Category Archives for "Accounting and Auditing"

AICPA Hosting Services Interpretation

By Charles Hall | Auditing

As of July 1, 2019, hosting services impair independence, so says the AICPA. And most firms are providing hosting services (though they may not know it). This can be dangerous. Below I explain the AICPA hosting services interpretation. 

AICPA Hosting Services Interpretation

Starting July 1, 2019, your possession of client documents (e.g., tax records) or information (e.g., the housing of QuickBooks files on your server) can, in some instances, create an independence impairment. (If you temporarily possess original documents (e.g., tax records) but return them to the client in a short period, then the possession of the original documents does not impair your independence.)

The AICPA recently adopted a new interpretation, “Hosting Services,” which appears in the Code of Conduct under nonattest services. See 1.295.143 of the Code.

Why would possessing documents or information potentially impair independence? Because you accepted the responsibility for designing, implementing or maintaining internal controls for the records in your possession. And this is considered a management function.

In effect, the AICPA is saying there is an implicit understanding that you (the CPA) will safeguard the client’s records. And to safeguard the information, you agree to create controls to ensure the safety of the information in your possession.

To understand the actions that would impair your independence, see Catherine Allen’s article in the Journal of Accountancy. Specifically, look at her examples of where independence is impaired and where it is not. 

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What I Wish I Had Known About Public Accounting

By Charles Hall | Accounting and Auditing

As I enter the latter part of my career, I look back and see several mistakes I made. Here’s what I wish I had known about public accounting–before I started.

I thought I knew a lot when I graduated from college, but my education was just beginning.

Job #1 – The Lesson of Firm Culture

In my first job, I went to work with a “big eight” public accounting firm in Tampa, Florida. As soon as I moved to my new digs on Tampa Bay, they shipped me out to Jackson, Mississippi where I remained for months (seeing my Tampa apartment twice in three months). Most days I did the expert work of pro-forming work papers—the thing they gave to newbies. Boredom defined. So I had this sexy job with a big firm, but I spent most days dawdling with routine duties. I kept thinking, “I went to college for this?” Surely accounting had to be more interesting.

I felt uncomfortable. This international firm was cold (even if this office was in Florida). I had grown up in a small town where you spoke to everyone and respected all. Soon I left Tampa and headed back home to Georgia.

What I learned: Work in a place that allows you to grow and one where you fit in. Firms have cultures. I needed one that aligned with who I was.

Job #2 – The Lesson of a Niche Practice

Back in Georgia, I landed work with a regional firm. I felt more at home. The work was more challenging than my former job, and my knowledge began to expand rapidly. This particular business had a strong niche practice and was very profitable. The firm used a pooled staffing approach, so I worked for one partner one week, another the next week, and another the next. I did not get a chance to start and finish audit engagements. It stressed me that so many different partners wanted me to complete their work. And each partner felt their work was the priority. After three years, I moved on.

What I learned: Firms that focus on niches perform better than those that don’t. As an employee, it’s better to work with one partner. You get to see engagements from start to finish, and the stress decreases since you know what your (one) boss wants. 

Job #3 – The Lesson of Working for One Boss

My new firm was even smaller than the last, having about thirty people. Here I worked for one partner which was nice, and he worked in one industry which was also pleasant. When I interviewed with the firm, I was told that my assigned partner would retire in three or four years, and I would have the opportunity to take his place. Since I was the audit manager, I learned a great deal, but over time it became apparent to me I was doing most of the work and the partner was receiving most of the pay.

The partner was a wonderful guy, but after eight years (not three or four), the partner was still in plain sight (and had not retired). 

So one day I screwed up my courage and asked, “When are you retiring?” The conversation was difficult (an understatement, he yelled at me). He wouldn’t answer my question. It was clear he had no intention of retiring (even though he was 68). I was angry. I had been duped (at least, I felt that way). 

So I left.

What I learned: I like working for one boss. I knew what he wanted, and I delivered it. When someone makes you a partnership offer, get it in writing (clarify the timetable and how the transition will occur). Don’t allow years to go by without communicating.

Job #4 – The Lesson of a Solo Practice

The next step in my journey was to start a new firm. I bought a small company that was only yielding $200 per month (yes, you read that right—$200 a month). My wife was at home with our kids, so we had no other income. 

