Examining the differences between public and private companies

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Stephen Cartwright is a Managing Director of the recruitment firm Chandler Macleod. He has an anxiety of transforming their private company to a public company. He thinks that it is a big step to convert it into a public company. Going public is a multifaceted and extended process as nnumber of Chief Executives wish for it be privatized again. Being a private company, it costs less because reporting requirements are less burdensome. A private company can make a fast decision, whereas going public has a huge transaction cost. Due to being public company, they have to prepare a general purpose financial report which has another disadvantage. However market conditions are unlikely to encourage private companies to go public in the coming year. Most of the Top 500 companies do not want to go public. The "Fear of floating" case thus discusses the public ownership and private ownership advantages and disadvantages. Whether it is a good decision to become a public company or not. The following discussion will give detailed information about the difference between becoming a private and public company.


The "Fear of floating" case mainly discusses public and private ownership. Stephen Cartwright is a Managing Director of the recruitment firm Chandler Macleod and he has a major concern with going public. Large companies are more expected to go public. After major investments and abnormal growth most of the independent companies are likely to go public, to reduce their power and investment after the IPO. In private companies owners have control. It allows quick decision making. Where public companies have large capital access. There are many advantages and disadvantages for public and private ownership which are going to be discussed in this report. Secondly, this report also discusses the corporate governance in private company, why it is necessary? Thirdly the report will discuss the proprietary view and entity view. Further it also discusses the accounting implications of going to public from private. The report will discuss why small businesses do not require general purpose financial statements. Lastly, the report will discuss private companies which are entrepreneurial, community focused and profitable.

Advantages of Public ownership versus private in corporate Australia

In a public company, owners can initiate a true value for their company. Owners can take personal liability on behalf of their company's borrowing facilities. A company can become more attractive borrowing candidate by increasing capitalisation from a booming offering. Due to the public, new doors open for expanding business opportunities. Being a public, products get publicity and public taste brings greater reliability in the market place. Share trading in stock exchange is cheaper (Fishman 1993). Whereas privatization increases capability and profitability in monopolistic sectors and competitive market (Sheshinski & Lopez 2003). A private company does not need to worry about quarterly earnings fluctuations and can aim for a long term approach to the business. A private company does not have annual meetings so that they do not require bosses to sweat about annual meetings. A private company does not also require people to deal with security analysts. (Kichen & McCarthy 1995). In a private company owners have control and shareholder time horizons are more associated with how you want to construct your business. A company can make fast decisions in the business's long term interest. Customers prefer quick service and decision making. Many people prefer doing business with private businesses, because they put more effort into the service of the customer. Cost is less because reporting requirements are less time-consuming. A private company can take more risks. Managers are able to set proprieties without thinking the reaction of the stock market.

Disadvantages of Public ownership versus private in corporate Australia

By going public, it will need a great deal of time and money to be spent and sometime a company suffers unpredictable market place and result in an unsuccessful or unsatisfactory IPO. Going to public means owners are no longer owners but they has to be employee who has to be completely responsible to shareholders and board of directors. Disappointments due to growth or earning can be painful. The operating cost will increase. Meeting Securities Exchange Commission (SEC) requirements on a continuous basis is very costly. Every quarter company has to declare their earnings per share. The company has to respond to shareholders, stock brokers, investment bankers and analysts which will be challenging and prolonged. The company is also required to make ongoing nationwide presentations to paying attention of brokers, analysts and investment bankers. Being public company, fees and expenses are huge.

Officer and director have responsibilities towards the company which bring likely personal liability considerations. If anyone works in a public company they are subjected to scrutiny by members of company's board, compensation committee, auditing committee, compliance committee. Owners will be under the scrutiny of the market for management structure and performance. Sometimes the company's sale of stock and its constant achievement may bring unwanted viewing by a controversial public (Fishman 1993). Whereas Private companies are more community focused and entrepreneurial, need to convince family member. Private companies may face higher interest rates. If the company goes bankrupt, manager loss their own property because directors guarantee liability. Private companies are not concerned with the people whom they are serving (Customers). Their main concern is to maximising their own profit i.e. own material welfare (Grand & Julian 1998).

