تقاضای ذینفعان برای کیفیت حسابداری و سودمندی اقتصادی حسابداری در شرکت های خصوصی در ایالات متحده Stakeholder demand for accounting quality and economic usefulness of accounting in U.S. private firms

The U.S. Private Company Council (PCC) recently issued guidance on its private company accounting project, Private Company Decision-Making Framework (PCC, 2013), which suggests that not all private firms need to prepare financial statements under the same set of U.S. GAAP as do public firms and that exceptions and alternatives should be allowed. To determine which exceptions to certain aspects of accrual-based accounting should be allowed, the PCC intends to consider the value relevance of the information to users of private firm financial statements relative to the firm’s cost of producing it. Furthermore, the Decision-Making Framework explicitly considers that the tradeoff between the value relevance and cost of certain accrual-based accounting estimates can vary across private firms. To provide information relevant to these standard setting deliberations, the purposes of our study are to understand (1) whether accrual quality in private firms is ‘‘useful” and (2) whether accrual quality varies across private firm characteristics. For the first purpose, we provide evidence of the effect of accrual quality on the ability of accruals to forecast future cash flows. For the second purpose, we examine whether accrual quality varies predictably with demand from a variety of stakeholders (equity investors, debt investors, and suppliers). Private (or nonpublic) firms make up a significant portion of the economic activity in the U.S. and nearly all other countries, yet prior research focuses primarily on public firms. To illustrate the relative contribution of private firms to  international economic activity, Berzins et al. (2008) show that, in the aggregate, nonlisted firms have about four times more employees than listed firms, three times higher revenues, and twice the amount of assets, and that these statistics are representative for most countries in the world. In fact, more than 99% of limited liability companies are not listed on a stock exchange (e.g., Pacter, 2004; Nagar et al., 2011). In the U.S., there are about 8 million private firms with paid employees, representing one-half of the nation’s GDP.1,2 Recently there has been increased emphasis on private firms’ accounting practices (Bradshaw et al., 2014). In 2007, the Financial Accounting Standards Board (FASB) established the Private Company Financial Reporting Committee (PCFRC) with the goal of improving the overall financial reporting environment. The PCFRC and other groups contended that the complex standards currently being set by the FASB had become too focused on public companies, had little relevance to smaller private companies, and should be modified by a separate standards-setting board. In 2010, the joint ‘‘Blue-Ribbon” Panel (BRP), established by the Financial Accounting Foundation (FAF) and the American Institute of Certified Public Accountants (AICPA), agreed to a separate reporting model for private companies. The BRP recommended an independent standard setting body for private firms, but the FAF in October 2011 suggested that the FASB retain oversight. The result of BRP’s recommendations was the establishment of the PCC in 2012.3 The key insight from the discussion above is that there is a growing trend to reduce the cost and complexity of private companies’ financial reporting. The implication is that the unique characteristics of private companies reduce the demand for financial reporting and therefore do not justify the preparation and auditing costs of providing complex GAAP-based financial statements, relative to public firms (Durak, 2013; Murphy, 2015). As a result, many accounting standards updates have been passed in recent years that allow exceptions or alternatives for private company reporting (e.g., subsequent measurement of goodwill). The lower demand for (costly) accrual-based financial reporting of private firms often is attributed to these firms lack of the typical agency problems observed in public firms. For example, private firms have capital providers that often take a direct role in helping to manage the company (Chen et al., 2011), or often include firms with a single manager-owner. Private companies may also have personal ties with lenders, who often are local financial institutions (Vera and Onji, 2010; Cole and Wolken, 1995). Because capital providers of private firms often have direct access to inside information and continuous contact with management, they often rely less on formal communication through published accrual-based financial statements (Berger and Udell, 1998). As stated in the PCC’s Basis for Conclusion to the Private Company Decision-Making Framework, ‘‘Many preparers of private company financial statements said that the preparation efforts and audit or review costs of complying with some accounting guidance that does not affect reported cash amounts or liquidity often are not justified considering the limited benefits of reporting that information to users” (PCC, 2013, paragraph BC13). Instead, private firms’ financial reports could more likely reflect other objectives such as tax reporting, dividend policy, or insurance requirements (Ball