2004 Private Company Financial Reporting Study Stratified Random

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2004 Private Company Financial Reporting Study Stratified Random Sample Executive Report August 2004

2004 Private Company Financial Reporting Study Table of Contents Background, Objectives & Methodology ……………………. . 2 Detailed Findings …………………………………. 10 Adjunct Owner/Manager Study……………………. . 10 Owner/Manager General Findings……………………. 17 Practitioners General Findings………………………. 32 External Stakeholders General Findings………………… 40 Specific GAAP Requirement Evaluations…………………. . 56 Value of GAAP Financial Statements……………………. . 70 GAAP Standards………………………………… 82 1 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § To assess perceptions of how well financial statements prepared using Generally Accepted Accounting Principles (GAAP) meet the needs of the stakeholders of privately held, for-profit entities and external users of that reporting, The MSR Group was commissioned to accomplish a nationwide opinion research survey, conducted in July 2004. Ø The MSR Group is one of the oldest and most respected full-service market research firms in the nation. It was founded in Omaha, Nebraska, over 50 years ago as a door-to-door data collection company. Ø Over the past half-century, the firm has grown into a full service market research firm with a highly respected reputation among clients nationwide from a diverse breadth of industries. The MSR Group has conducted a wide array of consumer and business-to-business research projects, both qualitative and quantitative, from local to national in scope. Ø As a member of the American Marketing Association (AMA), the Market Research Association (MRA) and the Council for Marketing and Opinion Research (CMOR), The MSR Group adheres to the nationally accepted principles and practices of data collection standards and conducts all projects according to exact specifications. Ø To ensure the objectivity and validity of research conducted, all functions of the research process are conducted inhouse at The MSR Group by a veteran staff of highly trained professionals. 2 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § Major objectives of the study included evaluating: Ø Utilization of GAAP financial statements by privately held, for-profit companies and by lenders, investors and sureties; Ø The general relevance and usefulness of GAAP financial statements to stakeholders of privately held, for-profit companies; Ø The relevance/decision usefulness of 12 specific GAAP requirements and the level of challenge to comply among businesses and practitioners or understand or use among external stakeholders; and, Ø The value and benefit of GAAP financial statements compared to the cost of preparing them. § The survey was conducted using a stratified random sample, CATI/Web Mixed Mode methodology. Prospective participants were called, screened to meet eligibility requirements and given the option of either completing the survey by telephone or completing the survey online. Ø Approximately 95 percent of the surveys were completed by telephone. Ø In the telephone interviewing process, all questions with specific pre-coded lists of potential responses (other than “Yes”/”No”), were first asked and top-of-mind response(s) recorded. Respondents were then read each of the remaining pre-coded responses and their answers recorded, as appropriate, before being asked the next question. Ø The sub-questions concerning the 12 specific GAAP requirements and the immediate follow-on questions concerning usefulness and value of GAAP financial statements were rotated within each primary question from respondent-torespondent to ensure any potential question position bias was eliminated. Ø The average survey length was approximately 10 minutes for Owner/Manager and 12 minutes for both Practitioners and External Stakeholders. 3 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § The stratified random sample was comprised of the following constituencies. Ø 300 Owners/Managers of privately held, for-profit businesses v 100 with revenue under $5 Million v 100 with revenue of $5 Million to $25 Million v 100 with revenue over $25 Million Ø 407 Practitioners v 107 from firms with 5 or less partners v 100 from firms with 6 to 10 partners v 100 from firms with 11 to 20 partners v 100 from firms with 21 or more partners Ø 301 External Stakeholders v 100 Creditors/Lenders v 101 from Investor/Venture Capital firms v 100 from Surety/Bonding/Insurance firms 4 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § Contact lists for the study were obtained from the following sources. Ø Owner/Managers – Total merged list of 30, 000 private, for-profit businesses. v A randomly selected list of 15, 000 business names and contacts was provided by the National Federation of Independent Business (NFIB) (5, 000 in each of three revenue ranges) from their membership. v A supplemental list of 15, 000 businesses randomly selected from a nationwide listing was acquired from a business list vendor by The MSR Group (5, 000 in each of three revenue ranges). Non-profit entities, schools, churches, post offices, government agencies and accounting firms were specifically excluded from the list. Ø Practitioners – Total list of 59, 619 practitioners provided by the AICPA. v 39, 004 names from firms with 5 or fewer partners. v 6, 071 names from firms with 6 to 10 partners. v 3, 332 names from firms with 11 to 20 partners. v 11, 212 names from firms with 21 or more partners. Ø External Stakeholders – Total list of 13, 906 potential participants. v Creditors/Lenders : A randomly selected list of 7, 000 national and state commercial bank headquarters and single, free-standing locations was acquired from a business list vendor by The MSR Group. v Investor/Venture Capital Firms: A list of 3, 569 names was provided by the National Venture Capital Association (NVCA). v Surety/Bonding/Insurance Firms: A nationwide list of 3, 337 firms was acquired from a business list vendor by The MSR Group. 