The Controversy over Private Company Reporting Standards

Recommendations of the Blue Ribbon Panel and the Financial Accounting Foundation's Response Spark New Debate

Nicholas C. Lynch, PhD

The debate over financial reporting standards for privately held companies has been going on for decades. In many instances, including moderate to significant loan settings, external users of financial information—such as lenders, assurers, and venture capitalists—prefer audited financial statements to aid in the decision-making process. Currently, private companies follow the same u.S. Generally Accepted Accounting Principles (GAAP), issued by FASB, as public companies when issuing audited reports to external users. Although GAAP is generally viewed as the gold standard for financial reporting, private company managers view GAAP as unnecessarily complex and lacking relevance to external users who assess ongoing cash flows in making investment decisions.