and Shivakumar, 2005; Burgstahler et al., 2006). One aim of the PCC’s Private Company Decision-Making Framework is to recognize ‘‘differentiating features” of private firms (e.g., ownership structure and type of external financing) that can be used ‘‘to identify opportunities to reduce the complexity and costs of preparing financial statements in accordance with U.S. GAAP” (PCC, 2013, paragraph 8). The costs allude to both direct costs of preparing the statements as well as indirect information processing and other proprietary costs (ICAEW, 2015, page 4). We identify the characteristics of private firms that are associated with higher quality accruals. Those firms that face a higher demand for accrual-based financial statements are more likely to show evidence of higher quality accruals. Our sample period ends before the introduction of new regulations for private firms, further highlighting the importance of demand factors (relative to regulation) that would have an impact on accounting practices among private firms. We use accounting data from the Sageworks database for a sample of private firms over the period 2002–۲۰۰۹٫۴ We measure accrual quality using three widely used metrics: (1) abnormal total accruals from Kothari et al. (2005) performancematched model; (2) abnormal working capital accruals from Dechow and Dichev’s (2002) cash flow-based model, controlling for sales growth and property, plant, and equipment (McNichols, 2002); (3) abnormal accrued revenues from McNichols and Stubben’s (2008) model. We investigate the impact of demand from both equity stakeholders (i.e., equity investors) and non-equity stakeholders (i.e., lenders and suppliers). Based on multivariate analyses, which contain controls for standard firm characteristics found to explain variations in accrual quality, our evidence suggests that accrual quality is strongly positively associated with demand for monitoring from equity investors (ownership dispersion), relatively powerful debt investors (senior debt), and suppliers (inventory intensity). Although our primary focus is on how accrual estimates are shaped by demand factors, we also assess the economic consequences of accrual quality for these firms. If accruals are less useful for private firms, we would not expect accrual quality to have economic consequences. However, there exist strong arguments that accruals ‘‘matter” for private firms (see Section 4.2. for further discussion). Our evidence supports the idea that accruals are indeed important for U.S. private firms. Specifically, we find that accrual quality positively affects the ability of accruals to forecast future cash flows. These tests also help us address questions regarding the construct validity of our accrual-quality measures in a private firm setting. Our results are not tautological. In our view, the tension comes from the fact that despite the possibility of accessing internal (and perhaps even non-accounting) information, these external stakeholders find accounting reports useful and that the quality of these reports varies predictably with stakeholder demand. We add new evidence to the literature by providing a within-private firm analysis of firm characteristics that contribute to high-quality financial statements. Accounting estimates for these firms should be relatively less affected by regulation than for publicly listed and regulated firms. Given that private firms have important stakeholders beyond shareholders, we assess the importance of both lenders and suppliers. Several recent studies compare the accrual quality of private firms versus public firms, but there has been comparatively limited research examining variation within private firms in the U.S.5 This is surprising, given both the economic importance of private firms and the substantial diversity among them along many dimensions. We also contribute to the debate on whether accounting is important for private firms by documenting significant effects for cash-flow predictability. Our focus on cash-flow prediction is directly motivated by the practitioner literature. For example, in his comment letter to FASB on the accounting and reporting standards for non-public companies, James Catty of the International Association of Consultants, Valuators, and Analysts, wrote that ‘‘We suggest the emphasis in financial statements for private companies should be on the entity’s cash-generation capability” (Cheney, 2012, page 13). Our results are also directly relevant to regulators and standard setters. The FASB and PCC are in the process of identifying alternatives and exceptions to U.S. GAAP for private companies.6 A major initiative of the PCC has been to gather feedback from constituents as to which private firms should be allowed these alternatives and exceptions. Making these decisions requires an understanding of the needs of users of private company financial statements and the ability of firms to supply costly accounting information (i.e., the typical cost-benefit tradeoff in financial reporting). The PCC’s decision-making framework identifies some specific firm characteristics that likely differentiate private firms along these lines, but it also acknowledges that others could exist. We provide empirical support to some of those factors identified in the framework and also explore new ones.