5 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § For sampling purposes, prospective participants were randomly selected from the contact lists for each of the 10 stratified constituency groups. To help minimize any potential non-response bias, each phone number from the resulting sample list was called up to five times before it was discarded and replaced with another randomly selected phone number from the contact list. § For the Owner/Manager Survey, interviewers ask to speak with the owner/company manager or the person responsible for internal preparation of financial statements for the company, as needed for quotas. Ø Respondents were further screened to represent privately owned, for-profit business that issue or release GAAP financial statements for external use and meet the appropriate company revenue criteria. § For the Practitioner Survey, interviewers asked to speak with a partner or other professional who primarily handles audit, compilation or review for privately held, for-profit companies. Ø Respondents were further screened to be personally involved in auditing, reviewing or compiling GAAP financial statements for privately held, for-profit companies and to be from firms of an appropriate size based on the number of partners in the firm. 6 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § For the External Stakeholders Survey, two sets of criteria were used to identify appropriate prospective respondents. Ø For Creditors/Lenders, interviewers asked to speak with the Chief Credit Officer, the Head of Credit Administration or other representative primarily responsible for the evaluation and approval of business loans for privately held, forprofit companies. Ø For Investor/Venture Capital firms and Surety/Bonding firms, the interviewer asked to speak with a representative who primarily works with privately held, for-profit companies or does a large amount of work with such companies. Ø Participation eligibility criteria for all external stakeholders also included personally serving or evaluating financial statements of privately held, for-profit companies and at least sometimes, at a minimum, requiring financial statements prepared in accordance with GAAP for their privately held, for-profit company clients and prospects. 7 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § For statistical purposes, the maximum margin of error associated with a sample of approximately 100 respondents in each of the stratified constituency groups, as presented in this report, is 9. 8 percent at a 95 percent confidence level. It is important to understand that sampling error rates increase as smaller segments are drawn from the survey, such as those as provided in the cross-tabulations. § The following table illustrates the sampling error at a 95 percent confidence level for a given number of respondents drawn from a large population. § Assume 80 percent of 100 respondents from companies with revenue of $5 Million to $25 Million reported that their company prepares GAAP financial statements for lenders. Using the table above, the sampling error would be ± 7. 8 percent. This means we expect between 72. 2 percent and 87. 8 percent of all such companies who prepare or issue GAAP financial statements to provide them to lenders. 8 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Background, Objectives & Methodology § The 95 percent confidence level means we would expect the actual percent of all privately held, for-profit businesses in that revenue range who prepare or issue GAAP financial statements externally and who provide the statements to lenders to fall outside the sampling error range less than 5 percent of the time. § The sampling error associated with the responses of any number of respondents can be determined by interpolating between the appropriate next higher and next lower number of respondents shown in the table on the previous page. § The information provided in this report is a result of primary research and its contents are proprietary to and for the sole use of AICPA and its designates. Any questions regarding the contents can be directed to The MSR Group only after receiving the expressed consent of these authorized personnel. 9 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings § To participate in the Owner/Manager Survey, all respondents were required to answer that they represent companies that prepare, issue or release financial statements for external use, in accordance with GAAP. Ø As part of the screening process, 148 prospective participants, all from privately owned, forprofit companies, were screened out for not meeting the above requirement. § The following five slides provide pertinent information about those who did not meet participation requirements based on the issuing of financial statements. Ø Complete information is provided in the Frequency Tables & Cross-tabulation Report provided separately. 11 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 3. Does your company prepare, issue or release financial statements for external use? [If “Yes”, next asked Q 5 (Slide 14)] (TOTAL n=448: n=195 for <$5 M, n=128 for $5 -$25 M, and n=125 for >$25 M) As shown, among all prospective participants, 43. 6% of privately owned, for-profit businesses with revenue of less than $5 million do not prepare, issue or release financial statements for external use. 12 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 4. What is the primary reason your company does not prepare, issue or release financial statements for external use? [From Q 3 (Slide 12). Asked only of those who DO NOT issue financial statements for external use who were then asked no more questions] [Multiple Responses Allowed] (TOTAL n=132: n=85 for <$5 M, n=27 for $5 -$25 M, and n=20 for >$25 M) The “Other” reasons mentioned most frequently are that there is no need to and because they are privately owned. A complete listing of “Other” responses is provided in the Verbatim Responses. 13 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 5. There are four common bases used for preparing financial statements: Federal income tax, cash, modified cash and Generally Accepted Accounting Principles commonly referred to as GAAP. Are the financial statements your company prepares, issues or releases prepared in accordance with GAAP? [From Q 3 (Slide 12). Asked only of those who DO issue financial statements for external use] (TOTAL n=316: n=110 for <$5 M, n=101 for $5 -$25 M, and n=105 for >$25 M) Considering the total prospective respondent base of 195 for <$5 M, 128 for $5 -$25 M, and 125 for >$25 M, the net percent of companies that do not issue financial statements for external use or do not issue them in accordance with GAAP is: <$5 M: 48. 7% $5 m-$25 M: 21. 9% >$25 M: 20% The vast majority of these (95% to 99%, depending on revenue size) do not issue financial statements for external use at all, as shown in Q 3 (Slide 12). 14 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 6. On what accounting basis are your company’s financial statements prepared, for example cash basis or tax basis? [From Q 5 (Slide 14). Asked only of those whose financial statements for external use are not prepared in accordance with GAAP] [Multiple Responses Allowed] (TOTAL n=16: n=10 for <$5 M, n=1 for $5 -$25 M, and n=5 for >$25 M) NOTE: Very small sample sizes. There are only 16 total responses to this question. There were no “Don’t Know” or “Prefer Not to Answer” responses. The “Other” responses are: <$5 M: 1. Accrual. >$25 M: 1. GAAP and Tax Year. 2. SAP, It’s the standard for the insurance industry. 15 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 7. Why does your company use that other basis? [Asked only of those whose financial statements for external use are not prepared in accordance with GAAP] [Multiple Responses Allowed] (TOTAL n=16: n=10 for <$5 M, n=1 for $5 -$25 M, and n=5 for >$25 M) NOTE: Very small sample sizes. There are only 16 total responses to this question. The “Other” responses are: <$5 M: 1. Combination of all the above. 