Skip to content

Washington, D.C. – U.S. Senator Mike Enzi, R-Wyo., proposed today the creation of a new advisory committee specifically designed to be an advocate for the needs of small businesses during the establishment of national accounting standards.

Enzi, the chairman of the Securities and Investment Subcommittee of the Senate Banking Committee, proposed that FASB immediately establish a Small Firm Advisory Committee to work with FASB and the Financial Accounting Standard Advisory Council (FASAC) to address small business concerns early in the rule-making process. The committee would review all pending and future FASB draft proposals and interpretations to ensure there are no unintended consequences on small businesses.

Enzi presented his plan at a subcommittee hearing he called to explore the importance of small business to the U.S. economy and the participation of small businesses in the establishment of accounting standards by the Financial Accounting Standards Board.

Enzi and panel members discussed concerns that FASB is overlooking small businesses when updating and establishing accounting standards, particularly in the consolidation of variable interest entities, the expensing of stock options, and the counting of mandatory-redeemable shares as liabilities.

Enzi's statement from the hearing follows.

Statement by Senator Michael B. Enzi
"Financial Accounting Standards Board
and Small Business Growth"
Subcommittee on Securities and Investment
Committee on Banking, Housing, and Urban Affairs
November 12, 2003



The Subcommittee at today's hearing will explore the important role of small business in our nation's economy and the important role played by the Financial Accounting Standards Board (FASB) in establishing accounting standards.

Our country's small business and entrepreneurial spirit have become woven into the fabric of our nation. Countries all over the world have sought to emulate and replicate our high technology centers. Recent press articles cite efforts by a city in China to replicate the operations of Silicon Valley.

Figures cited by the Small Business Administration demonstrate the importance of small business to our nation's economy. Nearly 23 million strong, small businesses represent more than 99.7 percent of all employers, employ half of all private sector employees, generate 60 percent of net new jobs annually, create more than 50 percent of non-farm private gross domestic product (DGP) and produce 13 to 14 times more patents per employee than large patenting firms.

The Financial Accounting Standards Board also is very important to the health of our nation's economy. This private sector, independent board is responsible for establishing and interpreting the accounting standards for our nation's companies. I have been an ardent supporter of FASB and its independence. The importance of FASB was seen last year with the passage of the Sarbanes-Oxley Act. The accounting scandals of Enron, WorldCom and others highlighted to us that an independent accounting body is essential to maintain the high standards and integrity of our nation's public markets. With this high level of responsibility, it is vital that FASB retain an objective and open process so that the accounting standards can be thoroughly discussed with all sectors of our economy. Sarbanes-Oxley worried about a "cascading effect" to small business. It was a justified concern that needs to be recognized by all boards and commissions.

Generally, it is very difficult for small businesses to participate in the federal rule-making process. Small businesses do not have the time or resources, as compared to their large-business counterparts, to shift through the thousands of pages of federal regulations to analyze and comment on the effects on small entities. In 1980, Congress recognized this fact and passed the Regulatory Flexibility Act (Reg Flex). The Reg Flex Act requires federal agencies to conduct an economic analysis on virtually all federal rule-making proposals to determine if there is a disproportionate burden upon small entities. Congress also established a "small business watchdog," the Office of Advocacy, within the Small Business Administration to monitor federal agencies' compliance with the Act. In addition, Congress amended the Act in 1996 to allow small entities to sue in court to have the implementation of an agency's rule set aside until an adequate small business economic analysis has been conducted.

Since the rise of the accounting scandals, FASB has become more active in updating and establishing accounting standards. The Board in its attempt to quell the accounting problems of companies in the Fortune 500 may have overlooked or have not paid enough attention to how the draft statements and interpretations may affect small entities. In addition, FASB may not have sought enough input from small firms.

For example, FASB relies upon Financial Accounting Standard Advisory Council (FASAC) for guidance and advice on draft accounting statements and interpretations. However, out of the 33 members of the FASAC, there are only five small entities and three of those are financial entities that may not represent the operations of your typical small business.

In addition, FASB played a critical role in the early and mid-1990s on the Securities and Exchange Commission's Government-Business Forum on Small Business Capital Formation. FASB was represented on the Executive Committee and actively participated in the annual forum. Unfortunately, during the past two years FASB has withdrawn from the Executive Committee and did not participate in the forums. I understand that at this year's forum, held in September, the participants discussed the potential affects of FAS 123 and FAS 150 in detail, but FASB had already withdrawn.

Today, our second panel will highlight three separate accounting issues that if fully implemented would have substantial effects on small entities. The first issues concern FIN 46. In January of 2003, FASB released FIN 46, an interpretation of the Financial Accounting Statement 46 requiring the consolidation of variable interest entities. Two of our witnesses will discuss that the implementation of the interpretation would have a serious effect on venture capitalists investing in small entities as well as franchisees ability to negotiate franchise agreements with franchisors.

The second issue concerns a soon to be released proposal by FASB on Financial Accounting Statement 123 concerning the expensing of stock options. Two of our witnesses will discuss the detrimental affects if this proposal is not fully vetted as it would place a tremendous hurdle for entrepreneurs trying to gain access to the equity markets. In addition, the adoption of this proposal may place U.S. small businesses at a competitive disadvantage with overseas companies that will not be bound by the standards.

With respect to this initiative, I have had serious concerns about whether FASB has sufficient inclusion of small business entities in the drafting process. This is an extremely complex initiative. Even FASB recognized how complex and intricate of a project this was when it established on ad-hoc committee, the Option Valuation Group, to come up with a standard valuation model for stock option expensing. It is my understanding that the Group met for the final time in early October, however, the Group was unable to achieve consensus on a valuation model. In addition, FASB has stated that it will "road test the valuation model." I am very interested in how this will operate and how many small businesses will be involved in the road-testing.

Finally, we have two witnesses who will discuss Financial Accounting Statement 150. Earlier this year, FASB issued a proposal that would require closely-held companies to count its mandatory-redeemable shares as liabilities. If implemented it would have had a devastating effect on thousands of closely-held businesses across the country.

With respect to FAS 150, the comment period ended on October 30. In lightening fast speed, FASB reviewed the small business comments and immediately issued a statement that the implementation of this initiative was put on hold indefinitely. I applaud FASB for its quick action in this process. In addition, I applaud the work of Mr. Forrestel. I believe that it was his hard work and dogged perseverance that made FASB see the potential effects of the proposal on small entities. However, the question that should be asked is whether the problems with the proposal could have been foreseen earlier.

In light of this, I am proposing that FASB immediately establish a Small Firm Advisory Committee to work with FASB and the FASAC to address small business concerns early in the process. Currently, the National Association of Securities Dealers (NASD) effectively uses its Small Firm Advisory Board to review all of the NASD's rule-making prior to the rule-makings being issued for comment by the NASD and by the SEC. I strongly believe that such a small business committee is essential for FASB.

With respect to FASB, there is no Regulatory Flexibility Act for small businesses, there is no small business watchdog and there is no recourse when an accounting standard has been adopted. Once FASB adopts an accounting standard it is final until the FASB Board members change their mind. Unlike the Regulatory Flexibility Act, small entities cannot seek a higher authority for appeal if the small entities believe an accounting standard was adopted with insufficient small business information.

This Small Firm Advisory Committee should review all pending and future FASB draft proposals and interpretations to ensure that there are no unintended consequences on small businesses.