Thursday, October 25, 2007

How can it already be Thursday?

Monday: Busy day. No post.

Tuesday: Construction incident about a mile from my office and we lose power for several hours. Interestingly, a building right by the incident only lost power for a minute. We lost it for several hours. So I join one of my partners for a while as he interviews possible interns for tax season. Then I came back and got the network up. Went home because I didn't feel well. No post.

Wendesday: Stayed home sick. Watching TV all day because you don't feel good is really boring. Although I did get to watch Jerry Springer. No post.

Thursday: I'm getting ready to go home and realized uh oh no post.

Wednesday, October 17, 2007

I Don't Understand Some CPA Firms

I plain just don't understand some CPA firms.

I had the pleasure to meet today with an area company that is currently with another CPA firm. The office manager and I worked together in the past, so it was wonderful to see her after several years.

The State of Michigan needs money, so they are sending out self-audit forms on Use Tax. Use Tax is what you pay on something that you would have paid Sales Tax on. For example, you buy a book from Amazon. If you live in Michigan, Amazon doesn't charge you sales tax because they don't have a physical presence here. But if I bought the same book at Borders or Barnes & Noble, they'd charge me sales tax. So you are supposed to pay use tax. Voluntarily.

Anyway, the office manager asked for help from the current CPA firm. They seem highly uninterested in helping. That alone boils my blood.

So I started looking at what this current firm does for the entity. Among other things, they are issuing a quarterly compiled balance sheet and income statement. Why? Why?? The bank isn't asking for it. The office manager with a small amount of additional training can do this herself using QuickBooks.

I sat with her and the owner and said I see no reason for them to do quarterly statements with a CPA report on them. I recommend they do an annual statement, but the quarterly is a waste of money.

This all reminds me of the famous story of Henry Ford and the Model T - you can get it in any color you want as long as it is black. This CPA firm seems to take all clients and fit them into one standard mold of how things get done.

And that just isn't right. And I try not to do things that way.

Monday, October 15, 2007

The Real End of Tax Season Part II

I'm remembering way back to when I was a young accountant at what was then Deloitte Haskins + Sells. I think it was the start of baseball season. I was talking with a guy named Bruce, who was a couple of years senior to me, and asked him if he was excited about the start of baseball season. Bruce said in reply:

There are only two seasons. Hockey season, and the rest of the year.

I'm remembering that because there are, in my life, only two seasons: Tax season, and the rest of the year. Tax season for all intents and purposes really does end on April 15. We then get to breathe pretty easy for the spring and summer.

Once you get past October 15, you start to think in earnest about the next tax season.

So, a new tax season starts tomorrow.

Why don't I remember the rest of the year?

Auditing Standards Board to Redraft Standards as Part of Clarification Project

The Auditing Standards Board has begun a "clarity" project to make auditing standards easier to understand. The ASB has said it hopes to do the following with this project:
  • Separate requirement paragraphs from the application text, so auditors can identify the requirements more easily;
  • Include an objective within each standard to help auditors understand what the standard is meant to accomplish; and
  • Set the same effective date for all “clarified” standards. The date will be far enough in the future to allow firms sufficient time to update their methodologies and training programs.

Harold Monk, ASB Chair, also indicated that this is part of the project to bring greater harmony between US and International auditing standards. I heard him speak recently at a conference on changes in auditing standards and was very impressed by him.

Sadly, they aren't going to make the standards any easier.

Wednesday, October 10, 2007

Uptick in IRS Audits of S Corporations

The IRS has indicated that they are going to increase the audits of S Corporations. They are keeping their words.

We're seeing a lot more of them. Generally we aren't seeing significant, if any, adjustments coming from them. We like to think that is because we are doing our job well.

One thing we are especially noticing is that S Corporations that use an employee leasing company (also known as a Professional Employer Organization) seem to be getting audited at a higher rate (this is an unscientific observation).

If you are using employee leasing, then you technically don't have wages to report on the officer's compensation and wages paid to employees lines. That's because you don't have employees - everyone is the employee of the leasing company. Instead you report that cost on the other deductions line.

Please keep this in mind - there is absolutely nothing wrong with using an employee leasing company. We ourselves use one, as do many of the companies we work with. They make sense in many situations. It just seems that is piquing the interest of the IRS.

The Real End of Tax Season

Most people think tax season ends April 15th.

Nope.

The real end is October 15th. That is the final due date for individuals, partnerships and limited liability companies.

What happens is things are nuts until about April 10th. By then you know what will get issued and what will be extended.

And then a lot of them just sit, because six months is a long time. Which goes by real quickly. I've got one left to go out. I already sent a draft out and now I'm just waiting for their ok.

