The AICPA works closely with the Financial Accounting Standards Board and other accounting regulators for the mutual goal of improving financial reporting. The AICPA provides accounting guidance via audit and accounting guides and issues papers, recommends to Financial Accounting Standards Board topics worthy of standard setting, and advocates its beliefs on needed outcomes on proposed accounting standards.
As auditors and management begin to prepare for June 30 year-end audits, it’s a good time to share some of the top concerns for not-for-profits this year. How can not-for-profits reassure donors that their contributions are in safe hands? What key implementation issues on new accounting standards updates are not-for-profits grappling with? Outlined below are four topics that should not be overlooked.
In addition to common hacking risks, not-for-profits that accept electronic contributions are targets for credit card fraud. While retailers collect certain personal information to set up customer accounts and ship goods, not-for-profits often forgo requiring that level of detail to make donating simple. Unfortunately, this makes not-for-profits an easier testing ground for stolen credit card data. Not-for-profit entities with real-time credit card authorization and settlement are even more likely to fall victim because real-time verification makes the stolen data more valuable. These organizations then bear the burden of repaying fraudulent donations in addition to paying fees related to the refunds. Organizations that use electronic methods to accept contributions should consider adopting appropriate controls to ensure revenues are properly recognized and that cash receipts are safeguarded.
Wrapping your head around the accounting standards changes on the horizon is no easy task—let alone figuring out which ones deserve the most attention. To help with this, I have highlighted five Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASUs) that not-for-profit accounting professionals should consider prioritizing this year. The following updates have fast-approaching effective dates, so it is important to familiarize yourself with these standards now.
Going Concern Requirements
For the first time in history, U.S. GAAP addresses management's responsibility to evaluate and disclose whether there is substantial doubt about an entity's ability to continue as a going concern. This change is significant because it shifts primary responsibility for the entity’s going concern assessments from auditor to management. Auditors should also be aware that FASB’s issuance of ASU No. 2014-15 prompted a change in the related auditing standards. The AICPA Auditing Standards Board (ASB) issued its going concern standard (SAS No. 132) in February 2017. SAS No. 132 has key changes that auditors will want to pay close attention to, including the required timeframe for considering going concern issues.
The end of March is here, which means that the end of busy season is just a few weeks away. Congratulations! You have accomplished a great deal so far. I know it is easy to get discouraged at this point. You are likely feeling sleep-deprived and stressed about your looming deadlines. How will you ensure that you will finish this season strong? Maybe you stay motivated by thinking about the time you will have to catch up on your favorite shows, work out at the gym, or relax with family and friends once April 18 rolls around. Or maybe you push through to the end by turning up the music.
Whether you look for tunes with inspirational lyrics and catchy beats or songs that promote focus, there are numerous options out there, so why not create a motivational playlist?
The parallels between sailing and audit quality came to mind recently when I was speaking with a practitioner who is passionate about sailing. His comments about his enthusiasm for sailing reminded me of the profession’s passion and ongoing commitment to quality.
When sailors go to sea, they depend on their ships to get them to their destinations quickly and safely, conquering instability, uncertain weather conditions and unexpected obstacles along the way. In many ways, they place the same faith in their vessels as CPAs place in their firms. CPAs rely on the firms they’ve built to achieve their goals – to help them serve their clients and business communities, uphold the public interest and create thriving workplaces – as they navigate the many challenges of a fast-changing and increasingly complex environment. In both cases, a strong discipline and commitment to quality is critical to success.
The Big 3 Accounting Standards Updates (ASUs) ─ ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-02, Leases, and ASU 2016-13, Financial Instruments – Credit Losses ─ from the Financial Accounting Standards Board pose significant challenges for CPAs. And, as their effective dates loom near, more and more practitioners are coming to realize the substantial level of work involved in applying these standards.
The Center for Plain English Accounting, the AICPA’s national A&A resource center, is receiving and answering quite a few inquiries about how to apply these standards. We recently celebrated our third anniversary of providing our members with valuable guidance on a wide array of accounting, financial reporting, auditing, compilation, review and preparation topics. Recently, we have been especially focused on providing our members with in-depth and practical implementation guidance on the new revenue recognition, leases, and credit loss standards. Below are three implementation questions and answers that we’ve selected to share with you.
CPA firms across the country are thriving, according to the 2016 PCPS/CPA.com National Management of an Accounting Practice (MAP) Survey. This unique study is the largest and most comprehensive examination of firms’ financial health and practice management approaches and solutions. To enhance the survey’s usefulness, the results are broken down into seven defined CPA firm segments, from small practices with less than $200,000 in annual revenue to large firms with $10 million or more. The latest survey found that firms are indeed doing well, with many practices making the strategic decision to reinvest profits back into the firm to build an even stronger foundation for the future.
