While this approach may seem fair at first glance, CPAs and owners of nonpublic companies have for years suggested it may not be. Is there really any reason, they ask, for financial statements of nonpublic companies to conform to the rigorous standards of disclosure set for their SEC-regulated counterparts when the only people who see the statements are the CEO, senior managers, a banker and—maybe—a customer or two? Arguments can be made either way, but the questioning has become more urgent as the number and complexity of standards have grown in wake of the Enron and other scandals. Applying those standards to the books of privately held companies, skeptics say, can drive up auditing costs while producing little of practical use to the business owners who have to pay for those costs.

auditors to apply standards aimed at large, public companies when preparing financial statements for smaller, nonpublic companies is like requiring doctors to order certain tests even when a diagnosis can be made without them. "The tests are expensive and take time, but the data they gather is not always useful," he said.

One example of a topic that may be looked at, he said, is requiring the financial statements of all related and semi-related entities to be combined with that of the primary organization. It became a requirement because Enron used special entities to hide unethical and illegal practices, but if a small business owner forms separate corporations for his building and the land it stands on, it takes time and effort to determine if they even meet the criteria for combination with the primary organization. And even if they do, does combining them make the financial statement more informative? "Does it make sense to combine the entities," Hart asked, "or would a footnote disclosure be more appropriate?"

"For example, our small business clients expect us to correct their accounting mistakes," he said. "If the adjustments materially affect the financial statements which is most often the case - it requires a line at the end of our report stating that we are not independent of the client. The bank may see it as a red flag, and that could negatively affect a lending decision. Some people may get the idea the books have somehow been made to look more favorable, even though that’s not the case at all."

Questions like these illustrate how current GAAP may sometimes work counter to the best interests of nonpublic companies. But there are other considerations. For example, if a different set of standards is established for nonpublic companies, or if some topics no longer apply to nonpublic companies, will it create a perception that the standards for those companies are less demanding? And if that perception does exist, how will it affect nonpublic firms when they apply for loans, bonding or insurance?

Ultimately, Noll said, any changes the Private Company Financial Reporting Committee recommends, and the Financial Accounting Standards Board passes, would have to address the needs of financial statement users, such as banks. One particularly tricky issue is maintaining GAAP’s reputation.

"GAAP has long been considered the gold standard, and any alternative offered to private companies will need to be perceived as having the same degree of credibility as the existing standards," Noll said. Making changes, he noted, would not mean establishing a whole new set of standards for nonpublic companies, but could mean noting within GAAP that certain topics should not apply to nonpublics or could apply to them differently.

"The short way of saying it," Noll explained, "is that maybe we should let the privately held companies and their bankers and auditors determine, to the extent that FASB allows for differences, which GAAP standards are appropriate."