
  2. The component auditor’s report should be presented with that of the group auditor’s report on the group financial statements

The group auditor can make reference to the component auditor only if the following is true:

  1. The component auditor must meet independence requirements 
  2. The group audit team must not have serious concerns about whether the component auditors will understand and comply with ethical requirements (including independence)
  3. The group audit team must not have serious concerns about the component audit team’s professional competence
  4. The component financial statements must be presented using the same financial reporting framework as the group financial statements
  5. The component auditor must audit the component in accordance with GAAS (or when required, PCAOB standards)
  6. The component auditor’s report must not be restricted as to use

Requirements to Communicate with Component Auditor 

Regardless of whether reference of a component audit firm is made in the group auditor’s report on the group financial statements, the group audit team should obtain an understanding of the following:

  1. Whether a component auditor understands and will comply with the ethical requirements that are relevant to the group audit and, in particular, is independent
  2. A component auditor’s professional competence
  3. The extent, if any, to which the group engagement team will be able to be involved in the work of the component auditor
  4. Whether the group engagement team will be able to obtain information affecting the consolidation process from a component auditor
  5. Whether a component auditor operates in a regulatory environment that actively oversees auditors

What About You?

What are your thoughts about this standard? Will it affect your work?

OCBOA Financial Statements

OCBOA is not a monster, although it does sound like one.

It is actually a kinder, gentler animal when compared to GAAP (generally accepted accounting principles) – also not a monster (though some accountants would beg to differ).

Types of OCBOA

OCBOA – other comprehensive bases of accounting – encompasses the following:

  • Cash basis
  • Modified-cash basis
  • Tax basis
  • Regulatory basis

In a word: Efficiency.

Often OCBOA is used as a simpler substitute for GAAP and is most often used in compiled financial statements. For instance, an accountant may be compiling financial information to complete a tax return, so it may be easier to create financial statements on the tax basis – killing two birds with one stone. (Converting tax-basis financial statements to GAAP can, in many cases, require a great deal of time, and your client’s banker may be just as happy with tax-basis statements.)

Sources of OCBOA

So where does OCBOA come from?

There is no standard setter for OCBOA. The OCBOA reporting options have largely evolved from tax and governmental regulators and from client requests for cash or modified-cash statements.

The lack of a standard setter allows for a great deal of reporting flexibility, however, the down side is that there is little guidance on the application of the various OCBOA options.

Cash and Modified-Cash Bases of Accounting

A pure cash-basis balance sheet has only two accounts: cash and equity.

The modified-cash basis of accounting is the cash basis with selected modifications such as capitalizing property and equipment and recording any related debt (without accruing certain items such as trade receivables, prepaid assets, and deferred taxes). These modifications are selective rather than mandatory; consequently, if note disclosure is provided, the basis of accounting should be fully explained.

The modified-cash basis can involve so many modifications that the statements become GAAP-like; then the CPA needs to decide whether he or she should just present the statements in accordance with GAAP.

Tax-Basis of Accounting

Generally most tax-basis financial statements are prepared in accordance with federal tax guidelines (which include the cash and accrual bases of accounting depending on the business).

Where possible, the CPA should consider preparing tax-basis financial statements without disclosure. This option is appealing because there are no disclosures and no cash flow statement to prepare, and the resulting statements agree with the tax return.

Reporting and Work Paper Considerations

Remember to title your financial statements appropriately (e.g., statement of assets, liabilities and equity – income-tax basis). Accordingly, the engagement letter and representation letter (for review engagements) should incorporate the OCBOA financial statement titles.

Disclosures, if provided, should be prepared using GAAP as a guide and then modify the notes to dovetail with the OCBOA used. (Many notes required by GAAP would not be pertinent to or needed for OCBOA statements.)


The AICPA is presently working on a new OCBOA that can be used in place of GAAP. At this time, we don’t know what this basis of accounting will entail, but it will allow CPAs to present financial statements on a simplified basis (avoiding thorny issues like variable interest entities).


Fraud: Check-for-Cash Substitutions

Sometimes employees steal company rebate or refund checks and convert them to cash for personal use.

How can an employee convert a company check to cash?

Check-for-Cash Substitution Scheme

Let’s say Bill Johnson opens the mail for ABC Company. One envelope contains a rebate check for $3,314.15. He knows from experience that the company annually receives dozens of such rebate checks, and he recently heard the finance director say, “I’m in the dark about the rebate checks.”

Bill steals the check, but he has a problem. He needs to convert the check to cash.

Bill also works one of the company’s cash drawers which often has over $10,000 (in cash and checks) at the end of the day.

Bill, while no one is looking, places the $3,314.15 check in the cash drawer and removes the same amount of cash. The $3,314.15 check is made out to ABC Company, just like other checks he’s collected, so no one will notice anything unusual. And since his total cash and checks will still equal his daily receipts summary, his supervisor does not notice the check-for-cash substitution.

Mission accomplished.

Preventing Check-for-Cash Substitution

It’s simple to prevent this type of fraud – just require the cash drawer operator to record on each receipt the amount of cash or the check payment received. (A copy of the receipt is given to the customer.) Then, at the end of the day, reconcile the daily amount of cash and checks from the cash drawer to the daily receipts summary (which should have (1) a total for cash and (2) a total for checks). The daily receipt summary should be attached to the cash and checks given to the supervisor (or person who will review the cash drawer report and complete the deposit slip).

You will know something is wrong if the composition of cash and checks (per the daily receipt report) does not agree with actual cash and checks received.

Many small businesses have one person opening the mail, receipting payments, making the deposit, and making the related accounting entry – this is a recipe for fraud. In such circumstances, other preventive measures may be needed, such as the one that follows.

After requiring cash or check notations on each receipt, consider periodically performing surprise test counts – in the middle of the day – of cash and check collections. Have your internal or external auditors perform these surprise audits. If this procedure is implemented, tell your accounting personnel before hand that their work is subject to random surprise tests. This keeps them honest, and helps mitigate complaints such as “I’m being picked on.”

Do you have other suggestions for preventing this type of fraud?

Why Good Referees Matter

The Seahawks-Packers game posits great truths:

  • We all like a fair call, especially when much is on the line.
  • Errant judgments cost innocent parties.

The NFL responded quickly after the debacle, and we now have professional referees back. Football fans everywhere are breathing a sigh of relief – even giving the regular refs a standing ovation upon their return.

Fans applauding referees? Aren’t these the guys we love to hate? The ones we boo – even curse – in most games?


So fans really do appreciate experienced referees – those who make the right calls.


Can auditors learn a lesson here?

If our job is to judge and communicate appropriately, then it is critical that we see correctly and make the right call – especially when there is push back (boos in the stands). If we don’t have the backbone to stand tall in the face of adversity, then why are we here?

Seeing the play as it occurred is of first importance. Get all the facts. Ask all the questions. Look to your fellow referees – particularly those seasoned pros around you – for their views. Collectively you can judge rightly. Oh and don’t be ashamed of using instant replay. For us, that’s going outside our firms to get additional insight, sometimes called consultations. Talk with other CPAs, or call the AICPA hotline.

Then call it as you see it, knowing that sometimes you (and I) will be wrong. Don’t let that keep you from raising your hands high to signal your decision. In our opinion will only mean something if we communicate events as we see them.

You will sleep better at night, and your reputation will only increase with each act of integrity. Who knows? Your call might even result in a standing ovation. Put your stripes on. It’s showtime.