2. It is what my CPA does. $5 M-$25 M: 1. It satisfies the external users. >$25 M: 1. It’s the insurance industry standard required by the NAIC. 16 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager Primary Study Demographics Revenue (Millions) <$5 M (n=100) % $5 M-$25 M (n=100) % >$25 M (n=100) % 100 100 61. 0 3. 0 10. 0 11. 0 0 14. 0 47. 0 10. 0 24. 0 3. 0 4. 0 0 12. 0 19. 0 22. 0 40. 0 5. 0 2. 0 100 Business Demographics 100 Q 1. Privately Owned, For-profit Company Yes Q 2 e. Respondent Title Within the Company President, Chief Executive Officer, or equivalent Chief Financial Officer Controller/Comptroller or equivalent Other Financial Executive Financial Manager Shareholder “Other” [See Verbatim Responses] Q 3 & Q 5. Prepare, Issue or Release Financial Statements for External Use Prepared in Accordance with GAAP Yes 18 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager Primary Study Demographics Revenue (Millions) <$5 M (n=100) % $5 M-$25 M (n=100) % >$25 M (n=100) % Under 25 25 -50 51 -100 101 -250 Over 250 58. 0 28. 0 10. 0 0 19. 0 31. 0 25. 0 23. 0 0 6. 0 11. 0 24. 0 23. 0 36. 0 Prefer not to say 3. 0 2. 0 0 Business Demographics (Cont’d) Q 19. Number of full-time employees in 2003 19 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager Primary Study Demographics Revenue (Millions) <$5 M (n=100) % $5 M-$25 M (n=100) % >$25 M (n=100) % 15. 0 9. 0 4. 0 14. 0 3. 0 18. 0 1. 0 4. 0 3. 0 12. 0 15. 0 0 21. 0 15. 0 3. 0 5. 0 0 0 19. 0 2. 0 5. 0 4. 0 12. 0 0 13. 0 1. 0 20. 0 1. 0 7. 0 0 1. 0 21. 0 0 2. 0 6. 0 12. 0 1. 0 8. 0 0 91. 0 4. 0 3. 0 1. 0 Business Demographics (Cont’d) 71. 0 16. 0 5. 0 3. 0 69. 0 17. 0 6. 0 5. 0 3. 0 Q 20. Type of Business Manufacturing Distribution/Wholesale Financial/Banking Services Insurance Healthcare Retail Technology Agriculture Transportation Construction Real Estate “Other” [See Verbatim Responses] Prefer not to say Q 21. Number of Owners/Shareholders Under 5 6 -25 26 -100 Over 100 Don’t know/ Prefer not to say 20 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 2 b. Are you an owner of your company? (n=100 for each cell) Interviews were conducted with a total of 254 company owners, of which 138 are also the person who prepares financial statements for their company. 21 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 2 c. Are you the person who prepares financial statements for your company? [If “Yes”, next asked Q 3 (Slide 24)] (n=100 for each cell) Interviews were conducted with a total of 184 respondents who prepare financial statements for their company. 22 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 2 d. Who prepares financial statements for your company? [From Q 2 c (Slide 22). Asked only of those who are not the person who prepares financial statements for their company] (n=50 for <$5 M, 44 for $5 -$25 M, and 22 for >$25 M) A significantly greater percentage of <$5 M businesses use outside accountants compared to larger revenue companies. Considering the total respondent base of 100 per cell, the net percent of companies that report using outside accountants is: <$5 M: 37% $5 m-$25 M: 19% >$25 M: 9% 23 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 3. Does your company prepare, issue or release financial statements for external use? [All asked, then next asked Q 5 (Slide 25)] (n=100 for each cell) 24 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 5. Are the financial statements your company prepares, issues or releases prepared in accordance with GAAP? [All asked, then next asked Q 8 (Slide 26)] (n=100 for each cell) 25 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 8. Who does your company prepare GAAP financial statements for? [Multiple Responses Allowed] (n=100 for each cell) Lenders and management use to run the business are the most mentioned uses of GAAP financial statements. “Other” responses are provided in the Verbatim Responses. 26 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 8 (Special). Who does your company prepare GAAP financial statements for? [This slide combines mention of lenders/creditors into a single response rather than separate responses as on the previous slide] [Multiple Responses Allowed] (n=100 for each cell) Combining the responses adds 2% to 6% to the “Lenders” responses on the previous slide, depending on the cell. 27 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 9. Does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [If “Yes”, next asked Q 10 (Slide 30). If NOT “Yes”, next asked Q 11 (Slide 31)] (n=100 for each cell) It should be noted that while roughly 70% to 80%, depending on the cell, said they have not, about 10% to 20% did not know. 28 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 9 (Special). Does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [This slide shows ONLY the mentions for the combined lender/creditor cell defined in Slide 27] n=79 for <$5 M, n=83 for $5 -$25 M, and n=86 for >$25 M) Considering only the combined lender/creditor response segment changes the outcome downward compared to the previous slide by about 1% or less, depending on the revenue cell. 29 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 10. Under what circumstances does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [From Q 9 (Slide 28). Asked only of those who reported they ever do] [Multiple Responses Allowed] n=10 for <$5 M, n=10 for $5 -$25 M, and n=14 for >$25 M) NOTE: Very small sample sizes. There is no clear consensus as to what circumstances result in issuing financial statements with exceptions to certain GAAP requirements. The 9 “Other” responses are provided in the Verbatim Responses. 30 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 11. Have you or other company representatives ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements? [All asked] (n=100 for each cell) The vast majority said they have not. Uncertainty is very low. Among those who prepare financial statements for their company, 9. 2% said the company has asked, which is significantly higher than the 2. 6% of those who do not prepare financials for their company that said their company has asked. 31 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Practitioner Primary Study Demographics Number of Partners 5 or less (n=107) % 6 -10 (n=100) % 11 -20 (n=100) % 21 or more (n=100) % 100 100 79. 4 13. 4 7. 1 58. 7 30. 0 11. 4 50. 9 32. 3 16. 8 26. 2 24. 8 49. 0 15. 0 78. 5 5. 6 0. 9 0 Practitioner Demographics 0 77. 0 22. 0 0 1. 0 0 62. 0 36. 0 2. 0 0 0 1. 0 46. 0 7. 0 46. 0 Q 2. Personally Involved in Auditing, Reviewing or Compiling GAAP Financial Statements for Privately Held, For-profit Companies Yes Q 3. Average Percent of Customers by Revenue Range Under $5 Million to $25 Million Over $25 Million Q 17. Firm Category Sole practitioner Local firm Regional firm National firm International firm 33 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 4. Who do your private, for-profit company clients issue GAAP financials for? [Multiple Responses Allowed] (n=107 for 5 or less partners and 100 for all other cells) NOTE: This question asked the practitioner to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. Lenders, management use to run the business and shareholders are the most mentioned uses of GAAP financial statements from the practitioner perspective. The “Other” responses are provided in the Verbatim Responses. 