Posted on Oct 21, 2016

Let’s look at some of the issues that an audit or review can bring to light for business owners and how it helps owners make better business decisions.

Keep in mind that experienced external audit teams conduct multiple engagements each year. The best teams stay up to date on changes in audit or review standards through their profession and the industries they serve. They also get a sense of best practices from seeing the best and the not-so-great examples of financial management.

For example, the team may notice that the size or level of experience in the accounting department has not kept pace with the growth of the company. Timing may be right to hire a controller or CFO or to consolidate accounting departments in multiple locations to one central location. Perhaps key financial measures that are typical of the industry are not in place to properly forecast…or A/R is consistently dated 120 days or more.

These issues will be brought to light by an experienced external audit team… issues that internal management may not notice or want to change. We find sometimes that aversion to change or personality conflicts can inhibit improvements in an accounting department — issues that an independent audit can recognize and communicate to owners for objective, third-party validation.

Experienced auditors will take notes on these improvements and also provide insight to the owners and staff as they go through the audit process. Some of their notations may not be required in the official opinion to satisfy compliance, while others are specific to the company culture and goals.

Auditing and Independence

The guise of independence stops some auditors from consulting during an audit and sticking to a checklist. In reality, independence has four parts: (1) auditors can’t function in management and make improvements for the company; (2) they can’t perform the accounting work they are auditing; (3) they can’t advise for personal benefit only; and (4) they can’t act as an advocate for the client to a third-party. However, providing suggestions for improvements is acceptable as long as the audit team steps back and lets the business owners make decisions and implement them.

It’s not an easy role to bridge the gap between compliance and business advisory. It takes a skilled auditor to see the forest for the trees — that is, interpreting the processes and accounting into actionable business steps.

Because a team may be on site for one or two weeks depending on the scope of the engagement, the following are additional areas they may note for later discussions from a tax or advisory services perspective.

  • Improvements to internal controls, company reports and disclosures
  • Reviewing how transactions are processed
  • Accounting department structure and capabilities
  • Accounting software or hardware recommendations
  • Consulting on entity structures or planned entity structures
  • Consulting on expansion plans in other states
  • Methods to improve cash flow
  • Debt and financing structures
  • Industry thought leadership and research

Building rapport and a relationship with the business owner, staff and audit committee members can bring these needs to light. The audit team is on site to do the job efficiently, but that doesn’t mean they have to be impersonal.

Continue Reading: What can business owners expect for follow-up after an audit or review?

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

Posted on Oct 11, 2016

The True Benefits of an Audit or Review of Financial Statements, Audit and Review Benefits

An independent audit or review of a company’s financial statements by external auditors has been a keystone of confidence in the world’s financial markets since its introduction. However, when discussing the value of audited or reviewed financial statements with privately held, middle-market business owners and operators, their views might fall more along the lines of obligation to bank terms rather than any true benefit to the business. In fact, industry-focused audit teams can deliver many business insights. With the help of an audit team, business owners can improve controls and operational inefficiencies while gaining a sense of best practices within their industry. An annual audit or review can support proper regulatory reporting and compliance, implementation of accounting standards in a timely manner and improved company KPIs for forecasting.


It’s a rare experience when clients are truly happy to see their audit team.

They may like the people on the team and value their experience, but they may not enjoy the requests for data, the potential on-site distractions or the issues an audit team may discover.

wp-download-audit-benefitsAs a CPA and career auditor in the Dallas area, I didn’t know if I could offer a different spin on this subject. Google tells us that an audit is defined as an official inspection — typically by an independent body — of an individual’s or organization’s accounts. A review is defined as a formal assessment or examination of something with the possibility or intention of instituting change if necessary. Based on those definitions, it started to take shape in my mind…official inspection? Formal assessment or examination? None of those sound all that amusing to get business owners to appreciate the experience.

OK, I am under no illusion to make the case that an audit or review will be amusing. However, I can provide some insight on how an audit or review is helpful beyond satisfying a bank’s (or other financial institution’s) credit requirements. The larger — and often unsung — benefits to a business owner are worth the effort.

What are the benefits of an audit or review of financial statements?