Small firms appeared to have a particularly bright future. Firms with less than $200,000 in revenues who completed the survey reported growth of almost 11%—up from 8% in 2014. What trends or decisions are powering small firm growth? Here are some key insights based on the survey findings:
I often hear from practitioners that many of their small business and startup clients lack an adequate and effective system of internal control. In fact, the Association of Certified Fraud Examiners’ recent Report of the Nations on Occupational Fraud and Abuse found that small organizations implemented anti-fraud controls much more sparingly than larger organizations. Additionally, the report found that the median loss incurred by small and large organizations due to fraud was the same, but that the impact on smaller organizations was much greater due to their smaller size. Since small companies such as startups are often hit hardest by fraud, it is critical that they develop adequate anti-fraud controls at their organizations. Outlined below are a few of the many significant benefits of a strong internal control system.
With the start of busy season just around the corner, planning is on most practitioners’ minds. I have recently spoken with many professionals about ways they jumpstart their upcoming audits. Outlined below are some activities to begin now that will make your busy season a little less hectic.
Ask your clients to fill out background information forms. If there have been changes to their management, ownership structure or board of directors, ask clients to document them before busy season begins. Also, if your client has entered a new market, they should note these changes as well. You can provide your clients with the prior year documentation and transfer information to the new form as soon as it is available.
As a CPA who has been in public practice for many years, I know the challenges that not-for-profit organizations face in financial reporting, and, more specifically, in applying generally accepted accounting principles.
Financial statements provide a compelling picture of the not-for-profit entity’s activities. However, in my experience, there are potential financial reporting concerns not-for-profit organizations need to be aware of to make sure that picture is conveyed properly. Here are three errors that come to mind.
Integrated reporting <IR> is receiving a growing amount of coverage worldwide lately, from both academics and from the accounting profession, and this trend shows no sign of slowing down. Books, research articles, presentations and other publications that highlight the potential opportunities of integrated reporting are becoming commonplace. The International Integrated Reporting Council has developed a plethora of resources including case studies and reports that provide a solid introduction to this topic. But a fundamental question remains unanswered. In terms of day-to-day implementation and data that can be acted upon, what exactly is an integrated report, and what does it mean for the CPA profession?
Consider this scenario: A longtime tax client of yours approaches you. They are interested in starting an online gaming platform with a colleague and have already landed a significant contract. The future of this business appears bright. A local bank has agreed to extend them a $75,000 line of credit, contingent on certain ratios and providing monthly financial statements and copies of all tax filings. You client asks you if you would be interested in performing nonattest services on their behalf. They are looking for a CPA to prepare the new venture’s monthly financial statements for the bank so the bank can monitor compliance with its ratio requirements, while the client maintains the books.
The current loan covenant only calls for a complete set of financial statements, classifying the engagement as a nonattest service. You do not need to be independent to prepare your client’s financial statements, however, based on the new venture’s growth trajectory, you believe that at some point in the future, attest services will likely be needed. Because of this, you decide to take certain steps to maintain your independence in case your client’s needs change, and you are asked to provide a service that requires independence down the road. Below are three steps you take to maintain independence.
Are you ready for significant changes to the financial statements of not-for-profit organizations?
The Financial Accounting Standards Board recently released Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 is the result of a multi-year FASB project conducted to review the financial reporting model for not-for-profits that has been in place for approximately 20 years. As a result of the review, the FASB identified several areas of the financial reporting model that needed improvements or updates to provide better information to those that rely on the financial statements issued by not-for-profits.
The full standard spans 270 pages (view it here) but it is not as daunting as it may seem. Here are four key facts about the new standard to keep in mind:
Transitioning to significantly new accounting guidance is always a critical process, and that’s particularly true with the Financial Accounting Standards Board’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). Since the effective date for this important guidance has been postponed, CPAs and their clients can now make the most of the added time they need to begin understanding and preparing to apply the standard. Here are seven facts that CPAs should know about this key standard.
What is a lease? And how should it be reported on a balance sheet? While your clients may not have spent much time pondering those questions in the past, the answers will take on new importance for them when a new Financial Accounting Standards Board standard on Leases becomes effective. While it’s true that the final guidance generally does not depart from existing GAAP as much as some earlier FASB proposals on this topic, practitioners should be prepared for significant changes in how all organizations that have lease assets—including private entities and not-for-profits—will account for leases. As practitioners begin to educate themselves on the guidance, here are five critical issues to keep in mind.
