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Comparing Financial Reports from Private and Public Businesses

If you were to compare annual financial reports of publicly owned corporations with annual reports of privately owned businesses, you’d discover many differences. Public companies are generally much larger (in terms of annual sales and total assets) than private companies, as you would expect.

Furthermore, public companies generally are more complex — concerning employee compensation, financing instruments, multinational operations, federal laws that impact big business, legal exposure, and so on.

Private and public businesses are bound by the same accounting rules for measuring profit and for valuing assets, liabilities, and owners’ equity, and for disclosures in their financial reports. (To be more precise, private companies are exempt from a couple of accounting rules.)

Most of the accounting and financial reporting standards that have been issued over the last two or three decades are directed mainly to public companies; by and large, private companies do not have these accounting issues.

Reports from publicly owned companies

Around 10,000 corporations are publicly owned, and their stock shares are traded on the New York Stock Exchange, NASDAQ, or other stock markets. Publicly owned companies must file annual financial reports with the SEC — the federal agency that makes and enforces the rules for trading in securities (stocks and bonds). These filings are available on the SEC’s EDGAR database.

Annual reports published by large publicly owned corporations run 30, 40, or 50 pages (or more), including all disclosure items. The large majority of public companies put their annual reports on their Web sites. Many public companies also present condensed versions of their financial reports.

Annual reports from public companies generally are very well done — the quality of the editorial work and graphics is excellent; the color scheme, layout, and design have very good eye appeal. But be warned that the volume of detail in their financial reports is overwhelming.

While private companies are cut some slack when it comes to reporting certain financial information — such as earnings per share — the requirements for publicly owned businesses are more stringent. Publicly owned businesses live in a fish bowl.

When a company goes public with an IPO (initial public offering of stock shares), it gives up a lot of the privacy that a closely held business enjoys. A public company is required to have its annual financial report audited by an outside, independent CPA firm. In doing an audit, the CPA passes judgment on the company’s accounting methods and adequacy of disclosure.

Reports from private businesses

Private businesses generally provide few disclosures in their annual financial reports. Their primary financial statements with the accompanying footnotes are pretty much it. Their financial reports may be printed on plain paper and stapled together. A privately held company may have very few stockholders, and typically one or more of the stockholders are active managers of the business.

Private corporations could provide numerous disclosures, but they generally don’t. Investors in private businesses can request confidential reports from managers at the annual stockholders’ meetings. Major lenders to a private business can demand that certain items of information be disclosed to them as a condition of the loan.

A private business may have its financial statements audited by a CPA firm but generally is not required by law to do so. CPA auditors cut private businesses a lot of slack regarding disclosure.

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