Filling in the GAAPs?

Let me preface this post by saying I am NOT a CPA or tax lawyer (see the Disclamer for that) and no expert on matters pertaining to accounting.  But that said, I run across issues related to accounting all the time.  Many times in leases or loan agreements or other real estate documents you will encounter language requiring that financial matters be prepared in accordance with generally accepted accounting principles, or GAAP.

Some of my clients hate this language.  Why? Because they believe that while they are often close to GAAP reporting, it isn't "quite" GAAP and it rarely is in the real estate industry.  (Oh, and it can be expensive, especially for smaller players.) They fear that a tenant or lender could use this as a trap to find a ticky-tack default.  These clients often prefer seeing the language "sound accounting principles consistently applied."  Of course, there is a counter argument to that phrase; namely, what does it really mean?  Could "sound" mean "Enron?" GAAP, they contend, has sufficient flexibility to work in real estate without creating a trap; thus the word "generally."  And the counter to that is that sound accounting means just that -- something that is not tricked up but meets normal, everyday standards but is still more flexible and easier than GAAP without being bad.  In other words, sound does not mean Enron.

So who is right?  No one, in my view.  It can be deal dependent or negotiation dependent and sometimes even accounting firm dependent.  I personally tend to prefer not stating GAAP, but I have been persuaded otherwise, too.  And sometimes the opposite has occurred.  Lesson here for me?  Talk to the spreadsheet guys -- the CPAs.  They have their expertise and you have yours, and if you work together as a team you are far more likely to get to a common sense solution that works for your client.