US lawmakers call for preservation of cash accounting

SWITCHING to accrual accounting would be severely damaging to businesses, US lawmakers have warned in a letter calling for the preservation of the cash method of accounting.

The letter, signed by a bipartisan majority of the US House of Representatives, urges the House leadership to retain cash accounting for tax purposes and echoes concerns raised by the Senate last month about reforms to the federal tax code that would require many businesses to change their method of accounting.

US institute AICPA is leading opposition to congressional efforts to mandate the use of accrual accounting for businesses that exceed $10m (£6.2m) in annual gross receipts and partnered with state CPA societies and firms to gain the support of Capitol Hill.

“Those who use the cash method of accounting include many of our local job creators and professionals including accountants, architects, attorneys, dentists, engineers, farmers, physicians and financial service professionals,” the legislators explained in an 11 September letter to speaker John Boehner and other members of the House leadership. “Importantly, the cash method of accounting is the foundation upon which these businesses have built their business models for decades.”

The House letter explained that the cash method of accounting is a simple method in which income is recognised when it is collected. By comparison, the accrual method of accounting recognises income when a service is performed, regardless of when cash is collected.

“If forced to pay taxes before income is received, as would be required under the accrual method, less money would be available to small businesses for growth and job creation,” the lawmakers wrote. “Additionally, cash flow management becomes far more complex as a result, and will likely trigger the need for additional outside financing. These factors alone would have a significant negative impact on our local economies.”

AICPA president and CEO Barry Melancon added that the “accrual accounting mandate is bad tax policy that should be abandoned by the House and Senate”.

The AICPA’s position appears to jar with the position of institutes in the UK and internationally. When the Department of Business, Innovation and Skills (BIS) suggested micro companies be allowed to use cash accounting as part of efforts to cut red tape in 2011, John Davies, ACCA head of technical, said at the time that cash accounting “would result in a stark difference between micro-entities’ accounts and those of all other companies”, saying reports produced on this basis would be “inferior”.

At the same time Roger Marshall, then chairman of the FRC’s accounting standards board, suggested that “even for the smallest businesses, cash accounting might not be very helpful,” while Baker Tilly partner Danielle Stewart doubted that cash accounting “would ever be the best way to achieve” deregulation.

Cash accounting within the public sector is also viewed negatively. In an interview with Accountancy Age in July, Fayez Choudhury, CEO of IFAC – the global federation for the accountancy profession – criticised governments for failing to address deficiencies in public sector cash-based accounting that were exposed by the sovereign debt crisis.

According to Fayez, governments must ditch the flawed model of public sector cash-based accounting and adopt accrual accounting and budgeting to better measure and manage fiscal positions.

The problem, Choudhury explained, is that cash accounting doesn’t provide a “comprehensive, comparable or transparent” picture of governments’ true financial health.

“It doesn’t take into account long-term obligations,” Choudhury said. “The sovereign debt crisis revealed the shortcomings of governments’ fiscal positions.” Choudhury added that cash-based accounting “contributed” to financial problems in Greece and Portugal, which involved concealing debts and deficits.