34 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 5. When do you recommend that a private, for-profit client issue financial statements to external users prepared on something other than a GAAP basis, such as cash basis, modified cash basis or tax basis, for example, and why? [Multiple Responses Allowed] (n=107 for 5 or less partners and 100 for all other cells) Overall, when external parties accept it, based on cost to fully comply with GAAP and when the outcome is closer to how management views the company are the most mentioned reasons for recommending use of a basis other than GAAP. “Other” responses are provided in the Verbatim Responses. 35 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 6. Do your private, for-profit clients ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [If “Yes”, next asked Q 7 (Slide 37). If NOT “Yes”, next asked Q 9 (Slide 39)] (n=107 for 5 or less partners and 100 for all other cells) NOTE: This question asked the practitioner to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. The percent for 11 -20 partners is significantly higher than the percent for 5 or less partners. The preponderance of remaining responses are “No. ” Less that 2% of any cell was uncertain or preferred not to answer. 36 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 7. Under what circumstances do practitioners’ private, for-profit clients issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [From Q 6 (Slide 36). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=54 for 5 or less partners, 60 for 6 -10, 69 for 11 -20 and 56 for 21 or more partners) While there are differences between the cells, there is little difference between the circumstances within each cell. “Other” responses are provided in the Verbatim Responses. 37 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 8. What are some of the more common GAAP requirements in which private companies report an exception to those requirements? [From Q 7 (Slide 37). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=54 for 5 or less partners, 60 for 6 -10, 69 for 11 -20 and 56 for 21 or more partners) [Table is sorted in descending order for 5 or less partner firms] Number of Partners GAAP Requirement 5 or less 11 -20 % 63. 0 59. 3 51. 9 40. 7 35. 2 25. 9 22. 2 18. 5 14. 8 11. 1 9. 3 1. 9 Cash flow statement Deferred income taxes Accrual basis of accounting Comprehensive income measurement Fair value basis of measuring assets and liabilities Intangibles Leases Post retirement and retirement plans Classification of liabilities and equity Guarantees Variable interest entities Share-based payments Don’t Know/ Can’t Answer Prefer Not to Answer 6 -10 % 68. 3 56. 7 58. 3 41. 7 33. 3 26. 7 11. 7 13. 3 15. 0 10. 0 5. 0 0 % 59. 4 58. 0 44. 9 40. 6 55. 1 36. 2 33. 3 37. 7 18. 8 10. 1 27. 5 15. 9 0 0 21 or more % 42. 9 37. 5 33. 9 26. 8 41. 1 19. 6 17. 9 32. 1 17. 9 19. 6 28. 6 1. 8 0 “Other” responses are provided in the Verbatim Responses. 38 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 9. Have your private company clients (or you on their behalf) ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements? [All asked] (n=107 for 5 or less partners and 100 for all other cells) The “Yes” percentage for 21 or more partners is significantly lower than the percentages for 610 partners and 11 -20 partners. 39 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings External Stakeholder Primary Study Demographics Type of Firm Investor/ Venture Capital (n=101) % Surety/ Bonding (n=100) % 100 100 88. 5 10. 5 1. 1 External Stakeholder Demographics Creditor/ Lender (n=100) % 56. 6 24. 9 18. 5 70. 4 20. 0 9. 7 Q 2. Personally Serve or Evaluate Financial Statements of Privately Held, For-profit Companies Yes Q 3. Average Percent of Customers by Revenue Range Under $5 Million to $25 Million Over $25 Million 41 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 4. Do you always, usually/sometimes or never require financial statements prepared in accordance with Generally Accepted Accounting Principles, commonly known as GAAP, for your privately held, for-profit company clients and prospects? (n=approximately 100 for each cell) A significantly higher percent of surety/bonding and investor/venture capital firms “Always” require GAAP financial statements than creditors/lenders. None of the external stakeholders said they “Never” require GAAP financial statements. As a result, survey questions 4 a (On what basis do you require financial statements to be submitted) & 4 b (Why do you require that other basis instead of GAAP) were never asked. All also responded, with none saying they “Don’t Know” or “Prefer Not to Answer. ” 42 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 5. What are your primary reasons for wanting GAAP financial statements? [Multiple Responses Allowed] (n=approximately 100 for each cell) Use as a decision-making tool, useful information, standardized language and providing comparability between periods and companies are the most mentioned reasons for wanting GAAP financial statements. The main reasons given in Q 5 a for the employer requiring it include: • It’s the industry standard • Consistency • Regulatory/Contractual requirements “Other” responses for Q 5 and Q 5 a are provided in the Verbatim Responses. 43 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 6. Do you ever accept financial statements of private companies prepared on a basis of accounting different from GAAP, such as cash basis, tax basis, modified cash basis or some other basis, for example? [If “Yes”, next asked Q 7 (Slide 45). If “No”, next asked Q 9 (Slide 48). If “Don’t Know”, next asked Q 10 (Slide 49)] (n=approximately 100 for each cell) NOTE: This question asked the external stakeholder whether they have ever accepted financial statements of private companies on a basis of accounting different from GAAP and a positive response may indicate that they have done so one time or more. The percent of creditors/lenders that accept financial statements on a basis other than GAAP is significantly higher than the other two cells. 44 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 7. What other bases do you accept? [From Q 6 (Slide 44). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=93 for creditor/lender, 59 for investor/venture capital, and 72 for surety/bonding) “Other” responses are provided in the Verbatim Responses. 45 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 8. Please answer “Yes” or “No” if the decision as to whether or not you accept financial statements of private companies prepared on a basis of accounting different from GAAP ever changes based on the following factors. [From Q 7 (Slide 45). Asked only of those who reported they ever do. ] (n=93 for creditor/lender, 59 for investor/venture capital, and 72 for surety/bonding) Reponses by Percent Type of Firm Decision Factor Creditor/ Lender % Investor/ Venture Capital % Don’t Yes No Know 64. 