Ability to stay in control appears to be main concern for smaller private companies. The affect of control on accounting in smaller companies.

Due to regulation of individual companies and market, an active member of a self-appointed group maintaining order i.e. board of directors, environment and an effective system of internal controls is compulsory to the economic and health of any business or institution, whether it is public or private or located domestically or internationally. (Jeffrey 2008). Goldberg (2006) believes that instead of ownership the centre of attention should be an effective economic control of the resources. Any activities undertaking in a company is decided by specific individuals or groups of individuals. According to commander theory, the main concern is the function of control, exercised by people. The person who handles or has a power on resources is called commander. The commander concept enables us to arrive at practical interpretation of purposes and functions of accounting. In smaller private companies proprietor have control of the resources of their organisation. It depends on proprietor to command resources that generates profit. However, in a large company shareholders do not have control over its resources as they are part owners of the company. It is in commanders' hand to command over company's resources. Every manager has limited control over some resources, and one or two managers have general command over all of the resources. The main concern of the commander is in a company which had a weak structure of internal control achieve at its peak? Does the company taking advantage of all the available resources? (Jeffrey 2008).

Accounting procedures are ruled by the top commander of the firm. All accounting records reserved, financial statements are arranged and reports are analysed by people for the benefit of people. The Chief Executive Officer handled the resources which are provided by creditors and shareholders and used to purchase things from people. If a company have strong control of commander, it will help to ensure it is not wasting valuable resources. If company implement a strong control over financial reporting a number of short term benefits can be realized, such as achieve confidence from investors, reduce fraud experience and reduced incremental borrowing rates. Similarly, if a company reaches at top level and earns high profit then the company needs to separate every individual duty and ultimately company needs strong corporate governance. Corporate governance is a complete set of dispute-resolution processes, incentives, safeguards that commands over different groups of stakeholders where they each look to improve its safety through corresponding money-making activity with others. This approach to corporate governance is based on transaction cost economics and agency theory. Agency theory explores the problems associated with the separation of ownership from control. Due to this, the executive officer and directors will be in the best position to know if their company is overvalued (Francoeur, Labelle & Martinez 2008). Agency theory is the contract where the principal (shareholders) engage another party (Manager) to perform service on behalf of principal. It is not necessary that manager always work in company's interest. Managers may seek to neglect overwork because he/she has the decision making authority. This leads to managers become bias and he/she can transfer or use wealth for its personal if principal do not intervene. This problem gives agency cost. Agency cost is divided into three types.

Monitoring Costs: Shareholders take step to ensure that management is acting in owners' interest that managers maximising shareholders wealth.

Bonding Cost: managers guarantee that he will work in shareholders' interest and if he bias manager will compensate to shareholders.

Residual cost: Sometimes managers make some decisions that are not entirely shareholders interest. Sometime managers might take stationery at home from work or put a less effort for work than shareholders expect. This deadweight loss is residual loss (Depken, Nguyen & Sarkar 2001).

If managers do not have control over this then the company might suffer from significant loss. To resolve agency problem, company has to provide a bonus plan to managers to improve performance, to maximise profit. Company can reward teamwork and increase employee's motivation.

Thus, in the long run if a company has a strong system of control, they will compete in marketplace and industries. Control will help to push the company beyond its current limits and implement best practices. Control will help a company to ensure it is serving its customers better than its rivalry is. .