Lessees must now recognize operating lease assets and liabilities on the balance sheet. This is the most significant change, since it will require all organizations and their CPAs to take a different approach to lease accounting. Before this standard, U.S. GAAP only required this type of recognition for capital leases. Operating lease amounts were generally shown in the financial statements as rent expense on the income statement and in disclosures to the financial statements. In implementing the new guidance, entities will have to reconsider the ways they identify lease arrangements.
The Financial Accounting Standards Board has finalized its credit loss standard, Accounting Standards Update 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard marks the end of accounting for credit losses using the Incurred Credit Loss model and replaces it with the Current Expected Credit Loss (CECL) model. The standard will have a significant impact on financial institutions. Additionally, it will apply to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantee contracts and loan commitments.
Since the FASB did not restrict the type of methodologies institutions can use when implementing the new standard, I recommend that CPAs working at financial institutions, along with CPAs with financial institution clients, begin reviewing the different models now. You will want to consider the specific portfolio makeup of your or your clients’ institutions when deciding which method will work best. Here are some of the more common models currently in use by financial institutions that can be modified and used under the new standard:
You know the feeling you get when you are excitedly looking forward to something? It just can’t come soon enough. For instance, you enter Broadway’s mega-popular Hamilton -- the musical lottery -- every morning and anxiously await the email saying that you won. Even if the chances are only 909 to 1.
The financial institution community has been anticipating the release of the Financial Accounting Standards Board’s credit losses standard. We have been following the process since the beginning. We reviewed drafts and submitted comments along the way. We participated in focus groups and met with the FASB to discuss the community banks’ concerns. The final standard is here. Now what?
Last month, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326). The release of this new standard marks the end of accounting for credit losses using an incurred model. Institutions should not only consider all factors that have been incurred as of the reporting date, but also should estimate losses over the life of the loan. If an institution cannot estimate credit losses to the end of the loan’s life, taking into consideration any anticipated prepayments, it must estimate as far as it can and then revert back to the mean for the remaining years. This process sounds simple enough to implement, right?
We could soon start to see a shift in how investors and other financial statement users access and analyze public company financial statement data. With the use of a technology called inline XBRL (iXBRL), data consumers will have access to view XBRL metadata while reading financial statements within their browsers.
In June, the Securities and Exchange Commission (SEC) issued an order to permit operating companies to use iXBRL in their periodic and current reports through March 2020. iXBRL enables XBRL information to be embedded into the HTML financial statement filing — as opposed to including XBRL data in a separate XBRL Exhibit. For filers that use iXBRL in their financial statements, this metadata will be viewable on the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system which now provides an iXBRL viewer. The SEC’s iXBRL viewer also provides enhanced search capabilities within the filings that use iXBRL.
If you currently perform attest engagements—or expect to next year—you’ll want to check out the new standard sooner rather than later.
Like other standards released under the AICPA’s clarity project, Statement on Standards for Attestation Engagements No. 18 (SSAE No. 18), Attestation Standards: Clarification and Recodification, released last month, incorporates drafting conventions that make the standard easier to read, understand and apply. The new standard differs from SSAE No. 17.
SSAE No. 18 introduces a “Common Concepts” section that applies to all attestation engagements. Additionally, the standard includes sections containing incremental requirements and guidance for the three levels of service in the attestation standards. These are: Examinations (reasonable assurance), Reviews (limited assurance) and Agreed-Upon Procedures. SSAE No. 18 also contains sections with incremental requirements and guidance for four specific subject matter areas, including Prospective Financial Information, Pro Forma Financial Information, Compliance with Laws and Regulations, and Controls at Service Organizations.
Every day we are inundated with articles, infographics and news reports that quote statistics that we are just supposed to accept at face value. Consider online real estate prices. If you search in your local area, you will find varying figures for median price, price per square foot and return on investment. The volume and variance in data leads to many questions: Who is supplying this information? What types of property does it include? What period does it cover?
As accountants, this unsubstantiated reporting should make us uncomfortable. We are a profession that prides ourselves on transparency and disclosure. When that isn’t forthcoming, our red flags should go up. How can we trust what we are reading when we know nothing about the source and quality of the underlying data? With all the advances in technology, accountants are uniquely positioned to be the champions who set higher standards for reporting. By giving the audience access to the data, we achieve the ultimate transparency. It’s not as hard or expensive as you may think.
I recently challenged myself to create a case study that analyzed real estate sales in my community—Panama City, Fla. Like many other resort areas, our beachfront county experienced wild fluctuations in property prices over the past decade. I was curious about property values, whether they were selling at a gain or loss and if the values used for tax purposes were fair.