We’ve already mentioned the obligatory reasons that companies schedule audits or reviews. Depending on the requirements of a bank or financial institution, business owners will need to seek an independent and outside perspective on the company’s financial statements. The chosen audit services team, at a minimum, should be able to review documents, processes and procedures and then issue an educated opinion on the general health of the financial statements.

I say “at a minimum” because that is all the audit services team is really engaged to do. To get the job done, they can go down their checklist, issue an opinion and get out of the business owner’s way. For some business owners, that may be enough. For others, there can be many more benefits to the audit or review experience.

A focused audit planning meeting in the fourth quarter is really the best place to start. With an experienced audit team, this doesn’t have to take long. They should ask questions about what’s going on in the business now as well as the owner’s short- and long-term goals; it helps the auditors look for issues, develop a plan for the engagement and open the lines of communication between management and the audit team. Prior to the audit planning meeting with the client, the engagement team will meet to review the previous years’ audit to give the whole team proper context on the client, its operations, areas for improved efficiency and unique things about the client and the engagement.

Bringing years of experience from other business situations is another plus during this planning meeting. The common complaint of having to “educate” the audit team about your company or industry shouldn’t happen during the audit. An experienced team will already have that knowledge base and use their time for constructive feedback throughout the engagement.

Speaking of consulting, keep this in mind. As a business grows, the complexity of a finance department changes. General bookkeeping gives way to the need for internal accounting staff, then a controller, then possibly a CFO. Companies traditionally engaged a CPA firm to support historic accounting, tax and assurance services, but as the competitive stakes get higher, owners need more sophisticated advisory services to keep pace with change. Auditors should ask the question: Why are you doing it that way? If the answer is: “That’s how we’ve always done it,” then it’s an opportunity for real time insight during the audit engagement. An audit team should not be viewed only as an enforcement agency that stops business owners from breaking the rules.  

When looking for an audit services team, owners and/or audit committees have to consider what they are really receiving from the engagement. Here are a few key characteristics to consider:

  • Does the audit team have industry-specific experience that can provide broader industry insights?
  • Is the audit team aware of industry and technical regulatory requirements that are specific to the company’s industry?
  • Has the audit team worked with similarly sized businesses to understand best practices for accounting requirements, company reports, controls and disclosures?
  • Has the audit team provided insight on accounting department staff capacity and levels of experience as they relate to the size of the company and its growth goals?
  • Will the audit team share operational best practices beyond providing baseline assurance on the financial statements?

This list may be considered above and beyond the confines of a typical audit or review — and owners may wonder if the price tag goes with it. In fact, an experienced audit services team can note many of these needs or issues within the timeline and hours of a competitively priced audit engagement. They know what to look for and can do it efficiently.

Continue Reading: How can an audit or review help business owners?

MR HeadshotMike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

Posted on May 2, 2016

In May 2016, we were honored to participate in the D-CEO Magazine Accounting Roundtable. Our newest partner, Mike Rizkal, CPA sat down with other leaders from accounting firms in the Dallas area to discuss the current state of business accounting, economic variables, and the various trends that affect our clients.

To read the full article on DCEO’s website, click here.

How is the location of a CPA firm office relevant to the decision to work with them?

Location is still a big factor, but no longer a deal breaker. Due to advancements in technology, we can now serve more clients that aren’t geographically located in our backyard while still maintaining the efficiency and personal touch of a face-to-face meeting. The advancements in online collaboration and meeting tools have changed our industry significantly and will continue to play an important role in how we service our clients. We invest in technology that matches our clients’ desire for convenience, and then we address their preferences for communication to deliver the best service possible. For traditional tax and audit compliance, those services are built around collaboration and often work best with a local CPA. However, a firm that has the capability to work remotely through cloud-based technologies can bridge the gap of geographical distance.

Is bigger better? How does the size of firm impact clients?

