07
Jul
11

Are NFP’s more like Private Companies, or Public Companies?

There is currently a bit of a disagreement (perhaps spat) between the AICPA and the FASB. I wrote this previous post  on the AICPA’s Blue Ribbon Panel on Private Company Reporting. Their report was quite a slap in the face of the FASB, insisting that the FASB was not capable of responding to the needs of private companies. The report urges the FAF (FASB’s parent organization) to establish a new board to simplify current US GAAP for private companies. The AICPA has gone so far as to organize a letter writing campaign  to lobby the FAF to adopt this solution.

 
Regardless of the structure, it appears increasingly likely that we are moving to different reporting requirements for public and private companies. This “big GAAP” /“little GAAP” concept is not new and is similar to the IFRS for Small and Medium sized Entities (SME) used internationally. This raises an important question: Are NFP’s more like Private Companies, or Public Companies?

 
The answer is not straight forward. Let’s look at some key criteria which speak to this topic.

Phone Call Access – One key difference between public companies and private companies is the access financial statement users have to custom financial information. In private companies it is not unusual for a banker to call the company’s accounting department and ask for an accounts receivable aging, or other information. This type of access means footnote disclosures have less value because custom information is a phone call away. By contrast there are laws preventing phone call access between shareholders and public companies so that all investors have equal access to information. Nonprofits fall somewhere in-between. In accounting I seldom talk with donors, but we do create custom grant reports. In addition most nonprofits welcome donor calls seeking information.

 
Number of Readers – Private companies often have only a few readers of the financial statements (owners, bankers, venture capitalists). Public companies, on the other hand, have many stockholders and have financial statements which are public information. Once again not-for-profits are in the middle. They have many donors and often publish their financial statements on their websites. But despite the wide distribution of these statements, my experience is that donors are more interested that an organization is audited, than what the report says. Donors do scrutinize overhead ratios, but are more likely to get this information from the form 990 (or indirectly through Charity Navigator).

 
Financial Sophistication of Readers – One major criticism of existing US GAAP is that it is designed for very sophisticated financial statement readers (financial analysts, corporate bankers, hedge fund managers, etc.). Private companies insist that the level of disclosure required to meet the demands of this audience is neither necessary nor appropriate for their readers (owners, bankers, and occasionally venture capitalists). If this is true for private companies it is truer for not-for-profits. This is in no way a criticism of donors, I just believe that most donors are concerned with efficiency and program effectiveness rather than GAAP financial statements. Those donors who are financially sophisticated (Foundations, board members, major donors) tend to seek custom financial information (grant applications, custom reporting, etc.)

 
Public Trust – This is probably the strongest argument for requiring not-for-profits to model the public company GAAP. As nonprofits we have a strong responsibility to the general public and our donors. As a result, it would make sense to require the highest standard of disclosure in our financial statements.

 
Financial Capacity – Private companies lack the same financial resources as public companies. As a result new and complex standards take a disproportionate toll on smaller companies. In addition with smaller finance teams these companies are less able to research proposed new standards. As a result their voice is less heard/considered by standard setters. Anyone who has worked for both a nonprofit and a private company will tell you that there are even less resources in a nonprofit.

 
So, what do we make of this? I personally lean toward following private company standards while voluntarily providing additional disclosure relevant to donors (focusing on program effectiveness). The practical expedients and reduced disclosures would ultimately mean more money can go to programs. Meanwhile the pressure to prove oneself to donors and external pressures form watchdog organizations and governments will protect the public trust. What do you think?

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