Regardless of the type of business that you are in, there is a good chance that you have been involved in a lease transaction. Whether you have rented space in an office building or leased vehicles or manufacturing equipment, you have most likely been exposed to lease accounting in one way or another.
While you may not have been required to recognize these leases on your company’s balance sheets in the past, with the Financial Accounting Standards Board’s new leases standard, the accounting is about to change. In addition, you will want to pay close attention as the new standard applies to all type of entities— including public, private and not-for-profit organizations.
Under the new standard, lessees are required to recognize assets and liabilities arising from all leases, except for agreements that have a lease term of 12 months or less. Generally, lessor accounting will be similar to current GAAP; however, both lessor and lessee disclosures will change.
In every audit, there are many transactions and accounts that need to be checked, whether they appear especially risky or not. And whether you’re an internal or external auditor, data analytics will help you identify and analyze those audit areas with the same effectiveness as methods auditors have used for decades—maybe even greater effectiveness. Sounds pretty good, right?
So what are the drawbacks preventing further integration of data analytics into the financial statement audit? Most significantly, there’s a need for additional guidance on how to harness the power of audit analytics. Additionally, the profession would benefit from independent research to support the effectiveness of new audit analytics in conducting an audit and meeting audit objectives.
The recently announced Rutgers AICPA Data Analytics Research (RADAR) Initiative seeks to study and find evidence of the effectiveness of automated techniques and data analytics applied in the context of the financial statement audit. This collaborative research effort, which will be hosted by Rutgers University, will explore the application of foundational approaches that can be applied by audit firms of all sizes.
Imagine being able to use real time data and analytical tools to help identify and track potential risks that could impact your organization. At IBM, analytics is the next big frontier of risk management, as technology sophistication, coupled with an abundance of data, continues to provide insight into actions.
Effective enterprise risk management programs continually capture, evaluate, analyze and respond to risks arising from changing internal operations such as systems failure or turnover; shifting external markets resulting from political turmoil, a recession or natural disasters; or changing regulations. Risk management requires an organization to align its assets, people, activities and goals, thereby leading to good organizational governance.
IBM has been weaving solid risk management practices into the fabric of our business for nearly a decade. Our program focuses on creating business value and competitive advantage through enhanced risk identification. We embed risk management into the day-to-day operations of our business units and instill a culture that promotes accountability and provides processes and mechanisms for reporting risks.
Is your organization looking to enhance its enterprise risk management program? Following is some advice to help you get started.
Are you ready to implement the new revenue recognition standard? Due to the deferral of the effective date of ASU 2014-09, public organizations must apply the new revenue standard to annual reporting periods beginning after December 15, 2017, while nonpublic entities have until December 15, 2018 to adopt the new standard. We at Telephone and Data Systems Inc., a telecommunications company headquartered in Chicago, are working hard to ensure that we are prepared in time for the effective date.
Under the current guidance, amounts billed to customers via the billing system are generally the same as the amounts recognized as revenue in the accounting records. Under the new revenue recognition standard, however, this is unlikely to be the case. The new standard requires a reallocation of transaction price between performance obligations under a five step model, resulting in the creation and amortization of contract assets and liabilities. Although the customer experience will not change, we will have to alter how we recognize and report revenue. Given that we have millions of customers, it would be impractical for our company to manually support the requirements under the new standard. For this reason, we have determined that a system solution is necessary.
Throughout my career, I have worked with small businesses and not-for-profits, auditing their financial statements and helping them improve their internal controls. On one hand, I love working with nonprofits and discovering their mission and how they are working to improve society. On the other hand, I do not love discovering one or two people taking advantage of poor internal controls to steal from the organization. Many of my clients conduct their work with limited funding, and some rely on volunteers to perform key roles. When I discuss internal controls with my clients, they are often surprised to learn that small improvements can go a long way in preventing theft of assets and unsubstantiated spending, two of the most common types of fraud in not-for-profits.
When small business owners want or need to address risk, they often turn to their CPA as a trusted adviser for guidance. Risk is a significant issue for companies of all sizes; in a recent CGMA report, “Global State of Enterprise Risk Oversight, 2nd Edition,” the AICPA and its partner, the Chartered Institute of Management Accountants, examine the challenges facing large and small companies and consider how investment in enterprise risk management can strengthen an organization’s resiliency and agility.
When organizations, particularly small ones, search for ways to minimize risk, there is a tremendous opportunity for CPAs to provide value. That’s because many companies misunderstand or underestimate the risk factors they face. Here is a look at five misconceptions that your small business clients may have about risk.