In our experience, going with a bigger firm doesn’t always guarantee better services or solutions. It is all about balance. Certainly for some larger entities and public companies a “name” firm carries weight with investors. However, in the middle market segment in which we serve, service is paramount and our competitive fees create more flexibility for ownership. Clients should focus on finding a firm with a solid reputation within the financial community that directly impacts them. When searching for an accounting firm, companies should consider: direct and easy access to partners, the capabilities of the firm to help solve their problems or provide referrals to other trusted service providers.  The most common reason for change to a new CPA firm is that the client felt “lost in the shuffle.” Therefore, it is important to find a firm that can deliver on the level of service offered during the proposal process. Don’t  buy based on size alone.

Do your clients rely on their CPA firm to make recommendations of trusted advisors in other service areas?

We spend a lot of time making sure we have strong alliances so we can refer clients to someone we trust. If we are not confident in the level of service they will provide, we do not refer them. The key to a successful recommendation is to know the needs of your client first, then match them with a specific service provider with experience that meets those needs at a value-based cost. Matching the personality of the client with the potential service provider is also an important factor in the referral selection. We go beyond simply providing a recommendation. It is our hope to provide a referral that leads to a successful relationship.

We spend a significant amount of time in the business community developing relationships that we believe can benefit our clients. Even after the referral, our team stays involved to ensure our client has a positive experience and the desired results are achieved.

How are your clients balancing the importance of providing strong earnings for banking needs versus reducing the amount of taxes paid?

All clients are looking for opportunities to reduce the tax burden while continuing to produce strong financial results that attract capital. We have found the answer to this question to be a combination of strategic tax and financial planning. This is often achieved through balance and communication.

There are several strategic tax planning opportunities that do not negatively impact the company’s earnings or common financial measurements. Banks are not purely concerned with earnings, but instead focus on the overall stability and financial health of the company.

We feel that it is important to help our clients through strategic planning to reduce the tax burden while maintaining strong financial performance. Then we work with our clients to communicate these strategies to their financial institution. We have often found that communication helps manage surprises and keeps our clients and their lenders on the same page regarding specific tax planning strategies and expected earnings.

How do tax laws and incentives in Texas benefit your clients?

Texas undoubtedly is one of the most business friendly states in the nation and has one of the lowest tax burdens in the country. Clearly, based on current economic performance of the state, Texas has done a good job incentivizing companies to do business in the Lone Star state. Unlike many other states, Texas does not impose a personal income tax or a corporate income tax. Texas’ margins tax was established to provide a broader, fairer tax assessed at a lower rate. There are numerous other tax incentives and laws that make Texas a business friendly state, including property tax incentives, sales and use tax exemptions for manufacturing, research and development and business relocation deductions, just to name a few. We look at every advantage and weigh it against the goals and financial results of every client before recommending a solution.

What unique marketing programs have you implemented to grow your business?

We are being very segment focused and promoting thought leaders in the industries we serve. We are increasing our web presence to encourage online leads, because a lead indicator among growing firms is website visits. We haven’t prioritized our website in the past, and I think the industry in general has underestimated buyer behaviors toward online search and comparison shopping.

We are promoting technologies that reduce client fees and improve operational efficiencies. Especially in services where we are experts, we are looking at solutions that make us attractive to clients for outsourcing such as payroll services.

What are obstacles that impede the growth of your clients’ businesses?

The biggest obstacles to growth are often corporate governance and finding and attracting talent. There are many issues that affect our clients’ businesses. Few owners can solve them all on their own. Many business owners are top-line focused and struggle to address the other challenges affecting the company primarily due to lack of time. Business owners need to invest inside the company as much as focus on new business development in order to remain competitive on all fronts. Keeping talent, investing in the right technologies and managing a diverse and mobile workforce are the biggest challenges to growth.

What is the best formula for creating a valuable and successful relationship between you and your client?

The key to creating a valuable and successful relationship is proactive involvement and communication. We strive to be actively involved in our clients’ businesses through tax planning and regular interaction throughout the year. Every client wants to feel attended to on a professional and personal level. We have leveraged internal resources, technology and our team to ensure follow-up with clients so they are well informed during every stage of the engagement. Our focus as professionals, then, is to exceed expectations with our attention and value-added services.

How should companies evaluate the effectiveness of their accounting firm?

Companies can evaluate the effectiveness of their accounting firm by assessing whether they feel the firm goes above and beyond to meet their expectations.