About this same time, my two-year-old son was diagnosed with cystic fibrosis. I wondered how we would make it. I’ve never been so low in my life. And then three years into the solo practice, I was diagnosed with a brain tumor. (See my article, Audit Lessons from a Brain Tumor.)

We had an excellent opportunity to exercise faith, so we did, praying often. All I can say is God took care of us. At the end of the first year, my income was equal to my prior year of employment. The following five years were successful.

But after six years of being a sole proprietor (and then as a partner), my father’s health began to fail, and I was called to attend to his needs and…yes, you guessed it, another job.

What I learned: Going solo is one of the hardest things you will ever do. I quickly realized how important it is to have other professionals around me so I can bounce things off them and seek their guidance. Being alone is…lonely. (I brought in a partner in my third year. Having her there was wonderful.) 

Without the economies of scale afforded to larger firms, my overhead ate most of my cash flow. I found it hard to get potential audit clients to take me seriously. They saw me as “small” though my skill level was no different than it was in my previous jobs. When it comes to marketing, perception is everything.

On to the next job.

Job #5 – The Lesson of Learning to Speak and Write

I returned to my first Georgia employer (job #2 above) as their quality control director. I was 42 years old and had never been a quality control guy, so this was all new to me. But I enjoyed the challenge. While the firm had a niche practice, it still afforded me the opportunity to see a wide variety of audits, reviews, and compilations. I also began teaching more continuing education classes and loved doing so. When I taught, I felt “in my element.” The firm did (and still does) an excellent job of marketing. 

After six years in this position, my father passed away, and my wife wanted to move back to middle Georgia to be near her mother. So we did.

What I learned: Exposure to a broad range of work expands your professional abilities. It is easier for niche firms to market themselves as go-to experts. A niche practice generates higher profits since a common client base allows a firm to build repeatable processes and train staff. Also, I was beginning to realize the importance of speaking and writing. 

On a personal note, being there with my Dad was awesome. The conversations we had are some of my most treasured memories.

Job #6 – The Lesson of Staying with a Firm

For the last ten years, I’ve worked as the quality control director and now as the quality control partner for our firm, McNair, McLemore, Middlebrooks & Co. We are well diversified, but we have specialized niches within the company, so no one industry defines us. The diversity of work keeps me on my toes. I deal with accounting and auditing issues for banks, telecommunication companies, nonprofits, governments, small businesses and more. I continue to speak at professional conferences and to our staff, and, as you can see, I write. 

The Main Lessons Learned

One thing I have thought about as I look back over my career: I changed jobs too often.

If I had my career to do over again, I would find a good firm, and I would stay.

What I learned: Finding and staying with a good firm will provide you with significant opportunities.

Speak to groups and write professional articles and blog posts. Doing so will allow you to make new friends and great contacts.

Reflections on the Journey

Finally, let me say this: Finding balance and taking care of ourselves physically and spiritually are keys to success. Sitting at a desk for ten to twelve hours a day—without breaks—will only make us less productive and less healthy.

Praying and running (now walking as I’m older) have been my two biggest allies. At 6:00 every morning, I spend about 30 minutes reading my Bible and praying. I also walk five days a week with my wife and every Saturday with my twin brother (he blogs at ProjectRiskCoach.com).  Praying and walking give me energy and stamina. (See my article How to Create Energy that Sustains You.)

By the way, I mentioned my son with cystic fibrosis. He was three years old when diagnosed. Today he is twenty-four and works as a data scientist at the University of Georgia. Most importantly, he is doing well. And I am so thankful. 

What Lessons Have You Learned?

These are some things I have learned. I’d love to hear about your lessons. Please share one or two career experiences in the comment field below.

Government Auditing Standards: 2018

By Charles Hall | Auditing , Local Governments

Livescribe: Note Taking Magic (for CPAs)

By Charles Hall | Accounting and Auditing , Technology

Livescribe: Note taking magic. Here’s an overview of how auditors are making their lives easier using the Livescribe pen.

Have you ever interviewed a client, feverishly taking notes, and straight away forgot critical facts? You wish you had a recording of the conversation. Better yet, you wish you could touch a particular word in your notes and hear the words that were being spoken at that moment. What if I told you, “you can”?

How? Livescribe.