The National Football League’s Denver Broncos will have a new head coach in the upcoming season, Gary Kubiak, a former quarterback and later assistant coach for Denver who most recently was offensive coordinator for the Baltimore Ravens. Kubiak brings a new offensive playbook featuring zone blocking schemes and play-action passing to his new team.
Broncos quarterback Peyton Manning has been playing at an All-Pro level for the vast majority of his career. Now he will need to learn Kubiak’s system – and quickly. It’s a challenge for Manning, but he knows that his new coach’s system has proven successful and can improve the Broncos’ chances of winning games.
Despite its lack of physical aggression, the accounting profession has quite a bit in common with these developments in the world of professional football. Consider this: Like Manning, you’ve been doing your job as an accountant at a high level for quite a while and you know what you’re doing when it comes to compilations and write-up work at your clients. Now Statement on Standards for Accounting and Review Services No. 21 has been issued and represents a new playbook for accountants in public practice who prepare financial statements.
There are roughly 1.5 million nonprofit organizations in the United States. Many of them are grassroots organizations run by well-meaning volunteers who are committed to the group’s mission, but who may not have knowledge of the numerous complicated rules governing not-for-profits. I learned of these complexities when I joined the board of an all-volunteer sports league in my community. I'm sure many practitioners can relate: because I am a CPA, of course, I was elected treasurer. In this role I gained a deeper understanding of not-for-profit finances. As a result, I've learned three things not-for-profits need to understand about their finances in order to run a more effective organization.
I’ve always thought the world would be a better place if only there were more professional accountants working throughout organizations. Each and every day, we bring transparency and accountability to businesses and governments around the globe. We promote financial integrity, expose wrongdoing, and lift the veil of uncertainty to shine light on the truth. When you think about it, we are much like the Swiss-Army knife for modern business—equipped to bring solutions in countless ways.
Tax work? We do that. Financial statements? We do those too. Interpreting human capital and supply chain implications of the latest regulatory standards? Your CPA has you covered.
If CPAs are like the Swiss-Army knife, then transparency is the Master Key that unlocks good business practices; transparency holds decision-makers accountable, leads to better management decisions, and provides the reliable, actionable information on which investors and the free market rely.
I am excited to write to you as the new chair of the AICPA Board of Directors. I hope to meet many of you at the numerous conferences, state society meetings and firm visits that I have lined up between now and next October. The Chair’s Letter also is a great forum to discuss common experiences and important developments. Throughout the year, I will share my thoughts on key trends and emerging professional issues. I hope you’ll share your comments with me and our fellow CPAs so we can have a robust dialogue.
Let me begin by telling you a little about myself. I grew up in the tiny town of West Liberty, Kentucky, home to about 2,000 people and two stoplights. I was raised on small-town values that remain with me today. These values – hard work, integrity, community and commitment – first attracted me to the accounting profession, and now they will shape my stewardship as AICPA Chair.
With the issuance of the AICPA’s Audit Data Standards, the Institute has introduced what promises to be a significant disruptive technology – data on demand. ADS were designed to bridge the gap between disparate Enterprise Resource Planning systems and apps (tools and technologies) that analyze a company’s data. Until now business information consumers had to rely on IT personnel to either develop customized extraction routines or develop applications within the ERP system to do what users were asking for. But, as many business information consumers know, that process is often expensive and time-consuming. All that is about to change.
In an interview with CPA Letter Daily, AICPA President and CEO Barry Melancon, CPA, CGMA, reflects on the accounting profession’s successes in 2014 and discusses the opportunities and challenges of 2015. Below is an excerpt from the interview; for the full interview, watch the accompanying video.
Let’s go back in time to December of 1978. You are longing for the weekend and thinking about going to see the new movie “Grease”that everyone is talking about. You need to get away from the three channels on your television set, as all that you see is the news about anti-Shah protestors in Iran and the craziness of someone giving a baseball player $32 million in a four-year contract. Maybe President Carter can do something to get us back on track. Well, at least you have your brand new Betamax and can record whatever television you miss – as long as it is not more than one hour long...
At work, your client has asked you to perform bookkeeping services for them. The client needs you to process their payroll, record certain journal entries in their general ledger book and calculate the amount of sales tax that they need to remit to the state. Additionally, the client needs you to prepare monthly financial statements for the owners and the bank that provides the entity’s line of credit. You sit down with a few sharpened pencils and ledger paper and draft those financial statements. The recently issued Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements,requires that you, at a minimum, perform a compilation engagement with respect to those financial statements that you submit to your client. So, you issue a compilation report along with those financial statements. The application of the compilation literature is easy to understand and apply.
Are you aware that the new Digital Accountability and Transparency Act, signed into law earlier this year, will have a significant impact on CPAs who work in government and or interact with the federal government?