  • Is the team simply completing the task they’ve been assigned or are they spending time proactively planning for the engagement to ensure the best client results in the most efficient manner?
  • Is the accounting firm providing the right level and type of communication as to the status of the project and the expected delivery date?

Proactive service means showing clients what they want before they know they want it. Clients need to hold their accounting firm to a standard of meeting promises and expectations. A CPA must be engaged in the relationship to know what can make a difference.

As a trusted advisor, what are you doing differently today to provide additional value to your clients?

We are striving to be more than just a service provider. We want our clients to view us as a resource to help with their business challenges. We encourage communication by offering an unlimited phone calls and meetings retainer to every client.  We want our clients to know that simply calling us to discuss a solution is not going to cost them.  These conversations often uncover opportunities and needs and enhance our client relationships.

Our professional team brings value to the table from a background of various industries and experiences, which can often be translated into a unique solution for our clients’ needs.

How has the use of technology impacted how clients run their business — are they willing to make the investment in this economy?

The advancements in technology and increases in efficiency it creates are often too big to ignore. During the recent downturn of the economy, companies sought out opportunities to leverage technology to decrease overhead and increase profitability. Although there has been some economic improvement, companies continue to look for new ways to increase efficiency. This is often achieved by leveraging new technology. We focus on making technology recommendations that fit our clients’ needs and help our clients assess the cost/benefit of their technology investments. It can be as simple as setting up ACH bill payment through their bank or investing in an ERP system. We live in a technology-based world at a time of high competition and increased demand for efficiency. Our clients are willing to invest in solutions that reduce overhead costs, increase efficiencies and help them remain competitive in today’s economy.

What are the most important issues impacting your client base today?

There are numerous issues impacting our clients, including increased competition, pricing, talent retention, taxes, succession planning, changes in healthcare regulation, increased compliance complexity and demand for efficiency.

We take pride in helping our clients navigate these challenges by being proactively involved in their business. Clients need an advisor to help prioritize and weigh their decisions, provide insight based on experience in their industry, and assess the financial impact of these decisions. Our goal is to help our clients make the best decision they can to provide a solution they can be confident in.

How do you keep up to date on issues that impact your clients?

We attend trade shows and conferences within our industry and the industries in which our client operate. Spending time with our clients is how we get the first-hand information on issues and trends affecting their industry. We see it as part of our job to stay in contact and be experts in our clients’ segments. We want to give clients a head start on what’s coming — and it’s constantly changing.

Often the concerns of here and now outweigh what’s coming in the future. It’s natural. Attending these conferences helps our professionals stay aware of upcoming changes in the industry, which allows us to provide knowledge to our clients regarding the latest trends, and in turn this helps our clients succeed in today’s competitive market.

What keeps your clients up at night?

The issues that keep our clients up at night are numerous and often different based on the industry in which they operate and the lifecycle stage of their business. Companies are always balancing the long-term decisions to remain competitive with the short-term concerns about payoff. What’s the short-term reward for the long-term investment? It’s human nature to worry about that. Are we on the right track? Can we keep the key people we need to succeed? Not to mention the normal concerns all business owners face, such as meeting revenue targets, maintaining healthy cash flow, technology investment and managing increased regulation. During these times of increased complexity it is important to find a trusted advisor that can help navigate the ever-changing business environment.


MR Headshot

Mike Rizkal, CPA has been with Cornwell Jackson for over ten years, and leads the firm’s benefit plan and financial statement audit practice. He specializes in providing a variety of services to privately-held middle market businesses, with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries.

View Mike Rizkal’s full bio here.

Posted on Apr 13, 2016

The primary objective of a benefit plan’s financial statements is to provide information that is useful in assessing the plan’s present and future ability to pay benefits.

Benefit Plan Audit Guide

Financial reporting for employee benefit plans financial statement audits may involve many parties, including the plan sponsor’s financial accounting and human resources departments, a third-party administrator, investment trustees and custodians, an actuary, ERISA legal counsel and the independent auditor. Plan management may hire service organizations to perform record keeping and reporting functions, but the ultimate responsibility for accurate financial reporting rests with plan management.

