The corporate environment can be separated into two broad categories: privately-held and publicly-traded companies. From an accounting perspective, the main difference between the two is regulatory. Public companies are subject to oversight by the Securities and Exchange Commission and Public Company Accounting Oversight Board. Furthermore, many affairs of these companies—good and bad—are publicly available. As a result, there are lessons that privately-held companies can draw from the experiences of their public counterparts, regardless of the differences in regulatory environment.
In today’s marketplace, many private companies continue to move toward a less regulated environment in an effort for business owners to focus capital on more of an operational aspect and less on their control environment. Depending on the complexity of your business, such deregulation would seem to make sense. However, that is not exactly true. Most of the regulations and authoritative literature geared toward public companies exists for a reason. Many public companies have experienced a breakdown in controls at some point in time, which affected the transparency of the operating financial results and, ultimately, the users of those statements: shareholders. Although privately-held companies are not subject to many of the rules of their publicly-traded counterparts, and there are fewer users exposed to such financial risks, we can learn from these experiences. For instance, fraudulent financial activities and errors resulting from breakdowns in the reporting process are not exclusive to companies that are public. The biggest mistake is taking the attitude that, “I am a heavily involved owner. I know my business and all those who are involved.” These people are at the greatest risk, because they may be smaller from an operational aspect and have more difficulty absorbing a major setback or fraudulent activity.
Here are a few opportunities for privately-held businesses, based on lessons learned from public companies:
- Integrate appropriate accounting systems that support the operating complexities and provide sufficient data for clear financial reporting. This allows business owners to access accurate operating results in a timely manner to make necessary decisions.
- Adopt a whistle-blowing policy. Companies should document and communicate policies and procedures on how employees can anonymously report certain activities that should be investigated by those with governance responsibilities. The policy should also include a method for external companies, such as customers and suppliers, to file complaints.
- Be careful not to undervalue the requirements for the head of the accounting and finance department at your company. It is imperative that you have employed the right individual with sufficient skill sets to handle tasks such as establishing financing agreements with your lenders and understanding terms, rates, and covenants. This individual also should be on top of recent accounting changes and how they will impact the company’s financial reporting. Too often, business leaders assume that new pronouncements only affect public companies. However, most pronouncements have specific private company guidance. Being aware of these changes is critical to avoiding a restatement of prior earnings.
It is not cost effective to adopt every recommended practice that is published for your accounting department. However, it is important to know where you are exposed and how you might be at risk. The biggest risk is not doing anything and making the assumption that your company is not susceptible to the types of situations that occur at large, publicly-traded companies.