Known as the DATA Act, the new law calls for the adoption of a data standard that is “a widely accepted, nonproprietary, searchable, platform-independent computer-readable format” to report federal contract, loan and grant spending information by federal programs. CPAs need to be aware of the changes so they can better serve their clients and be prepared to help agencies meet the new requirements.
Have you ever wondered what a day in the life of an auditor will look like in the near future, and how it will be different from today’s practice? Here is a glimpse…
You enter the audit room at 7:30 a.m. on Tuesday morning as the external audit partner of XYZ Enterprises, Inc. After settling in, you sign into AART, the audit firm’s Automated Audit, Reporting and Tracking system that was developed to leverage the widespread availability of information on a 24/7 basis. AART’s technology monitors XYZ Enterprises’ controls, transactions and account balances continuously. As you review the dashboard you notice that all of your audit status indicators are green, except for one. You also notice that you have been copied on a message that AART sent to your controls team notifying them of a modification to a key control parameter in the centralized enterprise resource planning system. You begin looking into the situation.
Is your client’s organization considered a public business entity under the new U.S. GAAP definition? Queries sent to the AICPA’s Private Company Practice Section Center for Plain English Accounting indicate that members continue to struggle with whether or not their entity qualifies to use the Financial Accounting Standards Board’s new Private Company Council accounting alternatives.
Understanding whether a reporting entity is a PBE is the first step in understanding whether it can apply the PCC accounting alternatives. Some of the most common areas of confusion regarding an organization’s definition as a PBE surround broker-dealers, equity-method investments held by PBEs, and governmental units or entities. The following explanations should help to clarify when to use PCC accounting alternatives.
When I tell people that I work on improving the relevance of corporate reporting, I often get asked about the value of reporting on non-financial information. I remind them that not all aspects of a company’s value can be ascertained from historical financial statements, which is why it’s important to consider a company’s intellectual, human, natural and social and relationship capital in addition to its financial and manufactured capital. In recent years, there has been a shift as investors and other users of corporate reports are beginning to consider more than just financial statements in their evaluations.
When I was in public practice, I audited both small and large entities, in both the public and private markets. Regardless of the client’s size or its stakeholders, the success of an audit depends on the dedicated efforts of numerous professionals. One or two people may oversee an engagement and chart its course, but its ultimate quality reflects each individual’s contribution and how well the team pulls together to maintain high standards. In essence, everyone has to step up to make sure the team succeeds.
The AICPA recently launched its own team effort: the Enhancing Audit Quality initiative. AICPA President and CEO Barry Melancon describes in his recent blog post how this comprehensive, integrated effort is looking at every area that impacts the quality of private entity financial statement audits. (When we talk about private entities, we are referring to all non-SEC registrants, including not-for-profit organizations, employee benefit plans and governmental entities.)
If you are a CPA who audits employee benefit plans, you understand how complex they can be. You know how critical it is to make certain that you and your staff have all of the knowledge and resources you need to perform quality audits in this area. Luckily, the AICPA has several resources available to assist members in performing EBP audits.
One such resource is the Center for Plain English Accounting. I am the director of the newly launched CPEA, the AICPA’s national A&A resource center for Private Companies Practice Section member firms. Members can submit written questions to the CPEA and receive written responses and gain access to reports, alerts and webinars on A&A topics including EBP, revenue recognition and Private Company Council accounting alternatives. Watch the video below for more information on CPEA.
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Every month, the CPEA receives many types of A&A inquiries. However, in the summer, we receive a higher number of EBP audit related queries because many companies receive tax extensions that delay the deadline for companies’ Form 5500 and audited financials for EBP until October 15.
Each query—and the CPEA’s response to that query—is unique in itself, because plans vary from organization to organization. Therefore, it is not a one-size-fits-all area. That is why it is so important for practitioners performing EBP audits to know where to go to find the right answers.
For example, we recently received the following query from a CPEA member:
For an employee benefit plan where there are no uncertain tax positions, would the plan be required to disclose, by year, each year that remains subject to examination by major tax jurisdictions? Alternatively, could we go with a more general note disclosure?
We suggested a more detailed disclosure, which might say something like “The Plan is subject to audits by the IRS; however, there are currently no audits for any tax periods in progress. The Plan’s management believes it is no longer subject to income tax examinations for years prior to 20X0.”
Even though the entity does not have any tax audits in process, it is helpful for users to understand which years might still be subject to examination by the Internal Revenue Service. Many times these disclosures can be overlooked where an entity has not been subject to IRS audits in the past or does not hold any uncertain tax positions.
