Category Archives for "Accounting and Auditing"

Audit Lessons from a Brain Tumor

By Charles Hall | Auditing

I said to my wife, “Am I driving straight?” I felt as if I was weaving, not quite in control. I felt dizzy and heard clicking noises in my ears.

The mystery only increased over the next two years as I visited three different doctors. They stuck, prodded, and probed me–but no solution.

Frustrating.

Picture is courtesy of istockphoto.com

Meanwhile, I felt a growing numbness on the right side of my face. So one night I started Googling health websites (the thing they tell you not to do) and came upon this link: Acoustic Neuroma Association. I clicked it. It was like reading my diary. It couldn’t be. A brain tumor.

The next day I handed my doctor the acoustic neuroma information and said, “I think this is what I have. I want a brain scan.”

Two days after the scan, while on the golf course, I received the doctor’s call: “Mr. Hall, you were right. You have a 2.3-centimeter brain tumor.” (I sent him a bill for my diagnosis but he never paid–just kidding.) My golfing buddies gathered around and prayed for me on the 17th green, and I went home to break the news to my wife. I had two children, two and four at the time. I was concerned.

Shortly after that, I was in a surgeon’s office in Atlanta. The doctor said they’d do a ten-hour operation; there was a 40% chance of paralysis and a 5% chance of death. The tumor was too large for radiation–or so I was told.

I didn’t like the odds, so I prayed more and went back to the Internet. There I located Dr. Jeffrey Williams at Johns Hopkins Hospital in Baltimore. I emailed the good doctor, telling him of the tumor’s size. His response: “I radiate tumors this size every day.” He was a pioneer in fractionated stereotactic radiation, one of the few physicians in the world using this procedure (at the time).

A few days later, I’m lying on an operating table in Baltimore with my head bolted down, ready for radiation. They bolt you down to ensure the cooking of the tumor (and not the brain). Fun, you should try it. Four more times I visited the table. Each time everyone left the room–a sure sign you should not try this at home.

Each day I laid there silently, talking to God and trusting Him.

Three weeks later I returned to work. Twenty years later, I have had two sick days.

I’ve watched my children grow up. They are twenty-four and twenty-six now–both finished college. My wife is still by my side, and I’m thankful for each day.

Cades Cove, Tennessee with my wife

So what does a brain tumor story tell us about audits? (You may, at this point, be thinking: they did cook the wrong part.)

Audit Lessons Learned from a Brain Tumor

1. Pay Attention to Signs

It’s easy to overlook the obvious. Maybe we don’t want to see a red flag (I didn’t want to believe I had a tumor). It might slow us down. But an audit is not purely about finishing and billing. It’s about gathering proper evidential matter to support the opinion. To do less is delinquent and dangerous.

2. Seek Alternatives

If you can’t gain appropriate audit evidence one way, seek another. Don’t simply push forward, using the same procedures year after year. The doctor in Atlanta was a surgeon, so his solution was surgery. His answer was based on his tools, his normal procedures. If you’ve always used a hammer, try a wrench.

3. Seek Counsel

If one answer doesn’t ring true, see what someone else thinks, maybe even someone outside your firm. Obviously, you need to make sure your engagement partner agrees (about seeking outside guidance), but if he or she does, go for it. I often contact the Center for Plain English Accounting. I find them helpful and knowledgeable. I also have relationships with other professionals, so I call friends and ask their opinions–and they call me. Check your pride at the door. I’d rather look dumb and be right than to look smart and be wrong.

4. Embrace Change

Fractionated stereotactic radiation was new. Dr. Williams was a pioneer in the technique. The only way your audit processes will get better is to try new techniques: paperless software (we use Caseware), data mining (we use IDEA), real fraud inquiries (I use ACFE techniques), electronic bank confirmations (I use Confirmation.com), project management software (I use Basecamp). If you are still pushing a Pentel on a four-column, it’s time to change.

Postscript

Finally, remember that work is important, but life itself is the best gift. Be thankful for each moment, each hour, each day.

Five Books to Read in 2020

By Charles Hall | Accounting and Auditing

Are you looking for books to read in 2020? Here are a five suggestions. Each will make you a better CPA—and person.

Digital Minimalism – Want to stop wasting time on Facebook, Twitter, LinkedIn and other social media platforms? Read this book. Full of helpful tips to help you regain your life.