Think about what you could record with such a tool:

• CPE class lectures
• Walkthroughs of transaction cycles
• Board or committee or partnership meetings
• Fraud interviews

Livescribe: Note Taking Magic

What is Livescribe? It’s an electronic pen/recorder. As you write on special coded paper, you simultaneously record the conversation (the recorder is built into the pen). Once done, you touch a particular letter in a word (with the tip of your pen) and you hear–from the pen–the words spoken at that moment. No more forgetting and not being able to retrieve what was said. And it’s efficient since you can go to any particular part of the conversation using your notes as signposts.

To start a recording, you press the tip of the pen to the “record” icon at the bottom of the page.

To stop the recording you press the “stop” icon above.

Once the recording is complete, you simply touch the tip of the pen to any letter and the audio recording will start playing–from the pen–at that point.

You can upload the pen notes and the audio to your computer desktop Livescribe software using a USB cord that connects to the pen. (See below.)

You can also play back notes from your uploaded desktop copy just as you can with your pen. Click a letter with your mouse and the recording will play.

I was surprised by the clarity of the sound from the pen and the audio capacity–200 hours (for the Echo version that you see below).

There are different versions of the pen. I bought the Echo version due to the lower price. You can review the available pens on Amazon. I also bought additional Livescribe notebooks (they come in packs of four) and a portfolio (binder) to hold the notebook and pen.

My Experience with Livescribe

I have used a Livescribe pen for four years. After using to it to record hundreds of hours of audio, I consider my Livescribe pen to be one of my best audit tools. I recommend it.

What if you don’t desire to shell out the $155 for the pen? Consider using the Notability app. 

Another Option 

If you have an iPad, you can buy the Notability app for $9.99 and record conversations with your notes (with play-back similar to Livescribe). You will need a stylus (I use an Apple pen) to take notes since you write on your iPad screen. See my article about using Notability.

One More Thought

If you are performing a walkthrough of a complex transaction cycle, consider using your phone to take pictures of what you are seeing (e.g., computer screens, documents). I use the Scanbot app. Between your notes (with audio) and your pictures, you will have a good understanding of what you have seen and heard.

You might also be interested in my article Four Keys to Better Client Interviews.

Going Concern Accounting and Auditing

By Charles Hall | Accounting , Auditing

Are you preparing financial statements and wondering whether you need to include going concern disclosures? Or maybe you’re the auditor, and you’re wondering if a going concern paragraph should be added to the audit opinion. You’ve heard there are new requirements for both management and auditors, but you’re not sure what they are.

This article summarizes (in one place) the new going concern accounting and auditing standards.

Going Concern Standards

For many years the going concern standards were housed in the audit standards–thus, the need for FASB to issue accounting guidance (ASU 2014-15). It makes sense that FASB created going concern disclosure guidance. After all, disclosures are an accounting issue. 

Going Concern Accounting Standard

ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, provides guidance in preparing financial statements. This standard was effective for years ending after December 15, 2016.

GASB Statement 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, is the relevant going concern standard for governments. GASB 56 was issued in March 2009. (GASB 56 requires financial statement preparers to evaluate whether there is substantial doubt about a governmental entity’s ability to continue as a going concern for 12 months beyond the date of the financial statements. As you will see below, this timeframe is different from the one called for under ASU 2014-15. This post focuses on ASU 2014-15 and SAS 132.)

Meanwhile, the Auditing Standards Board issued their own going concern standard in February 2017: SAS 132.

Going Concern Auditing Standard

Auditors will use SAS 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to make going concern decisions. This SAS is effective for audits of financial statements for periods ending on or after December 15, 2017. SAS 132 amends SAS 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

So, let’s take a look at how to apply ASU 2014-15 and SAS 132.

Two Going Concern Decisions

In the past, the going concern decisions were made by auditors in a single step. Now, it is helpful to think of going concern decisions in two steps:

1. Management decisions concerning the preparation of financial statements 
2. Auditor decisions concerning the audit of the financial statements

First, we’ll consider management’s decisions.

1. Management Decisions about Going Concern Accounting

ASU 2014-15 provides guidance concerning management’s determination of whether there is substantial doubt regarding the entity’s ability to continue as a going concern.

What is the Going Concern Accounting Definition?

FASB defines going concern with the words substantial doubt. So, how does FASB define substantial doubt? 

Substantial doubt about the entity’s ability to continue as a going concern is considered to exist when aggregate conditions and events indicate that it is probable that the entity will be unable to meet obligations when due within one year of the date that the financial statements are issued or are available to be issued.

What is Probable?

So, how does management determine if “it is probable that the entity will be unable to meet obligations when due within one year”?