Another question we are asked:
Does a successor auditor in a limited scope audit have to comply with the requirements in AU-C section 510 of the professional standards related to obtaining information from the predecessor auditor?
Our answer? Yes. An auditor still needs to comply with AU-C section 510.
Simply put, EBP is not an area to enter into lightly. I cannot stress enough the importance of tapping into the right resources that specifically address EBP so you can provide quality services to your clients. The AICPA has a number of resources that provide key assistance for EBP auditors. Here are three additional ones you should know about and keep on hand, if needed:
The AICPA’s EBP Audit Quality Center. EBPAQC membership connects you to a community of peers through a membership center with tools and resources, regular e-alerts, a dedicated website with a robust member forum that keeps you abreast of the latest Department of Labor, accounting and auditing developments affecting your EBP audit clients.
AICPA EBP Publications. The Employee Benefit Plans: Audit & Accounting Guide and the Accounting Trends & Techniques: Employee Benefit Plans are targeted toward practitioners auditing in this area.
Conducting EBP audits can be a growth area for CPA firms. However, these specialized audits involve a level of knowledge and experience that requires dedication and diligence.
If you’re just getting your feet wet in the EBP audit world, I encourage you to avail yourself of the additional assistance and resources offered by the AICPA.
Robert Durak, CPA, CGMA, Director, Center for Plain English Accounting, American Institute of CPAs. Bob is the AICPA’s lead staff person on accounting and attest matters affecting private companies. Prior to joining the CPEA, Bob led the AICPA's development of the Financial Reporting Framework for Small- and Medium-sized Entities and speaks frequently across the country about private company financial reporting.
Many preparers and practitioners have been anxiously awaiting the new, converged revenue recognition standard for quite some time. The standard was released by the Financial Accounting Standards Board and the International Accounting Standards Board on May 28. How can we prepare for a smooth transition to the new standard? What major changes will we encounter as we begin implementing it? The new standard is principle-based, which is a big shift from the industry-specific guidance we have today. In preparation for this change in approach, the AICPA has established 16 industry task forces which are developing a new accounting guide containing helpful tips and illustrative examples for applying the new revenue recognition standard.
As the co-chairs of the Construction Contractors Revenue Recognition Task Force, we have been thinking about our major implementation issues for a while now. Here are our top 12 concerns so far.
Is the United States somewhat behind the rest of the world when it comes to embracing sustainability practices and reporting? Some seem to think so. However, a shift has occurred over the last couple of years as companies are beginning to recognize that sustainable business practices are simply good for business. This point was made in a conversation between Susan Coffey, AICPA Senior Vice President, Public Practice and Global Alliances, and Jessica Fries, Executive Chairman and Board Director of the Prince of Wales Accounting for Sustainability Project, also known as A4S. Many companies around the world are beginning to take notice of risks within their business models, such as their reliance on non-renewable forms of energy or their excessive water consumption, and are working toward replacing these practices with sustainable solutions.
It’s here! The new revenue recognition standard, that is. I believe it is the most pervasive and across-the-board important topic that the Financial Accounting Standards Board and the International Accounting Standards Board could have tackled. This new standard eliminates the transaction and industry-specific guidance found in current U.S. GAAP and replaces it with a principle-based approach. Also, it applies to all public, private and not-for-profit entities. I implore you, no matter what your professional discipline, to pay attention to this new standard. And please, don’t get comfortable because the effective dates seem far off.
Are you sure the final words in the new standard are consistent with what you have been hearing to date about this project? Are you comforted in having specific revenue recognition rules replaced by a more principle-based approach? Are you confident that unwritten industry norms of accounting practice formed over decades are consistent with the new standard? In this video, AICPA Senior Technical Manager for Accounting Standards Kim Kushmerick provides an overview of the standard, in addition to highlighting key items to consider and helpful AICPA resources.
From the newest design inventions to the Thai food truck that showed up in your town last week, the crowdfunding movement is allowing individuals to unleash their entrepreneurial spirit and turn their dreams into reality. By sharing their ideas on the web, users can raise funds to support the launch of their small businesses.
Numerous crowdfunding platforms exist, many focusing on the type of project being funded. For example, certain platforms serve non-profits and philanthropic causes, music, theatre, small business and so forth. Even with such specialization, investing comes with risk. Crowdfunding indeed opens investment opportunities to a new pool of potential stakeholders. Many of those investors may not fully understand the risks involved. During the next few weeks on AICPA Insights, we will look at the benefits and risks of crowdfunding.