4 33. 9 1. 7 Yes No 79. 2 19. 4 Don’t Know 1. 4 Surety/ Bonding % Yes Company size The industry in which the company operates The owner’s personal guarantee/liability The amount of capital involved No 78. 5 21. 5 Don’t Know 0 51. 6 46. 2 23. 7 76. 3 0 48. 6 51. 4 0 62. 4 36. 6 1. 1 13. 6 86. 4 0 61. 1 36. 1 2. 8 75. 3 24. 7 0 49. 2 50. 8 0 81. 9 16. 7 1. 4 46 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 8 e. In general, are you more likely to accept non-GAAP financials from smaller companies or larger companies. [From Q 8 (Slide 46). Asked only of those who mentioned “Company Size” as a decision factor on Slide 46. Next asked Q 10 (Slide 49)] (n=73 for creditor/lender, 38 for investor/venture capital, and 57 for surety/bonding) Approximately 3% of each cell said they are likely to accept non -GAAP financials from either size of company. 47 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 9. What are the main reasons you only accept GAAP financial statements from private companies? [From Q 6 (Slide 44). Asked only of those who said they do not ever accept financial statements of private companies on a basis of accounting different from GAAP in Q 6] [Multiple Responses Allowed] (n=6 for creditor/lender, 41 for investor/venture capital, and 26 for surety/bonding) Use as a decision-making tool, providing useful information, standardized language and providing comparability between periods and companies are the most mentioned reasons for only accepting GAAP financial statements, especially by the investor/venture capital respondents. “Other” responses are provided in the Verbatim Responses. 48 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 10. For private, for-profit companies, do you ever accept financial statements prepared in accordance with GAAP, but with exceptions to certain GAAP requirements? [From Q 6 (Slide 44), Q 8 e (Slide 47) and Q 9 (Slide 48). All asked. If “Yes”, next asked Q 11 (Slide 50). If “No, next asked Q 13 (Slide 52). If “Prefer Not to Answer”, next asked Q 14 series (Slide 65)] (n=approximately 100 for each cell) NOTE: This question asked the external stakeholder to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. There is no statistically significant difference between any of respective response cells. 49 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 11. Under what circumstances do you ever accept private, for-profit company financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements. [From Q 10 (Slide 49). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=71 for creditor/lender, 62 for investor/venture capital, and 65 for surety/bonding) [Circumstances are sorted in descending order based on aggregate percent mention by all cells] The type of exception requested is the primary circumstance for all three cells. “Other” circumstances are provided in the Verbatim Responses. 50 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 12. What are some of the more common GAAP requirements in which private companies report an exception to GAAP requirements? [From Q 11 (Slide 50). Asked only of those who reported they ever do. Next asked Q 14 series (Slide 65)] ] [Multiple Responses Allowed] (n=71 for creditor/lender, 62 for investor/venture capital, and 65 for surety/bonding) [Requirements are sorted in descending order based on aggregate percent mention by all cells] Type of Firm Accrual basis of accounting Cash flow statement Fair value basis of measuring assets and liabilities Deferred income taxes Intangibles % 57. 7 53. 5 49. 3 43. 7 40. 8 Investor/ Venture Capital % 54. 9 54. 8 50. 0 40. 3 45. 2 Classification of liabilities and equity 33. 8 38. 7 44. 6 Comprehensive income measurement 26. 8 41. 9 26. 2 Guarantees 39. 4 21. 0 30. 8 Leases 26. 8 21. 0 26. 2 Post retirement and retirement plans 16. 9 16. 1 21. 5 Share-based payments 14. 1 24. 2 7. 7 Variable interest entities 16. 9 16. 1 9. 2 Don’t Know/ Can’t Answer 14. 1 3. 2 6. 2 0 1. 6 1. 5 Creditor/ Lender GAAP Requirement Prefer Not to Answer Surety/ Bonding % 60. 0 56. 9 60. 0 52. 3 38. 5 “Other” requirements are provided in the Verbatim Responses. 51 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Q 13. What are the main reasons you do not accept GAAP financial statements with exceptions to certain GAAP requirements. [From Q 10 (Slide 49). Asked only of those who said they do not ever accept financial statements of private companies prepared in accordance with GAAP, but with exceptions to certain GAAP requirements in Q 10] [Multiple Responses Allowed] (n=26 for creditor/lender, 34 for investor/venture capital, and 33 for surety/bonding) Use as a decision-making tool, providing useful information, standardized language and providing comparability between periods and companies are the most mentioned reasons for NOT accepting GAAP financial statements with exceptions to certain GAAP requirements. “Other” reasons are provided in the Verbatim Responses. 52 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings As previously shown, the percent of External Stakeholders who ever accept financial statements of private companies prepared on a basis of accounting different from GAAP, such as cash basis, tax basis, modified cash basis or some other basis, is as illustrated by the graph to the right. (n= approximately 100 for all cells) A comparison of the percent of Owner/Manager respondents who reported that their company ever issues financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements, the percent of practitioners that said their private, for-profit clients ever issue such financial statements, and the percent of External Stakeholders that said they ever accept financial statements prepared in accordance with GAAP, but with exceptions to certain GAAP requirements is shown below. (n= approximately 100 for all cells) Owner/Manager Practitioners 53 External Stakeholders Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings The graphs below compare the percent of Owner/Manager respondents who reported that they or other company representatives ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements with the percent of practitioners that said their private company clients (or the practitioner on their behalf) ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements (n = approximately 100 for each cell) Owner/Manager Practitioners 54 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings The table below compares the percent of Practitioners and External Stakeholder responses for some of the more common GAAP requirements to which private companies report an exception to GAAP requirements. (n=54 for 5 or less partners, 60 for 6 -10, 69 for 11 -20, 56 for 21 or more partners, 71 for creditor/lender, 62 for investor/venture capital, and 65 for surety/bonding) [Table is sorted in descending order for 5 or less partner firms] External Stakeholders Practitioners by Number of Partners GAAP Requirement 5 or less 6 -10 11 -20 Cash flow statement Deferred income taxes Accrual basis of accounting Comprehensive income measurement Fair value basis of measuring assets and liabilities Intangibles Leases Post retirement and retirement plans Classification of liabilities and equity Guarantees Variable interest entities Share-based payments % 63. 