Compare and contrast the proprietary view and the entity view

In proprietary view there is no separation of owners and control. Firm is virtually identified, whereas in entity view control and ownership are separate. In pproprietary view financial loss connected with activates of the business is owner's personal liability. And the profit earned is directly distributed to owners. In entity view assets are the property of the firm, owners and creditors have rights against those assets. The main focus of the proprietary view is assets and liabilities and the relationship between them. Which can be calculate as Asset - Liability = Profit. This stand for the net wealth of the proprietor. Proprietor has benefits, control and possession on assets of business. In the entity view financial risk of shareholders is restricted to capital contribution and gives related opportunity cost of capital. In entity view Assets = Liabilities + Owner's Equity, in which Owner's equity is creditors and shareholder. In large organisation due to separation of investors, creditors and ownership, company's control handover to 'Agent' to have control on financial resources. Unlike proprietary view net income does not belong to the owners but it is distributed to equity holders after satisfying all other claims. Directors do not get income until dividends or interest becomes due. For measuring income both interest and dividends represent distribution of income to capital providers. The basics of proprietary theory are very much simultaneous with the workings of net income. In proprietary theory the focal point can be assets on hand for dividends or to measures the wealth. The differences between assets is that it have implications for the use of historical cost and some measure of current cost in valuing balance sheet accounts. However, the proprietary theory suggests that company's owners' have control over all its resources. But in today's world, correlation between the owner and the firm has changed much because of increasing importance of huge corporations and modern societies in present economic situation. In public company agent has to work in company's interest which shows its duties towards company (Raar 2006).

Accounting implications for company transform from Private Company to Public company

Transforming into a public company is a very complex and extended process. Initial Public Offering (IPO) is the first step for going public. Many large companies are expected to go public. Due to a lack of enforcement of minority property rights makes it complicated for small and young companies to capture the investor's expectation. Similarly independent companies go public to reduce their power and investment after the IPO, when company face more investments and abnormal growth. So a company decides to go public to rebalance their balance sheet after large investment and growth. For young and small companies is a serious obstacle who do not have any track record and have very low publicity. The chances of going public are correlated with the age and the size of a company.

Going to a public company must have minimum 3 directors, and 2 of them must generally reside in Australia. Classification of Public Company:

Companies limited by shares: In such type of companies members are generally shareholders and liability is limited to the nominal. Shareholders are not liable for full amounts, known as the share capital method of corporate finance. Another method is borrowing money from bank called debt.

Companies limited by guarantee: These types of companies have no share capital. The company is guaranteed by members who may only be imposed on the winding up of the company and is not an asset of company.

Unlimited liability companies: It is the original form of registered company under the 1844 UK Act. In Australia it is defined in Corporate Act as a company whose members have no edge placed on their individual liability to contribute to the debts of the company.

No liability companies: In Australia, companies may register as no liability where its sole aim is mining purpose and the company has share capital (James 2008).

Zingales (1995) suggested that whenever a self-governing company undertakes an IPO, owners separate only 6% of the amount they hold in the company at that date initially. Then he/she separate 1.3% more in the 3 following years, retaining much more than a majority stake. Divestments are much larger 14.2%, which in the 3 years after the IPO controlling group has larger turnover than normal. Going public have other major implications such as:

Administrative Expenses and Fees: Going public implies significant costs such as registration fees, underwriting fees. Additionally company has to pay yearly for auditing, certification, and, stock exchange fees and distribution of accounting information etc.

Loss of Confidentiality: Being a public company it is compulsory to prepare general purpose report. The rule of stock exchanges force companies to disclose information. Sometime company might have future marketing strategies or ongoing Research & Development (R&D) projects, whose confidentiality may be vital for their competitive benefit. Sometime they have to purposely represent them to hide from tax authorities to avoid scrutiny.

Other implications: Newly listed companies should reduce their debt and increase

their investment after the IPO. They are not likely to increase their cost ratio after the IPO.

For any public company which is a government activity, it will have one set of accounting concepts and standards. Depreciation and maintenance of prolonged assets should be included and be based on a life-cycle approach and the regular terms of services. Allowances must be made in environmental organization and use of natural capital assets. Likewise, to account for most resources in the provision of common government goods and services, full accrual basis accounting, partly based on mercantile accounting can be used. On the other hand, the nature of government financial support differs from business-related revenue. Finally, accrual accounting needs main modifications in accounting for society facilities, mostly to natural capital, tradition and common society facilities. Every public company needs to follow SAC 2. SAC 2 defines the basic purpose of general purpose financial reporting. In which company has to provide information useful for shareholders and other users for decision making and evaluating the portion of scarce resources. Accountability has implications for the use of resources which has consider as a major objective for public sector accounting. (Pagano, Panetta & Zingales 1998)

"Perhaps the proprietor view of accounting should be advocated for small business, as they are really an extension of their owners and are not normally required to prepare general purpose financial statements.'