You keep hearing about “the cloud.” You have read articles and attended conference sessions encouraging the use of cloud services. It is clear that the cloud is increasingly becoming a part of our business processes and solutions. Your clients are starting to clue in. This is for good reason. The cloud may enable them to reduce costs, better use their resources and perform more efficiently.
As your clients seek cloud services, how are you advising them?
Your clients should understand the importance of Service Organization Control reports. It is essential that they have trust in their cloud service providers and are assured that their information is being protected by the necessary security, availability, processing integrity, confidentiality, privacy controls and/or internal controls over financial reporting.
Many nonpublic companies have looked to the Financial Accounting Standards Board – through the creation of the Private Company Council – to examine the existing accounting standards and make recommendations for alternative approaches to financial reporting.
Based on the PCC recommendations, the FASB has now issued two Accounting Standards Updates, one standard provides simplified accounting alternatives for accounting for goodwill, the other for applying hedge accounting to certain plain vanilla interest rate swaps (which is explicitly not available to financial institutions) and have others in the pipeline for release. Financial institutions may want to proceed cautiously before moving forward with adoption of any of the PCC alternatives.
Since Statement on Standards for Valuation Services No.1 was released in June of 2007, I have received numerous questions about when SSVS No. 1 applies. It is important to note that all AICPA members are required to follow all AICPA standards, and many state boards of accountancy require CPAs to follow AICPA standards as well.
SSVS No. 1 was promulgated for one reason: To protect the public and the reputation of CPAs. Before SSVS No. 1, both CPAs and non-CPAs would tell their clients the value of their business based on what amounted to a rule of thumb measurement. The client would then rely on that number for tax returns, transactions, employee stock ownership plans and many other purposes, sometimes with negative consequences for their own clients.
Have you read about conflict minerals in the news? Apple Inc. recently stated in its supplier responsibility report that the company’s entire supply of tantalum used in its products was verified as conflict free, as reported by the Los Angeles Times. The report also noted that “we’re pushing our suppliers of tin, tungsten, and gold just as hard to use verified sources.”
This news relates to the U.S. Securities and Exchange Commission’s final rule issued in August 2012 which required public companies to disclose their use of “conflict minerals” in their manufacturing processes and supply chains. The term “conflict minerals” describes certain minerals—tantalum, tungsten, tin and gold—that are mined in the Democratic Republic of the Congo and its surrounding areas. Public companies might be required to file a Conflict Minerals Report, which may also be subject to an Independent Private Sector Audit. As a CPA, you are the premier provider of such an audit and the AICPA provides resources to help with inquiries you may be receiving from your clients.
The firm I work for, RubinBrown, prides itself on supporting small business. Our three offices are in America’s heartland – St. Louis, Kansas City and Denver. As an accountant, auditor and adviser for Main Street, private company financial reporting has always been an important issue to us. So, of course, last June we were excited to see the AICPA release its Financial Reporting Framework for Small- and Medium-Sized Entities. We quickly put in place a strategy to offer FRF for SMEsTM-based financial statement preparation to our clients who do not need GAAP-based financial statements.
For me, seeing what works for others and how they accomplish their goals helps me figure out an efficient and effective path for my own initiatives. If you are interested in expanding your firm’s services and serving your clients by using the FRF for SMEs, you may find our firm’s approach and experiences informative.
Back in March, AICPA Senior Vice President Susan Coffey wrote about the dangers of providing client comfort letters. Since then, we’ve been hearing from more and more members that they are seeing a rise in requests from third parties for some sort of assurance on client accounting and tax information, or financial condition. I think Edward Karl said it best in CPAs and Comfort Letters: The New Chocolate (from the July edition/DC Currents column of The Tax Adviser) when he described them as requests for “verification, confirmation, certification, corroboration, authentication or substantiation of their clients’ financial information.” You name it, we’ve been asked to validate it. On the bright side, an increase in these requests confirms the faith, confidence and trust that business owners, decision makers and the public have in CPAs.
The AICPA Technical Hotline provides non-authoritative advice to members on matters of accounting and financial reporting, audit, attest, compilation and review service standards. This podcast, the AICPA Insights Live webcast on Nov. 22, addresses some of the more commonly asked questions over the past year in the areas of audit, attest, compilation and review engagements. Highlights include the new clarified audit standards, verification requests, supplementary information and Service Organization Controls reporting. (Email subscribers can listen to the podcast on our website).
Under the Volcker rule, ownership interests in covered funds (in other words, investments) will not be permissible and will have to be divested by 2015. Ownership interests in covered funds subject to the Volcker rule include many pooled trust preferred collateralized debt obligations, certain collateralized loan obligations and possibly Real Estate Mortgage Investment Conduits. At this conjuncture, the full scope of investments impacted is unknown.