Ultralearning – This book provides practical steps to increase your ability to learn new skills and rapidly gain knowledge. Lifetime learning is a necessary skill for CPAs.

The Bullet Journal Method – Bullet journaling is a blend of planning, journaling and project management. I have read dozens on time management books. This is one of the most interesting. All you need is a blank notebook, and you can plan your days, weeks, months and years.

The Coaching Habit – Do you want to make your employees better? Do so with questions, not answers. This short read is chock full of simple but effective questions to ask those who work for you. 

Essentialism – Are you trying to master too many things? So many that you aren’t effective in any. Greg McKeown’s book will help you focus on the important and forget the rest. This book is a classic.

SSAE 19: Agreed-Upon Procedures Engagements

By Charles Hall | Auditing

On December 19, 2019, the AICPA released SSAE 19, Agreed-Upon Procedures Engagements. This is one of those standards that you'll want to implement early. Why? Greater flexibility. 

Greater AUP Flexibility

CPAs will find the new agreed-upon procedures (AUP) standard (SSAE 19) more flexible that the preceding guidance (SSAE 18 AT-C section 215).

How is it more flexible?

• You no longer request an assertion from the responsible party
• You can issue general-use reports 
• Intended users are not required to take responsibility for the sufficiency of the procedures
• You can develop or assist in developing the procedures over the course of the engagement

And which of these do I like the best? No requirement for assertions.

Additionally, I like the option to develop AUP procedures as the engagement progresses. In the past, the client might review the draft AUP report (at the end of the engagement) and realize it doesn't meet their needs. Sometimes it's better for practitioners to develop procedures as they perform the AUP. SSAE 19 allows you to do just that.

So, if you develop new procedures, what must you do? Prior to issuance of the AUP report, obtain the engaging party's agreement regarding the procedures. Moreover, obtain their acknowledgement that the procedures are appropriate and that they satisfy the intended purpose of the engagement. In effect, the client reviews the procedures, agrees with them, and expresses satisfaction.

Definition of an Agreed-Upon Procedures Engagement

SSAE 19 defines an agreed-upon procedures engagement as "an attestation engagement in which a practitioner performs specific procedures on subject matter and reports the findings without providing an opinion or conclusion. The subject matter may be financial or nonfinancial information." The standard goes on to say "Because the needs of engaging party may vary widely, the nature, timing, and extend of the procedures may vary, as well."

Now, let's see what the AUP objectives are.

SSAE 19 Objectives

The objectives of an SSAE 19 engagement include:

• Applying specific procedures to subject matter
• Issuing a written practitioner's report that describes the procedures applied and the findings

Next, let's look at the structure of an AUP report.

AUP Report Structure

The structure of the AUP report should be as follows:

• Procedures
• Findings

So, the CPA should state what was done and then provide the findings (results). The procedures and findings are placed in the body of the AUP report. 

The description of the procedures should be simple and clear.

Good AUP Procedure and Finding

Here's an example of a good AUP procedure and finding:

Procedure - We obtained the January 2020 check register and the January operating bank account statement. We compared check numbers 2850, 2892, 2933, 2935, 2972 to cleared checks agreeing the payee and the amount. 

Findings - No exceptions were noted.

Now, let's look at a poor example:

Poor AUP Procedure and Finding

Procedure - We scanned the company's 2020 bank statements and talked with the CFO. The books seemed to be in order with the exception of July errors.

Finding - Overall, the check disbursements appear to be okay after our general review.

In this poor example, we see general words or statements. What does the word scanned mean? How about seemed to be in order ? Additionally, the finding is vague: okay after our general review.

SSAE 19 provides examples of acceptable and unacceptable wording.

Acceptable and Unacceptable AUP Wording

SSAE 19 calls the practitioner to clearly define procedures. Moreover, the standard states that practitioners should not perform procedures that are open to varying interpretations or that are vague. 

Unacceptable Terms

.A27 of the standard even provides examples of unacceptable AUP terms such as:

• General review
• Evaluate
• Examine

Acceptable Terms

.A27 also provides examples of acceptable AUP terms such as:

• Inspect
• Compare
• Agree
• Recalculate

In addition to proper wording, document your engagement in accordance with SSAE 19.

