Tag Archives for " AICPA Consulting Standards "

AICPA Consulting Standards – The Swiss Army Knife

By Charles Hall | Accounting and Auditing

In this post, I tell you how to use the AICPA Consulting Standards (Statement on Standards for Consulting Services). I will also compare AUP engagements with consulting engagement options.

Are you ever asked to perform unusual engagements such as reporting on a city’s water losses, or reviewing a company’s internal controls for billing, or performing test counts of widgets.

When such client requests are made, you might wonder “what professional standards should I follow?” Often the answer is in the AICPA Consulting Standards.

AUP or a Consulting Engagement?

Regarding unusual engagements, I am sometimes asked, “Should this be an agreed-upon-procedures (AUP) engagement or a consulting engagement?” 

My answer is usually, “It depends.”

Allow me a moment to compare AUPs with Consulting engagements, and then I’ll explain how to make this decision.

Agreed Upon Procedures Engagement

First, consider the AUP option.

AUPs are mainly composed of the following:

1. Procedures
2. Findings

An example of a procedure and finding follows:

Procedure – Agreed all January 2020 disbursements greater than $20,000 to checks that cleared the bank statement; also compared the payee on each check to the payee per the check register.

Finding – All check payees agreed with the exception of check 2394 for $45,000. The payee for this check was I. Cheatum, and the check register reflected a payment to King’s Supply Company.

CPAs must be independent of the client to perform AUP engagements.

CPA Consulting Engagement

Second, we’ll consider the consulting engagement option.

A consulting engagement (sometimes called management advisory services) is less precise than an AUP and does not necessarily follow the procedures/findings format. There are no specific reporting standards for a consulting engagement, so a CPA can more easily design the engagement to meet various needs. The consulting standards are more flexible than the attestation standards. And this flexibility enables you to be more creative in designing the engagement.

Independence is not required when performing consulting engagements, though the CPA still needs to be objective. For example, the CPA needs to be free of conflicts of interest. 

A consulting report might address the following:

1. Reading of minutes
2. Interviews of individual employees
3. Flowcharting of internal controls
4. Summary of production statistics
5. Narrative of business goals and enterprise risks

As you can tell, there are no procedures and findings (though you are not prohibited from doing so). Most CPAs usually perform AUPs when there are specific procedures.

The Best Option

So which is better? An AUP or a consulting engagement?

I’ll say it again: It depends. On what? Third party reliance.

Consider the following:

1. Will there be external parties (e.g. creditors) placing reliance on the report?
2. Is the purpose of the report to add credibility to the information (by having the CPA attest to procedures and findings)?

If the answer to either of these questions is yes, then consider the AUP option. Why? The Attestation Standards–the guidance for AUPs–are more defined and rigorous. And AUP procedures tend to be more specific than those in a consulting engagement.

If no third party reliance, then a consulting engagement may be the better option. Always ask, “Who will receive the report?” You need to know who will read and potentially place reliance upon the report. Then design the work product accordingly. 

Litigation Exposure

Are consulting engagements riskier than AUPs? Generally, yes—at least, in my opinion.

The safer option is to perform an AUP. In such engagements, you are asked by the client to perform particular procedures or you design procedures that the client approves (see SSAE 19). This specificity lowers the risk of potential litigation as it relates to your work product.

The flexibility of a consulting engagement, while helpful in designing creative deliverables, can be riskier because of the lack of specific client requirements. (This is why the consulting engagement letter is so important. You can clearly define what the client wants done.)

Now, let me provide you with an overview of the Consulting Standards. 

AICPA Consulting Standards 

You might call the AICPA Consulting Standards the CPA’s Swiss army knife. Why? Because of the diversity of services you can perform.

What services fall under these standards?

The consulting standards specifically address six areas:

1. Consultations – e.g., reviewing a business plan
2. Advisory services – e.g., assistance with strategic planning
3. Implementation services – e.g., assistance with a merger
4. Transaction services – e.g., litigation services
5. Staff and other support services – e.g., controllership services
6. Product services – e.g., providing packaged training services

CPAs often provide consulting services such as the following:

• Consultations with regard to complex transactions
• Fraud investigation services
• Internal control services
• Bankruptcy services
• Divorce settlement services
• Controllership services
• Business plan preparation
• Cash management
• Software selection
• Business disposition planning

Now, let’s review the characteristics of consulting engagements.

Characteristics of a Consulting Engagement

The characteristics of a consulting engagement include the following:

• Generally nonrecurring
• Requires a CPA with specialized knowledge and skills
• More interaction with client
• Generally performed for the client (usually, no third party sees the information)

But, what are the workpaper requirements for a consulting engagement?