0 59. 3 51. 9 40. 7 35. 2 25. 9 22. 2 18. 5 14. 8 11. 1 9. 3 % 68. 3 56. 7 58. 3 41. 7 33. 3 26. 7 11. 7 13. 3 15. 0 10. 0 % 59. 4 58. 0 44. 9 40. 6 55. 1 36. 2 33. 3 37. 7 18. 8 10. 1 27. 5 15. 9 21 or more % 42. 9 37. 5 33. 9 26. 8 41. 1 19. 6 17. 9 32. 1 17. 9 19. 6 28. 6 1. 8 Creditor/ Lender Investor/ Venture Capital Surety/ Bonding % 53. 5 43. 7 57. 7 26. 8 49. 3 40. 8 26. 8 16. 9 33. 8 39. 4 16. 9 14. 1 % 54. 8 40. 3 54. 9 41. 9 50. 0 45. 2 21. 0 16. 1 38. 7 21. 0 16. 1 24. 2 % 56. 9 52. 3 60. 0 26. 2 60. 0 38. 5 26. 2 21. 5 44. 6 30. 8 9. 2 7. 7 “Other” responses are provided in the Verbatim Responses. 55 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings § The following 10 slides provide scattergram plots and for each of the constituency cells for 12 specific GAAP requirements cross-plotted by the average scores for Relevance/Usefulness and the Level of Challenge to Comply (for Business and Industry and Practitioners) or the Level of Challenge to Understand or Use (for External Stakeholders). Ø The 12 identical requirements evaluated are shown with a corresponding letter down the left hand side and can be found under Q 12 a-12 l in the Owner/Manager Survey, Q 10 a-10 l in the Practitioner Survey and Q 14 a-14 l in the External Stakeholder Survey. Ø A scale of 1 to 3 was used for all evaluations, with 1 being Low, 2 being Medium, and 3 being High. Ø “Not Applicable” and “Don’t Know” responses were excluded from the average score calculations. v While the level of “Not Applicable” and “Don’t Know” responses varies from plot to plot, as a general rule, it is highest for Owner/Manager respondents from companies with $5 Million or less in revenue and may range from about 12% to 36% for most requirements. v “Not Applicable” and “Don’t Know” responses are particularly high for Guarantees, ranging from 36% to 41% for the smaller business respondents, and especially high for Share-based Payments (roughly 55% for small business respondents and roughly 55% for the practitioner from firms with less than 25 partners for this particular requirement). v The actual percentages of “Not Applicable” and “Don’t Know” responses for each of the evaluated requirements are shown in the Frequency Tables & Cross-tabulation report. 57 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: < $5 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) B F K E GJ H I L C D A Low (1) H I J K L Accrual basis of accounting (n=88/81) Cash flow statement (n=86/82) Classification of liabilities & equity (n=76/74) Comprehensive income measurement (n=68/64) Deferred income taxes (n=73/66) Fair value basis for assets & liabilities (n=81/76) Guarantees (n=64/59) Intangibles (n=66/62) Leases (n=67/61) Post retirement and retirement plans (n=70/66) Share-based payments (n=46/42) Variable interest entities (n=63/59) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 58 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: $5 Million-$25 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) F L GH E D I J B A C K Low (1) H I J K L Accrual basis of accounting (n=97/96) Cash flow statement (n=98/94) Classification of liabilities & equity (n=80/80) Comprehensive income measurement (n=70/69) Deferred income taxes (n=79/79) Fair value basis for assets & liabilities (n=88/86) Guarantees (n=55/54) Intangibles (n=70/66) Leases (n=77/76) Post retirement and retirement plans (n=70/69) Share-based payments (n=39/35) Variable interest entities (n=56/56) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 59 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: >$25 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) K H G JE F L I D B A C Low (1) H I J K L Accrual basis of accounting (n=97/95) Cash flow statement (n=96/93) Classification of liabilities & equity (n=86/86) Comprehensive income measurement (n=72/71) Deferred income taxes (n=76/73) Fair value basis for assets & liabilities (n=85/84) Guarantees (n=59/58) Intangibles (n=62/59) Leases (n=82/83) Post retirement and retirement plans (n=69/68) Share-based payments (n=39/37) Variable interest entities (n=49/47) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 60 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 5 or less partners (n = # rating Relevance-Usefulness/# rating Challenge) F L E K D J G H I C B A Low (1) H I J K L Accrual basis of accounting (n=106/105) Cash flow statement (n=107/106) Classification of liabilities & equity (n=92/90) Comprehensive income measurement (n=84/83) Deferred income taxes (n=102/101) Fair value basis for assets & liabilities (n=89/89) Guarantees (n=82/81) Intangibles (n=96/94) Leases (n=100/100) Post retirement and retirement plans (n=90/89) Share-based payments (n=48/44) Variable interest entities (n=56/58) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 61 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 6 -10 partners (n = # rating Relevance-Usefulness/# rating Challenge) F K L H JE D G C I B A Low (1) H I J K L Accrual basis of accounting (n=98/98) Cash flow statement (n=98/97) Classification of liabilities & equity (n=89/88) Comprehensive income measurement (n=90/91) Deferred income taxes (n=96/97) Fair value basis for assets & liabilities (n=79/79) Guarantees (n=85/87) Intangibles (n=92/93) Leases (n=99/99) Post retirement and retirement plans (n=79/79) Share-based payments (n=38/40) Variable interest entities (n=67/66) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 62 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 11 -20 partners (n = # rating Relevance-Usefulness/# rating Challenge) L K F H D E G J C I B A Low (1) H I J K L Accrual basis of accounting (n=100/100) Cash flow statement (n=99/99) Classification of liabilities & equity (n=90/90) Comprehensive income measurement (n=91/91) Deferred income taxes (n=100/100) Fair value basis for assets & liabilities (n=88/88) Guarantees (n=88/87) Intangibles (n=92/92) Leases (n=98/98) Post retirement and retirement plans (n=91/92) Share-based payments (n=48/48) Variable interest entities (n=65/66) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 63 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 21 or more partners (n = # rating Relevance-Usefulness/# rating Challenge) L F K J H E G CI D B A Low (1) H I J K L Accrual basis of accounting (n=100/99) Cash flow statement (n=99/99) Classification of liabilities & equity (n=94/93) Comprehensive income measurement (n=94/94) Deferred income taxes (n=97/96) Fair value basis for assets & liabilities (n=93/93) Guarantees (n=90/90) Intangibles (n=93/92) Leases (n=99/98) Post retirement and retirement plans (n=94/93) Share-based payments (n=71/71) Variable interest entities (n=82/81) Challenge to Comply A B C D E F G High (3) Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Low (1) Relevance/Decision Usefulness High (3) 64 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Creditor/Lender Plots are based on the average scores on a scale of 1 (Low) to 3 (High). K E J L I H D CF A B G Low (1) H I J K L Accrual basis of accounting (n=99/98) Cash flow statement (n=99/99) Classification of liabilities & equity (n=92/91) Comprehensive income measurement (n=95/95) Deferred income taxes (n=84/84) Fair value basis for assets & liabilities (n=96/95) Guarantees (n=92/92) Intangibles (n=91/91) Leases (n=88/88) Post retirement and retirement plans (n=85/85) Share-based payments (n=66/64) Variable interest entities (n=73/72) Challenge to Understand/Use A B C D E F G High (3) (n = # rating Relevance-Usefulness/# rating Challenge) Low (1) Relevance/Decision Usefulness High (3) 65 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Investor/Venture Capital Plots are based on the average scores on a scale of 1 (Low) to 3 (High). K J L E F C H G I D A B Low (1) H I J K L Accrual basis of accounting (n=100/100) Cash flow statement (n=101/101) Classification of liabilities & equity (n=98/97) Comprehensive income measurement (n=90/88) Deferred income taxes (n=90/89) Fair value basis for assets & liabilities (n=95/94) Guarantees (n=84/83) Intangibles (n=92/90) Leases (n=94/93) Post retirement and retirement plans (n=79/77) Share-based payments (n=89/89) Variable interest entities (n=72/73) Challenge to Understand/Use A B C D E F G High (3) (n = # rating Relevance-Usefulness/# rating Challenge) Low (1) Relevance/Decision Usefulness High (3) 66 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Surety/Bonding Plots are based on the average scores on a scale of 1 (Low) to 3 (High). E K J L H D G B A F C I Low (1) H I J K L Accrual basis of accounting (n=99/98) Cash flow statement (n=95/94) Classification of liabilities & equity (n=94/94) Comprehensive income measurement (n=85/83) Deferred income taxes (n=84/84) Fair value basis for assets & liabilities (n=92/92) Guarantees (n=80/78) Intangibles (n=86/86) Leases (n=86/85) Post retirement and retirement plans (n=79/80) Share-based payments (n=63/61) Variable interest entities (n=65/64) Challenge to Understand/Use A B C D E F G High (3) (n = # rating Relevance-Usefulness/# rating Challenge) Low (1) Relevance/Decision Usefulness High (3) 67 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Relevance/Decision Usefulness of specific GAAP requirements by mean scores. (n=approximately 60 -90, depending on requirement and cell) [Average scores on a scale of 1 (Low) to 3 (High). Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. ] Owner/Manager by Practitioners by Number External Stakeholders by Revenue (Millions) of Partners Type of Firm <$5 M 2. 5 $5$25 M 2. 6 >$25 M 2. 7 5 or less 2. 7 6 -10 2. 9 Cash flow statement Comprehensive income measurement Classification of liabilities & equity Fair value basis of measuring assets and liabilities Post retirement and retirement plans Deferred income taxes Leases 2. 5 2. 3 2. 2 2. 0 1. 9 2. 5 1. 8 2. 1 1. 9 2. 0 1. 8 1. 9 2. 6 1. 9 2. 3 2. 1 1. 9 2. 0 2. 3 1. 6 2. 1 1. 7 1. 8 1. 7 2. 2 Guarantees 1. 9 1. 6 1. 7 Intangibles 1. 8 1. 6 Variable interest entities 1. 8 Share-based payments 1. 6 Accrual basis of accounting Investor/ Venture Surety/ Capital Bonding 2. 6 11 -20 2. 8 21 or more 2. 8 Creditor / Lender 2. 7 2. 5 1. 7 2. 2 1. 8 2. 2 2. 4 2. 6 1. 7 2. 1 1. 9 2. 1 2. 0 2. 3 2. 5 1. 5 2. 2 2. 0 2. 4 2. 2 2. 3 2. 8 2. 2 2. 4 1. 7 2. 1 2. 0 2. 9 2. 1 2. 4 2. 2 1. 4 1. 7 2. 0 2. 5 2. 2 2. 5 2. 4 1. 7 2. 3 2. 0 1. 7 2. 1 2. 0 2. 1 2. 4 1. 9 2. 3 1. 5 1. 7 2. 0 1. 8 2. 1 1. 9 1. 8 2. 0 1. 5 1. 9 1. 7 1. 9 2. 1 1. 7 1. 5 1. 9 1. 4 1. 5 1. 2 1. 6 1. 5 2. 0 1. 5 1. 9 1. 7 As a very general statement, differences between means are usually statistically significant if they differ by. 2 or more. Testing would have to be done between any specific pairs of interest to verify a significant difference, since both the average score and response distribution are factored into significance testing. 68 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Level of Challenge to Comply/Understand or Use of specific GAAP requirements by mean scores. (n=approximately 60 -90, depending on requirement and cell) [Average scores on a scale of 1 (Low) to 3 (High). Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. ] Owner/Manager by Practitioners by Number External Stakeholders by Revenue (Millions) of Partners Type of Firm <$5 M 2. 2 $5$25 M 1. 9 >$25 M 1. 9 5 or less 1. 8 6 -10 1. 8 Fair value basis of measuring assets and liabilities 2. 1 2. 0 1. 9 2. 4 Accrual basis of accounting 2. 0 1. 8 Comprehensive income measurement Deferred income taxes Classification of liabilities & equity Post retirement and retirement plans 2. 0 1. 9 1. 8 1. 7 1. 9 Guarantees 1. 8 Leases Intangibles Investor/ Venture Surety/ Capital Bonding 1. 5 2. 1 11 -20 1. 6 21 or more 1. 6 Creditor / Lender 1. 9 2. 6 2. 4 2. 5 1. 8 1. 9 2. 0 1. 8 1. 7 1. 6 1. 5 1. 8 1. 6 2. 1 1. 6 1. 9 1. 7 1. 9 2. 1 2. 2 1. 8 2. 1 2. 0 2. 3 1. 9 2. 2 1. 9 2. 3 1. 7 2. 3 1. 9 2. 5 1. 8 1. 9 1. 8 1. 7 1. 8 1. 9 2. 0 2. 1 2. 0 1. 7 1. 6 1. 9 2. 0 2. 1 1. 7 1. 6 1. 9 1. 7 2. 0 1. 9 1. 7 1. 6 1. 5 1. 9 2. 2 2. 3 1. 6 1. 7 1. 9 Variable interest entities 1. 7 1. 5 1. 8 2. 3 2. 5 2. 7 1. 8 1. 9 Share-based payments 1. 6 1. 4 1. 6 2. 2 2. 3 2. 6 2. 4 1. 8 2. 0 1. 8 Cash flow statement As a very general statement, differences between means are usually statistically significant if they differ by. 2 or more. Testing would have to be done between any specific pairs of interest to verify a significant difference, since both the average score and response distribution are factored into significance testing. 69 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 13 a, Practitioner (P) Q 11 a, External Stakeholder (ES)Q 15 a. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Raise capital from lenders, investors or others (n= approximately 80 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. P 6 -10 > all O/M and P 5 or less P 11 -20 > all O/M and P 5 or less P 21+ > all except ES VC ES C/L > O/M $25 M or less and P 5 or less ES VC > all O/M, P 5 or less and other ES ES SB >O/M <$5 M 71 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 13 b, Practitioner (P) Q 11 b, External Stakeholder (ES)Q 15 b. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Obtain credit from vendors or suppliers (n= approximately 90 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. P 6 -10 > P 5 or less P 11 -20 > O/M <$5 M and P 5 or less P 21+ > P 5 or less ES VC > all O/M, P 5 or less and ES C/L ES SB >all O/M, all P and ES C/L 72 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 13 c, Practitioner (P) Q 11 c, External Stakeholder (ES)Q 15 c. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Qualify for bidding on contracts or obtain licenses (n= approximately 70 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. P 5 or less > all O/M P 6 -10 > all O/M, P 5 or less, ES C/L and ES VC P 11 -20 > all O/M, P 5 or less, ES C/L and ES VC P 21+ > all O/M, P 5 or less, ES C/L and ES VC ES C/L > O/M $5 M or more ES VC > all O/M ES SB >all except P 6 -10 73 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 13 d, Practitioner (P) Q 11 d, External Stakeholder (ES)Q 15 d. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Manage, plan or forecast for business (n= approximately 90 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. O/M <$5 M >P 5 or less O/M $5 M-$25 M >P 5 or less O/M >$25 M >P 5 or less and P 21+ P 11 -20 > P 5 or less and P 21+ > all O/M, P 5 or less, E&S C/L and ES VC ES C/L > P 5 or less and P 21+ ES VC > P 5 or less ES SB > P 5 or less and P 21+ 74 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings External Stakeholder (ES)Q 16 a. Average rating of value of private company GAAP financial statements in ability to use them: As a tool in making investment or credit decisions (n= approximately 95 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. There are no significant differences between cells. 75 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings External Stakeholder (ES)Q 16 b. Average rating of value of private company GAAP financial statements in ability to use them: As a check and balance against other tools you may use in making investment or credit decisions (n= approximately 100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. There are no significant differences between cells. 76 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings External Stakeholder (ES)Q 16 c. Average rating of value of private company GAAP financial statements in ability to use them: To be able to execute your investment exit strategy (n= approximately 80 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. ES VC > all others 77 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 14 a, Practitioner (P) Q 12 a, External Stakeholder (ES)Q 17 a. Average rating of private company GAAP financial statements on: The value of comparability between periods and companies (n= approximately 80 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. O/M >$25 M > all other O/M P 5 or less > O/M <$5 M P 6 -10 > O/M $25 M or less P 11 -20 > O/M $25 M or less P 21+ > O/M $25 M or less, P 5 or less, ES C/L and ES VC ES C/L > O/M <$5 M ES VC > O/M <$5 M ES SB > O/M $25 M or less 78 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 14 b, Practitioner (P) Q 12 b, External Stakeholder (ES)Q 17 b. Average rating of private company GAAP financial statements on: The understandability of the information presented (n= approximately 100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. O/M <$5 M > all P except P 6 -10 O/M $5 M-$25 M > all P except P 6 -10 O/M >$25 M > all P ES C/L > all P except P 6 -10 ES VC > all P except P 6 -10 ES SB > all P 79 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 14 c, Practitioner (P) Q 12 c, External Stakeholder (ES)Q 17 c. Average rating of private company GAAP financial statements on: The value of having an independent accountant’s report (n= approximately 95 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. P 5 or less > all O/M and ES C/L P 6 -10 > all O/M and ES C/L P 11 -20 > all O/M P 21+ > all O/M, P 5 or less, ES C/L and ES VC > O/M <$5 M ES SB > O/M $25 M or less Other testing shows an average rating of 2. 7 for those who do not prepare their own company’s financial statements which is significantly higher than the average rating of 2. 5 by those who do. 80 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 14 d, Practitioner (P) Q 12 d, External Stakeholder (ES)Q 17 d. Average rating of private company GAAP financial statements on: The benefit of preparing or using GAAP financial statements compared to the cost of preparing them (n= approximately 85 -100 per cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Significance testing. P 6 -10 > ES C/L P 21+ > O/M $5 M-$25 M and ES C/L ES SB > O/M $25 M or less, P 5 or less, P 11 -20, and all other ES 81 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 15, Practitioner (P) Q 13, External Stakeholder (ES)Q 18. How challenging would you say it is to keep current and up-to-date on GAAP standards? (n= approximately 95 per cell) Significance testing for “Extremely Challenging”. All P > All O/M and all ES P 21+ > all other P 83 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 16, Practitioner (P) Q 14, External Stakeholder (ES)Q 19. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? (n= approximately 100 per cell) Significance testing for “Yes”. All P > All O/M and all ES P 11 -20+ > P 21+ Other testing shows that 51. 6% of those who prepare their own company’s financial statements replied “Yes, ” which is significantly higher than the 36. 2% of those who do not. Significance testing for “Yes” vs. “No” by constituency. Each O/M “Yes” > Each O/M “No” Each P Yes” > Each P “No” ES C/L “Yes” > ES C/L “No” 84 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings Owner/Manager (O/M) Q 17, Practitioner (P) Q 15, External Stakeholder (ES)Q 20. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, based on the size of companies? (n= approximately 100 per cell) Significance testing for “Yes”. O/M <$5 M > ES VC and ES SB O/M >$25 M > ES SB P 5 or less > O/M $5 M-$25 M, ES VC and ES SB P 6 -10 > O/M $5 M or more, ES VC and ES SB P 11 -20 > All O/M, ES VC and ES SB P 21+ > ES VC and ES SB ES C/L > ES VC and ES SB Other testing shows that 64. 7% of those who prepare their own company’s financial statements replied “Yes, ” which is significantly higher than the 50. 9% of those who do not. Significance testing for “Yes” vs. “No” by constituency. Each O/M “Yes” > Each O/M “No” Each P Yes” > Each P “No” ES C/L “Yes” > ES C/L “No” 85 Copyright 2004. All rights reserved.

2004 Private Company Financial Reporting Study Detailed Findings § Owner/Manager Q 18, Practitioner Q 16, External Stakeholder Q 21. What suggestions, if any, would you provide for improving the underlying accounting for GAAP financial reporting for privately held, for-profit companies? Suggestions mentioned most often include: Ø Owner/Manager v Simplify the reporting process v Make GAAP requirements/rules easier to understand v Have fewer/less stringent requirements than for larger/publicly held companies Ø Practitioners v Need Big GAAP-Little GAAP. Do not hold smaller and/or privately owned companies to the same standards used for larger and/or publicly held companies. v Simplify the reporting process and make it less complex v Reduce the cost of GAAP v Eliminate fair market value v Make the rules easier to understand v Require fewer disclosures. Ø External Stakeholders v Stock options should not be expensed v Have fewer/less stringent requirements than for larger/publicly held companies and reduce the cost v Streamline/simplify the reporting process and make it less complex v Have fewer note disclosures A complete listing of suggestions is provided in the Verbatim Responses 86 Copyright 2004. All rights reserved.