AUP Documentation

SSAE 19 calls for the following documentation:

• Written agreement with the engaging party regarding the appropriateness of the procedures performed for the intended purpose of the engagement
• The nature, timing, and extent or procedures performed
• The results of the procedures

You'll also need a written engagement letter (see paragraph .15 of SSAE 19 for an example) and a representation letter (see paragraph .27 of SSAE 19 for an example).

So what about dating the representation letter? The representation letter date should be the date of the AUP report. Additionally, the representation letter should address the subject matter and periods covered by the practitioner's findings.

By now you may be thinking, "Where can I find AUP report examples?"

SSAE 19 Illustrative AUP Report

SSAE 19 provides four illustrative AUP reports in its exhibit (see .A78). 

The four example AUP reports relate to:

1. Statement of investment performance statistics
2. Cash and accounts receivable
3. Claims of creditors
4. Procedures specified in regulation

If you're looking for a template to follow, see example 2. Why? The cash and accounts receivable procedures and findings are excellent. Build procedures and findings like these and you'll be in good shape.

I suggest you download SSAE 19 and keep these reports handy.

So, what about independence? Is that required?

Attestation Independence

The practitioner has to be independent in order to perform an AUP.  

One exception exists when the practitioner "is required by law or regulation to accept an agreed-upon procedures engagement and report on the procedures performed and findings obtained."

SSAE 19 Effective Date

The effective date of SSAE 19 is for AUP reports dated on or after July 15, 2021.

Early implementation is permitted.

Center for Plain English Accounting: A Review

By Charles Hall | Accounting and Auditing

Do you ever need a heavy-weight to assist you with a complex accounting issue? Or do you ever wonder how you’ll ever keep up with all the new FASB and AICPA standards? The Center for Plain English Accounting (CPEA) might be your answer. 

Last week I was working with another partner to resolve a nonprofit accounting issue. He had one opinion and I had another. Both were logical. Each appeared to be possible. But we needed a single answer. What did we do? We submitted our question to the CPEA. Within twenty-four hours we had an answer–in writing. (I would say who was right but I might embarrass myself.) And with it, we documented our consultation per our firm’s quality control document. Now, if the issue comes up in peer review, we have a solid answer for our position. 

Below I provide you with a review of the CPEA and whether the annual dues are worthwhile. 

Why Join the Center for Plain English Accounting?

My firm joined the CPEA about four years ago. What led to that decision? We had used the free AICPA Hotline service for years, and the experience was positive. But as you may know, the AICPA Hotline does not offer written responses. I would send the Hotline an email with an inquiry, and the AICPA would call me with an answer, usually within 24 hours. I would document that discussion in my engagement file. But, in the back of my mind, I always longed for a written response. Why? These were usually thorny, high-risk issues. And I wanted black-and-white written answers. Something I could bank on. This is part of what the CPEA does: they provide written answers to technical questions.

Center for Plain English Accounting Mission

The CPEA provides other services as well.

As a member, you receive a monthly report (see example below) covering a variety of accounting and auditing issues. You also receive emails with alerts and special reports about hot-topic issues. The last alert informed members about the delay in the effective date of the lease standard. These technical reports and alerts are accessible online, so you have a library of past articles to assist you. 

Here’s my latest monthly special report email.

Additionally, the CPEA offers CPE at reasonable rates. These are online sessions, though they do offer an in-house option. 

In short, the CPEA provides information about evolving technical issues and answers to specific accounting and auditing questions.

I have found their staff to be accessible and easy to work with. They are some of the best in the business. 

Here’s an excerpt from their website regarding what they do:

The Center for Plain English Accounting (CPEA) is the AICPA’s national A&A resource center, sponsored by the Private Companies Practice Section. The CPEA’s team of experts assist members with accounting, auditing, attest, review, and compilation needs by sharing technical advice and guidance. The CPEA’s straight-forward and clear style of writing and speaking gives practitioners the opportunity to understand the applicability of the professional literature when preparing financial statements and when auditing, reviewing, and compiling those financial statements.

Cost of CPEA Membership

What’s the cost of joining the CPEA? $1,700 per year. So it’s not cheap. But I feel like my company receives its money’s worth. We pose several questions each year, and we receive timely written responses–every time. For firms that don’t have a national office (and most don’t), this is an excellent solution.

There are also smaller firm options. If you have five or fewer professionals, the annual fee is $795. If you are a sole practitioner, it is $450. Additionally, if you are not a member, you can pay a per-inquiry fee of $300. 

Here’s additional information about membership. 