Consulting Workpaper Requirements

Consulting workpaper requirements are minimal. Nevertheless, documentation is always wise.

The understanding with the client can be oral or in writing (I recommend the latter).

The consulting standards do not require the CPA to prepare workpapers, but you should do so anyway. The workpapers are the link between your work and your report. Also, the general standards of the profession, contained in the AICPA Code of Professional Conduct, apply to all services performed by members. The general standards state:

Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

By now, you’re probably thinking the Consulting Standards sound easy, I’ll bet the reporting requirements are challenging. Not so, my friend.

Consulting Reports

A report is not required, but if one is provided, the client and CPA determine the content and format. Again, define the particulars in an engagement letter. How’s that for flexibility? 

No Opinion or Attestation Report

For consulting engagements, the CPA does not issue an opinion or any other attestation report.

Subject to Peer Review?

Are deliverables created under the Consulting Standards subject to peer review? No.

Where Can I Find the AICPA Consulting Standards?

Here are the AICPA Consulting Standards. They are only a few pages in length. 

AICPA Consulting Standards Summary

The Consulting Standards provide us with a breath of options, enabling you and I to craft services and reports in the manner desired by our clients. This is one Swiss army knife that I will continue to use. 

Here is a table comparing consulting and AUP services. If needed, the table below scrolls horizontally.

Consulting vs. AUP

Question	Consulting	AUP
Procedure and finding format?	Usually no, but permissible to do so	Yes
Engagement letter required?	No, but best to obtain a signed agreement with specifications of what is to be done and the type of report to be issued (if any)	Yes
Work papers required?	Must obtain obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed	Yes
Report required?	No; report can be provided but no specific wording is required	Yes; specific wording is required
Opinion provided?	No	No
Offers a high level of flexibility in terms of structuring the engagement?	The approach and report (if one is issued) is very flexible	Accountants can design the AUP procedures but the client has to approve them
An attest service?	No	Yes
Provides assurance to third parties?	No, report can be provided to third parties but it is not an assurance report	Yes
Subject to peer review?	No	Yes

When a report is to be provided to third parties, consider using the AUP approach since it is an assurance service.

 

Read my article about AUPs (SSAE 19). 

Fraud Prevention for Small Governments

By Charles Hall | Fraud , Local Governments

Many small governments suffer losses from theft since they lack a sufficient number of employees to segregate accounting duties. There are, however, steps you can take to protect your resources. In this post, I provide ideas for fraud prevention in small governments.

Most government officials don’t realize that external audits are not designed to detect immaterial fraud (immaterial can be tens of thousands of dollars – sometimes even more). Such officials incorrectly believe that a clean opinion means no fraud is occurring in their locale – this is a mistake. External financial statement opinion audits are not designed to look for fraud at immaterial levels. Even if your government has an external audit, consider implementing fraud prevention procedures.

In a typical small government accounting setting, the city of In Between (as in between two stop lights) (population 1,202) has a mayor and three council members. The city has one bookkeeper (we’ll call him Dale) who orders and receives all purchased items; he writes all checks, reconciles bank statements, and keys all transactions into the accounting system. Dale also receipts all collections and makes all deposits. Mayor Chester signs all checks (vendor and payroll). (In a long-standing tradition, the mayor also graces the city Christmas parade float as Santa Claus.) With so little segregation of duties, what can be done?

The smaller the government, the greater the need for fraud prevention – even if Santa Claus in involved. And yet, these are the governments that most often don’t have the resources–whether the money to pay for outside assistance or employees to segregate duties–to prevent fraud. Here are few ideas for even the smallest of governments.

Low-Cost Fraud Prevention

First, let’s look at low-cost fraud prevention options:

• Have all bank statements mailed directly to Mayor Chester who will open and inspect the bank statement activity before providing the bank statements to Dale; alternatively, provide online access to Mayor Chester who reviews bank statement activity and signs a monthly memo documenting his review
• Once or twice a year, have council members pick two months at random (e.g., May and September) and review key bank statement activity (e.g., the operating and payroll accounts)
• Once or twice a year, have council members randomly select checks (e.g., ten vendor checks and ten payroll checks) and review supporting documentation (e.g., invoices and time sheets)
• Once or twice a year, have the mayor and council review receipt collections and related documentation (e.g., for two days deposits); agree receipts to bank deposits and to the general ledger
• Provide monthly budget to actual reports to mayor and council
• Provide monthly overtime summaries to mayor and council
• Do not allow Dale to sign checks
• Require two signatures on checks above a certain level (e.g., $5,000); have two of the council members (in addition to the mayor) on the bank signature cards; supporting documentation (e.g., invoice) should be provided to check signers for review
• Require Mayor Chester and Dale to authorize any wire transfers
• Have Dale provide the mayor with monthly bank reconciliations; the mayor should document (e.g., initial the reconciliation) his review
• Don’t provide Dale with a credit card
• If Dale is provided a credit card, provide him with one card; use a low maximum credit limit (e.g., $1,000); Dale’s credit card statements should be provided to the mayor when he signs the related check for payment
• Use a centralized receipting location (if possible); receipts should always be written upon collection of a payment