Probable means likely to occur. 

If for example, a company expects to miss a debt service payment in the coming year, then substantial doubt exists. This initial assessment is made without regard to management’s plans to alleviate going concern conditions. 

ASC 205-40-50-4 says:

The evaluation initially shall not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued).

But what factors should management consider?

Factors to Consider

Management should consider the following factors when assessing going concern:

• The reporting entity’s current financial condition, including the availability of liquid funds and access to credit
• Obligations of the reporting entity due or new obligations anticipated within one year (regardless of whether they have been recognized in the financial statements)
• The funds necessary to maintain operations considering the reporting entity’s current financial condition, obligations, and other expected cash flows
• Other conditions or events that may affect the entity’s ability to meet its obligations

Moreover, management is to consider these factors for one year. But from what date?

Timeframe

The financial statement preparer (i.e., management or a party contracted by management) should assess going concern in light of one year from the date “the financial statements are issued or are available to be issued.”

So, if December 31, 2017, financial statements (for a nonpublic company) are available to be issued on March 15, 2017, the preparer looks forward one year from March 15, 2017. Then, the preparer asks, “Is it probable that the company will be unable to meet its obligations through March 15, 2018?” If yes, substantial doubt is present and disclosures are necessary. If no, then substantial doubt does not exist. As you would expect, the answer to this question determines whether going concern disclosures are to be made and what should be included.

Substantial Doubt Answer Determines Disclosures

If substantial doubt does not exist, then going concern disclosures are not necessary.

If substantial doubt exists, then the company needs to decide if management’s plans alleviate the going concern issue. This decision determines the disclosures to be made. The required disclosures are based upon whether:

1. Management’s plans alleviate the going concern issue
2. Management’s plans do not alleviate the going concern issue

What if Management’s Plans Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

1. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

Management’s plans should be considered only if is it probable that they will be effectively implemented. Also, it must be probable that management’s plans will be effective in alleviating substantial doubt.

So, if management’s plans are expected to work, does the company have to explicitly state that management’s plans will alleviate substantial doubt? No. 

When management’s plans alleviate substantial doubt, companies need not use the words going concern or substantial doubt in the disclosures. And as Sears discovered, it may not be wise to do so (their shares dropped 16% after using the term substantial doubt even though management had plans to alleviate the risk). Rather than using the term substantial doubt, consider describing conditions (e.g., cash flows are not sufficient to meet obligations) and management plans to alleviate substantial doubt.

Sample Going Concern Disclosure – Substantial Doubt Alleviated

An example note follows:

Note 2 – Company Conditions

The Company had losses of $4,525,123 in the year ending March 31, 2017. As of March 31, 2017, its accumulated deficit is $11,325,354. 

Management believes the Company’s present cash flows will not enable it to meet its obligations for twelve months from the date these financial statements are available to be issued. However, management is working to obtain new long-term financing. It is probable that management will obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period from the date the financial statements are available to be issued.

Notice this example does not use the words substantial doubt.

What if Management’s Plans Do Not Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the notes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued (or issued when applicable). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

1. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

Sample Going Concern Disclosure – Substantial Doubt Not Alleviated

An example disclosure follows:

Going Concern Accounting Summary

2. Auditor Decisions Regarding Going Concern

SAS 132 provides guidance concerning the auditor’s consideration of an entity’s ability to continue as a going concern.

Auditing Going Concern Accounting

SAS 132, paragraph 10, states the objectives of the auditor are as follows:

An example of a going concern paragraph is as follows:

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

The auditor should not use conditional language regarding the existence of substantial doubt about the entity’s ability to continue as a going concern. 

Opinion – Inadequate Going Concern Disclosures

Paragraph 26. of SAS 132 states that an auditor should issue a qualified opinion or an adverse opinion, as appropriate, when going concern disclosures are not adequate.

Going Concern Auditing Summary 

Now, let’s circle back to where we started and review the objectives of SAS 132.

The objectives are as follows:

• Conclude about whether the going concern basis of accounting is appropriate
• Determine whether substantial doubt is present
• Determine whether the going concern disclosures are adequate
• Issue an appropriate opinion 

Conclusion

As you can see ASU 2014-15 and SAS 132 are complex. So, make sure you are using the most recent updates to your disclosure checklists and audit forms and programs.

Finally, keep in mind that going concern is also relevant to compilation and review engagements.