One of the most important duties of plan management is to hire the independent auditor. In some cases the plan sponsor may have an audit committee, employee benefits committee or administrative committee that oversees the financial reporting process, including internal control over financial reporting and the appointment, compensation and oversight of the independent auditor. The plan financial reporting and audit environment is unique in many respects, including the nature of plan operations; the various laws and DOL and Internal Revenue Service (IRS) regulations with which plans must comply; and special reporting and audit requirements. These matters, which affect every plan, add to the complexity of an employee benefit plan audit. Other matters that may complicate the plan reporting and audit process may include changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations.

Purpose and Objectives of the Independent Audit

The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.

Financial statement audits provide an independent, third-party opinion to participants, plan management, the DOL and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. A financial statement audit helps protect the financial integrity of the employee benefit plan, which helps users determine whether the necessary funds will be available to pay retirement, health and other promised benefits to participants. The audit may also help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. And the audit helps the plan sponsor carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.

The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements as a whole.

To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance (see a discussion of reasonable assurance below) that material misstatements, whether caused by error or fraud, are detected. The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management. The auditor tests evidence supporting the amounts and disclosures in the plan’s financial statements and DOL-required supplemental schedules; assesses the accounting principles used and significant accounting estimates made by management; and evaluates the overall financial statement presentation to form an opinion on whether the financial statements as a whole are free of material misstatement.

General Benefit Plan Audit Considerations

The following are some general audit considerations for all employee benefit plan financial statement audits.

  • Generally Accepted Auditing Standards
  • Adequate Technical Training and Proficiency
  • Professional Skepticism
  • Auditor Independence
  • Reasonable Assurance and Materiality
  • Professional Judgment
  • Auditor Communications

Full Scope vs. Limited Scope Benefit Plan Audits

Typically, financial statement auditors are engaged to audit and report on the reporting entity’s financial statements, including all assets; liabilities and obligations; and financial activities. These audits are performed without any client-imposed scope limitation or other restriction. ERISA is unique in that, when certain criteria are met, it permits plan management to instruct the auditor to limit the scope of testing of investment information included in the financial statements. This limited scope election must be supported by a certification from a qualified entity as to both the accuracy and completeness of the plan’s investment information. Such audits are referred to as “limited scope” audits. Plan management is responsible for determining that the conditions of the limited scope audit exemption have been met.

Full Scope vs. Limited Scope Image

Benefit Plan Audit Areas

The financial statement audit for employee benefit plans typically cover employee and employer contributions; benefit payments; plan investments and investment income (full scope audits); participant data; participant allocations; liabilities and plan obligations; loans to participants; and administrative expenses. In addition, the auditor considers other matters that may affect the financial statements, as shown below.

Benefit Plan Audit Areas

EBPAQC-Plan-Advisory-on-EBP-Financial-Statement-Audit CoverTo learn more about benefit plan audits, and to find out if one is required for your company’s 401(k) plan, download the whitepaper here: Guide to Employee Benefit Plans – Financial Statement Audits Whitepaper The Whitepaper includes:

  • Plan Financial Reporting and Audit Process and Management’s Responsibilities
  • Purpose, Objectives, and Benefits of an Independent Audit
  • General Audit Considerations
  • Full Scope vs. Limited Scope
  • Audit Areas
  • The Audit Process
  • Auditor’s Report
  • Your Role in the Audit Process
  • Additional Resources

For more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.

Posted on Apr 7, 2016

AuditPartnership IRS audits were up 18.6% in 2015 over the previous tax year, according to the agency’s Fiscal Year 2015 Enforcement and Service Results.

That’s the highest audit rate partnerships have experienced since 2006. By comparison, audits of large C corporations decreased by 8.8% in 2015.

The situation is expected to only get worse under the new rules for partnership IRS audits that were enacted last November under the Bipartisan Budget Act of 2015. The new rules also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners affected by the new partnership audit rules.)

Here’s what owners of these pass-through entities need to know, starting with the current partnership audit rules — which will remain relevant for a while longer.