So if one tax season is ending, I guess that means another one isn't far behind.

Countdown to a Cure - NephCure Foundation

I had the honor to attend and be a part of the Countdown to a Cure program held last night October 9 at the Michigan Theater in Ann Arbor held by NephCure Foundation.

The NephCure Foundation is the only organization solely committed to seeking a cause and cure for two potentially devastating kidney conditions, Nephrotic Syndrome and Focal Segmental Glomerulosclerosis (FSGS). NephCure is made up of patients, their families and friends, researchers, physicians and other healthcare professionals joining forces to create awareness and generate funding for research.

The disease generally strikes young children. Not all children respond to existing treatment, and those that do respond often have sever side effects. NephCure is seeking to discover the cause to these horrible diseases, and then find a cure.

I have had the privilege of being associated on a professional basis with NephCure over the last few years.

Monday, October 8, 2007

CPA 2.0?

Rick Telberg, a consultant to CPAs, raises the question in his weekly email today if it is possible for the CPA "profession" to reinvent itself as an "industry."

Interesting question.

Friday, October 5, 2007

SAS No. 112 and Who Does Your Financial Statements

Lot of discussion this week at the Audit Risk Conference on Statement on Auditing Standards ("SAS") No. 112, Communicating Internal Control Related Matters Identified in an Audit. Most of the Risk Assessment standards become effective at the end of 2007, but SAS No. 112 was effective at the end of 2006.

A big issue that came out of SAS No. 112 related to preparation of an entity's financial statements. Historically, an entity's CPA firm would assist in drafting the financial statements, including the notes to the financial statements. Let's be realistic - most small businesses do not have the in house capability to do this themselves, or even if they do would prefer that the auditor, who has a lot of experience in this area, do it.

SAS No. 112 though makes it clear that an entity has the responsibility to do draft its financial statements, including the notes. If the auditor does it, then the entity has essentially included the auditor in its internal control structure. And SAS No. 112 says you can't include the auditor in your internal control structure.

This is a problem for many companies. If they keep the status quo, then the auditor has to issue a letter stating that the entity has a significant deficiency in internal control in this area. This can lead to problems in some instances.

Solutions:
  1. Demonstrate the capability to supervise the work done by the auditor. If possible, then there should be no significant weakness.
  2. Don't make a change. Many entities are fine with getting this as a significant weakness.
  3. Bring in a second accounting firm to specifically prepare the financial statements and notes prior to the auditors coming in.

The auditing theorists really like that 3rd idea, and think it will happen a lot as time goes forward. In theory it makes sense, but I'm sure there are CPAs out there who are afraid the second accounting firm will try to take over the entire account.

For my part, I'm doing audits where a second firm is involved. In both cases, I got brought in by the second firm. We've arrived at a situation where we respect what the other is doing and work well with each other to service the client. Which is what it is all about anyway.

Wednesday, October 3, 2007

Las Vegas

As I mentioned in my previous post, I was in Las Vegas for a conference. I went by myself. Stayed at the Flamingo, which was where the conference was held.

It reminded me of when my friend Bill and I went to Europe for six weeks after we graduated from Michigan - we did the whole tour Europe deal and it was hard work. One mistake we made was we went to Venice. Ok, Venice was interesting to see, but it is a city made for lovers. What, were Bill and I going to go on a gondola ride together?

So there I was in Las Vegas by myself. I wound up getting a piece of pizza for dinner on Monday at a place at New York New York. What was I going to do - sit in the ESPN Zone by myself?

The water show in front of Bellagio was cool though.

The Risk Assessment Standards - Part I

I was in Las Vegas the first part of this week for training on what is being called The Risk Assessment Standards. The Auditing Standards Board has issued 11 new Statements on Auditing Standards over the last 18 months, and all become effective for this year end (some were effective for the 2006 year end).

The vast majority of audits I have performed over the last 12 years or so have been primarily substantive in nature. That means you do a tremendous amount of testing of details - agree account balances to vendor invoices, confirm accounts receivable, etc. And it has meant placing little or no reliance on the entity's internal control structure. Frankly, this was usually the most efficient approach. Why would I want to spend say 8 hours testing controls if it would only save me 2 hours of audit testing time.

This primarily substantive approach is still possible under the risk assessment standards, but now instead of just saying "control risk at maximum" you have to document how you came to that conclusion.

Instead, we will be working on getting an even better understanding of the business, and then ask "what could go wrong?" Perhaps the business is a construction contractor that uses the percentage of completion method - that is a complicated calculation and it "could go wrong." Once you have identified these risks, you determine how you are going to respond.

Result: auditors should be more focused on the risk areas and should do a better audit.

More on this coming.