Submitting Questions to the CPEA

How do you submit your questions to the CPEA? With an online form such as the following:

Worth the Money?

For me, the cost of membership has been worth the money. If your firm desires to keep up with evolving standards and needs written answers to technical questions, the CPEA is an excellent choice. 

Debt Covenant Violations: How to Report

By Charles Hall | Accounting

How does a debt covenant violation affect the presentation of debt on a balance sheet? If a waiver from the lender is obtained, should the violation be disclosed? In this article, I will tell you how to report debt covenant violations.

Lenders commonly include debt covenants in loan agreements. Those covenants might require certain profitability, liquidity, or cash flow ratios. A violation of such requirements can make long-term debt callable. And, by definition, the debt becomes current since it is now due within one year of the balance sheet date. 

If a debt covenant violation occurs, the debt should be classified as current unless the lender provides a waiver for more than one year from the balance sheet date. (See an exception below when there are subsequent measurement dates within one year of the balance sheet date.)

How should debt be classified if a cure occurs prior to the issuance of the financial statements? Debt is shown as noncurrent if the company is able to cure a violation subsequent to the balance sheet date but before the issuance date (or date available for issuance) of the financial statements.

Additionally, some loans provide for a grace period. If the violation is cured during the grace period, the debt will be reported as long-term. Also if the cure has not already occurred but the company demonstrates it is probable that the cure will occur within the grace period, then the debt will be reported as long-term.

Reporting Debt Covenant Violations

When a violation occurs, the main consideration in classifying long-term debt is whether the amount is due or callable within one year of the balance sheet date. If the loan is due or callable within the year after the period-end, the amount generally should be reported as current. If a debt covenant violation is timely cured within a grace period, then the debt is no longer callable and will, therefore, remain long-term. Noncurrent classification is also appropriate if the creditor provides a waiver that extends more than one year beyond the balance sheet date.

Waivers do not, however, guarantee long-term debt classification, particularly if there are other measurement dates within the year after the period-end. 

Subsequent Measurement Dates

470-10-45 of the FASB Codification provides the following guidance:

Some long-term loans require compliance with quarterly or semiannual covenants that must be met on a quarterly or semiannual basis. If a covenant violation occurs that would otherwise give the lender the right to call the debt, a lender may waive its call right arising from the current violation for a period greater than one year while retaining future covenant requirements. Unless facts and circumstances indicate otherwise, the borrower shall classify the obligation as noncurrent, unless both of the following conditions exist:

a. A covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date or would have occurred absent a loan modification.
b. It is probable that the borrower will not be able to cure the default (comply with the covenant) at measurement dates that are within the next 12 months.

If both of these conditions exist, then the debt is shown as current.

Consider a scenario where a company has a covenant violation on December 31, 2019, and it obtains a waiver from the lender that lasts through January 1, 2021. If a September 30, 2020 measurement date is required by the loan agreement and it is probable that the company will not be in compliance, then the loan is classified as current on December 31, 2019, even though the waiver was obtained. Why? The new violation would make the loan callable within one year of the balance sheet date. (The prior waiver was in relation to the December 31, 2019 violation, not a subsequent violation.)

Is Disclosure Required if a Waiver is Obtained?

If a company obtains a waiver for more than one year from the balance sheet date, must the financials disclose this fact (that a waiver was obtained)?

The AICPA answers this question–in Q&A section 3200 (paragraph 17)–with the following:

The authoritative literature applicable to nonpublic entities does not address disclosure of debt covenant violations existing at the balance-sheet date that have been waived by the creditor for a stated period of time. Nevertheless, disclosure of the existing violation(s) and the waiver period should be considered* for reasons of adequate disclosure. If the covenant violation resulted from nonpayment of principal or interest on the debt, inability to maintain required financial ratios or other such financial covenants, that information may be vital to users of the financial statements even though the debt is not callable.

*Emphasis added by CPAHallTalk

Translation: It is wise to disclose the debt covenant violation and the existence of the waiver.

FASB’s Current Work on a New Debt Standard

The FASB has an ongoing project regarding the classification of debt. The FASB issued a revised Exposure Draft on September 12, 2019, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). Comments were due October 28, 2019. It has taken FASB over two years to deliberate this topic. So you call tell the classification decision is not an easy one.

Additional Information About Auditing Debt

See my post regarding the audit of debt.