Delayed Effective Date

The new partnership audit rules will generally apply to partnership tax years beginning after December 31, 2017. Affected partnerships may elect to apply the new rules to returns for partnership tax years beginning after November 2, 2015, and before January 1, 2018. But typically partnerships will be better off forgoing this election, since the new rules could make it easier for the IRS to audit them.

Current Rules for Partnership IRS Audits

Before delving into the new partnership audit rules, it’s important to review the current rules, which will continue to apply until the revised rules go into effect starting with tax years that begin in 2018. The IRS follows three regimes for auditing partnerships under the Tax Equity and Fiscal Responsibility Act (the law that was revised by the Bipartisan Budget Act).

  1. Unified Audit Rules. These rules generally apply to partnerships with more than 10 partners. Under this audit regime, the tax treatment of partnership items of income, gain, loss, deduction and credit, as well as any additions to tax or penalties from IRS-imposed adjustments to partnership items, is generally determined at the partnership level. In other words, the IRS can conduct a single partnership-level audit to resolve all issues for partnership tax items. However, once the partnership-level audit is complete and the resulting adjustments are determined, the IRS must recalculate the tax liability of each partner for the affected tax year.
  2. Small Partnership Audit Rules. Unless the partnership elects to have them apply, the unified audit rules do not apply to a partnership with 10 or fewer partners, each of whom is an individual (other than a nonresident alien), a C corporation or the estate of a deceased partner. For these small partnerships, the IRS generally conducts separate audits of the partnership and each partner.
  3. Electing Large Partnership Audit Rules. These rules provide simplified audit procedures for partnerships with 100 or more partners that choose to be treated as large partnerships for federal income tax reporting and audit purposes. For such electing large partnerships, disputes over the treatment of partnership tax items are resolved at the partnership level. Then any IRS-imposed partnership-level adjustments generally flow through to the partners for the partnership tax year in which the adjustments take effect (the adjustment year), as opposed to the year that was under audit.

New Partnership Audit Rules

The Bipartisan Budget Act of 2015 repeals the current unified partnership audit rules and the current electing large partnership audit rules. They’re replaced by a single streamlined set of rules that call for auditing partnerships and their partners at the partnership level. Small partnerships can elect out of the new rules. (See below.)

Under the new streamlined guidance, any IRS-imposed adjustments to partnership items of income, gain, loss, deduction or credit for the applicable partnership tax year (and partners’ shares of such adjustments) are determined at the partnership level. Subject to the exceptions outlined below, any resulting additions to tax and any related penalties are generally determined, assessed and collected at the partnership level.

Under the new rules, the IRS will audit partnership items and partners’ distributive shares for the applicable partnership tax year (called the “reviewed year”). Any adjustments are taken into account by the partnership (not the individual partners) in the adjustment year.

Partnerships generally must pay tax equal to the imputed underpayment amount, which generally equals the net of all IRS-imposed tax adjustments for the reviewed year multiplied by the highest individual or corporate tax rate in effect for that year.

Partnership Adjustment Options

Under the new audit rules, partnerships will have the option of demonstrating that an adjustment would be lower (more favorable to partners) if it were based on actual partner-level information for the reviewed year, rather than imputed amounts based solely on partnership information for the reviewed year.

Such partner-level information could include amended returns filed by partners, tax rates applicable to specific types of partners (for example, individuals vs. C corporations and tax-exempt entities) and the type of income subject to the adjustment (for example, ordinary income vs. capital gains and qualified dividends).

As an alternative to taking an adjustment into account at the partnership level, the partnership can elect to issue adjusted Schedules K-1 for the reviewed year to its partners. In that case, the partners would take the adjustment into account on their individual returns in the adjustment year through a simplified amended return process. Schedule K-1 is the information return that must be provided to each partner. It shows the recipient partner’s share of all partnership tax items and includes other information needed to prepare that partner’s separate federal income tax return.

Finally, the partnership also has the option of initiating an adjustment for the reviewed year, such as when it believes an additional tax payment is due or a tax overpayment was made. The partnership would generally be allowed to take the adjustment into account either at the partnership level or by issuing adjusted Schedules K-1 to the partners.