"Proprietorship is the core of the double entry system" Littleton claimed (2006, p. 99). The proprietor view is considered as one person is the owner of business. Business and owners are not separate. Owners have control over its resources. In the proprietary view, monetary values of assets and liabilities are changing with respect to profit. Assets and liabilities are added for the determination of profit in proprietary view but not in entity view. The proprietary view believes in current cost accounting. The value changes in assets and liabilities are holding gains and losses. In proprietary view assets and liabilities are the ownership of proprietor. It represent net wealth of the proprietor which can be Assets - Liability = Equity. Owner invests their personal funds and expected high rate of return. As there is no separation of ownership with control, all the financial risk which is due to activity of business considered as risk. Therefore, the accounts are prepared for an individual. Proprietor has all control over internal management and information and level of financial risk is real. Decisions made by owners combine the information into the process. Thus the content of outside financial reports is reliable with regulatory requirements and so that do not require general purpose accounting information for decision making (Raar 2006).

Accounting standards applied to financial reports of public companies and large proprietary companies. A reporting entity is defined in IFRS 3 and AASB 3 as users who rely on the entity's general purpose financial report for making and evaluating decisions about distribution of resources. SAC 1 Definition of the Reporting Entity mainly suggested for listed companies where there is a serration of economic interest and management or financial characteristic. Furthermore Australian Profession Statement APS 1 conformity with Accounting Standards and UIG Consensus Views suggest that companies who are publicly listed or government controlled business or listed trusts are reporting entities. According to APS 1 proprietary companies, family trust, sole traders, partnership firm do not require to prepare general purpose report (2006, p. 119)

Private companies are more entrepreneurial, more community focused and more profitable than listed companies.

An entrepreneur is an individual who runs a business by assuming that all the return and risk for a new business, idea, goods and services are going to generate profit. Many large publicly listed companies are family based business. Such a business is run by one or more families who have significant commitments and ownership interest towards business. A family business is basically operated by one person called manager and manager usually takes necessary steps automatically. For example a manager may know that business needs a new plant, so that he/she might take less money from business earnings and this way manager build up cash needed for plant. The manager can balance his personal interests with the development of the business. It is very community focused and strong business because of loyalties and dedication of family members. This business is continuing for year and year. Thus this business is more profitable than listed companies. In growing organization corporate responsibility and balancing system is a major concern, which is also referred as Triple Bottom Line reporting (TBL) (Colbert 2007).

TBL reporting includes social, economic and environmental issues. It is separate from an annual report. It mainly focuses on company's performance such as safety, human rights, child labor, health, pollution, human rights and other social and environmental issues. McDonald's issue "Social responsibility report" which maintains a code of conduct. Companies can gain financial benefits from TBL reporting. New investors can catch attention as well as maintain and attract employees. Companies that try hard for success and grow rapidly may need to follow standards which are a part of social and environmental funds. TBL reporting gives transparency of company's environmental, social activities, weaknesses and future goals. (Tschopp 2003)

Summary of case study

From above discussion we can conclude that both private ownership and public ownership have their own accounting aspects and have their own advantages and disadvantages. We have seen in 'Fear of Floating' 500 topmost companies are not interested in listing because they might have considered the cost of being public. Being a private company they can control their own destiny, which is the most important aspect for any business. Being a private company does not required general purpose report. However, company has to follow some regulation to stay in competitive market and in society such as Triple Bottom Line Reporting. Thus by adopting the standards company will be benefited by obtaining and measuring feedback about ethical and social performance.