Higher Cost Fraud Fraud Prevention

Now let’s examine some higher cost options (that are probably more effective):

• Have an outside CPA or Certified Fraud Examiner (CFE) perform the receipting and payment tests listed above
• Have an outside CPA or CFE map your internal control system and make system-design recommendations
• Have an outside CPA or CFE make surprise unannounced visits (e.g., two per year) to examine the receipting system, payroll, and the payment system; at the beginning of the year, tell Dale that the surprise visits will occur (details of what will be tested should not be communicated to Dale)
• Install a security camera to record all of Dale’s collection and receipting activity
• Purchase fidelity bond to cover elected officials and Dale

Keep in mind that you can limit the cost of the outside CPA. The contract might read Surprise audit of vendor payments with cost limited to $1,500. Try to contract with a CPA or CFE with governmental experience. The surprise audits and the fidelity bond recommendations are, in my opinion, the most critical steps.

Some states like New York audit local governments for fraud; consequently, if your local government is frequently audited by a state agency, there may be less of a need to hire an outside CPA or CFE to perform fraud prevention procedures.

Additional Fraud Prevention Resources

Click here for a list of local government controls to consider.

For additional insights into preventing fraud in your government, get The Little Book of Local Government Fraud Prevention on Amazon.

CPA Client Interviews: Four Keys

By Charles Hall | Auditing

Today we talk about four keys to better CPA client interviews.

Many times I have interviewed accounting staff and walked away thinking, “I have no idea what they just said to me.” Do you ever have this problem? If yes, this article is for you. Below I provide four keys to better client interviews.

In my early years–fresh out of college–I would think: “I must be stupid. It’s obvious, he understands what he just said, but I don’t.” Often my anxiety would increase when I realized the interviewee (e.g, accounts payable clerk) had no college degree (and me, a masters in accounting).

Reasons We Don’t Understand

After years of performing client interviews, I realized that I wasn’t dense (at least, not as much as I thought), and that I was encountering what The Art of Explanation calls, the “curse of knowledge.”

What is the “curse of knowledge?” It’s when someone knows a subject very well, and, consequently, has a difficult time imagining what it is like to not know it. I was experiencing the “curse of knowledge.” Those I interviewed thought I knew what they knew. As a result, they left out details.

Also, those I interviewed had years of experience doing the same job day after day. Of course they understood what they did. But I had less than an hour, in many cases, to grasp their duties.

Additionally, those I interviewed used a language unique to their office, and I, mistakenly, tried to use a different language—one I had learned in college. The result: we did not understand one another. So how can I communicate and comprehend better?

Here are four CPA client interview ideas guaranteed to to help. 

Four Keys to CPA Client Interviews

1. Pay attention to their language and use it.

If they call it a thingy, then I call it a thingy.

2. Seek understanding more than trying to impress.

I often want to impress more than I desire to understand. The remedy: Admit (maybe even out loud) I don’t know everything.

I tell the clerk, “Treat me like I don’t know anything. I’ve never been here, so I need your help in understanding what you do.”

To higher level personnel (e.g., CFO), I might say, “I have worked in this industry for fifteen years, but I need your help to understand how you guys operate.”

3. Repeat what is said to you.

For example, “May I repeat what you just said to make sure I understand? ‘The thingy is created once per week on Mondays to ensure that total receipts agree with deposits.’”

4. Use your cell phone to take pictures and to record parts of the interview.

Just last week, I reviewed a complex accounting system (for about three hours). As I did so, I used my cell phone Evernote app to take pictures of computer screens and printed reports. I also used the app to record parts of the conversation. Later, I summarized the conversation in memo form (complete with pictures).

Scanbot is another useful iPhone app if you take pictures of client information. By using your phone to take pictures, you can leave your physical scanner in your office.

Your CPA Client Interview Ideas

Have I left out any key interviewing ideas? Please share your thoughts.

Check out my series of articles about auditing.