Update on Private Company Council Activities

The Private Company Council (PCC) met on September 16, 2014, and “voted to finalize an alternative [to US GAAP rules] that would exempt private companies from separately recognizing and measuring non-competition agreements and customer-related intangible assets that are not capable of being sold or licensed independently in a business combination.  The PCC voted to send the alternative to the FASB for endorsement.  The FASB will discuss the alternative in the coming weeks.”

At the meeting, the PCC also discussed accounting for stock-based compensation for private companies and the FASB’s lease accounting improvements project.

Background on the Private Company Council:  The PCC was created in May 2012 by approval of the Financial Accounting Foundation’s Board of Trustees.  The PCC has two principal responsibilities:

1.  The PCC and the Financial Accounting Standards Board (FASB), working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. Generally Accepted Accounting Principles (GAAP) are warranted for private companies.  Based on those criteria, the PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements.

2.  The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Source: PCC website at www.fasb.org.  Information relating to the 9/16/14 meeting is from the PCC Media Meeting Recap available on the website.

AU 240 Consideration of Fraud in Financial Statement Audit

AU 240 Consideration of Fraud in Financial Statement Audit is effective for audits of financial statements for periods ending on or after December 14, 2012. While this pronouncement is specifically addressed to financial statement audits, it offers broader lessons for the forensic accountant. It points out that a misstatement may result from either fraud or error and reminds users that fraud is a broad legal concept, with the deciding factor between fraud and error being whether the underlying action that results in the misstatement is intentional or unintentional.

In addition, AU 240 does a good job of describing the role of corporate governance in diminishing the risk of fraud, as follows:

Responsibility for the Prevention and Detection of Fraud

.04  The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, places a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating a culture of honesty and ethical behavior, which can be reinforced by active oversight by those charged with governance. Oversight by those charged with governance includes considering the potential for override of controls and other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of financial statement users regarding the entity’s performance and profitability.