As a result of the new rules, partners generally must treat each partnership item of income, gain, loss, deduction or credit in a manner that is consistent with the treatment of the item on the partnership return.

Exception for Small Partnerships

Similar to the provision in the current audit rules that exempts most small partnerships (with 10 or fewer partners) from the unified audit rules, the new rules allow eligible partnerships with 100 or fewer partners to elect out of the revised rules for any tax year. To be eligible for this election, all partners generally must be individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic entities, S corporations or estates of deceased partners.

If the IRS audits a partnership that has elected out of the new rules, the partnership and its partners will be audited separately under the audit rules applicable to individual taxpayers.

Managing Audit Risks

Although the new partnership audit rules are complex, they’re expected to make it easier for the IRS to audit large partnerships. When they go into effect, businesses that are set up as partnerships and multimember LLCs could be at a greater risk of being audited.

The IRS is expected to issue additional guidance on the rules, and it’s currently asking for comments to assist in the development of this guidance. Feedback is due to the IRS by April 15, 2016, and additional guidance is expected to come out during the summer.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s compliance practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas. Contact Gary today to learn more about IRS Audits for partnerships, and to see if your business is at risk.


Posted on Apr 6, 2016

Compilation, Review, and Audit Assurance Services

You’ve worked hard to get your business off the ground. Business is good— so good that you’re ready to trade up from your leased space and build your own building. You’ve met with the bank and they’ve given you preliminary approval on a loan package. But the bank representative says she needs to see your financial statements before she can finalize your loan.

You know that timely, accurate and understandable financial statements are necessary to gauge how well your business has performed and to assess the strength of its financial position. You know that they are the foundation upon which you make important business decisions.

You can prepare your financial statements in house, but if you’re like many small business owners, you may prefer to have an outside professional to prepare your financial statements in accordance with an accounting framework that is appropriate for your business.

Oftentimes, the certified public accountant (CPA) who performs your general accounting and/or bookkeeping and prepares your annual tax return can also prepare your financial statements and, in addition, perform the appropriate service in order to meet your bank’s requirements. Keep in mind that not all accountants are CPAs. In most states, only a licensed CPA can perform certain services.

Guide to Financial Statement Assurance Services

What are the differences between a compilation, review, and audit?

Compilation of financial statements is a service where the role of the CPA is more apparent to outside parties, and as such, the requirements for performing this service are more explicit.

For example, if the CPA is not independent from ownership, management and other circumstances in their relationship to you and your business, she is required to disclose the impairment to her independence in her compilation report. The compilation report is the first page before the actual financial statements and is written by the CPA on her firm’s letterhead.

The review service performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy.

The review is the base level of CPA assurance services. Similar to a compilation, the CPA is required to determine whether he is truly independent. If he determines that he is not independent, the CPA cannot perform the review engagement.

In a review engagement, your CPA is required to understand the industry in which you operate — including the accounting principles and practices generally used in the industry. Your CPA is also required to obtain knowledge about you — including your business and the accounting principles and practices that you use — sufficient to identify areas in the financial statements where it is more likely that material misstatements may arise.

The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements.

The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement. In an audit, your CPA is required to obtain an understanding of your business’s internal control and assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures. When performing an audit engagement, the CPA is required to determine whether her independence has been impaired. Similar to a review, if her independence has been impaired, the CPA cannot perform the audit engagement.

Financial Statement GuideTo learn more about the differences in assurance services, download our whitepaper Guide to Financial Statement Services – Compilation, Review and Audit. The Whitepaper includes:

  • Financial Statement Services Your CPA Can Provide
  • Basic Financial Statement Preparation
  • What is a Compilation?
  • What is a Review?
  • What is an Audit?
  • Service Comparison of Assurance Services

For more specific information about how the requirement of an audit or review will affect your company, contact our in-house expert, Mike Rizkal, CPA.

Posted on Mar 14, 2016

New retail space available for rent

Many companies choose to lease certain assets, rather than buy them outright. Leasing arrangements are especially common among construction contractors, manufacturers, retailers, health care providers, airlines and trucking companies that rely on expensive equipment or real estate in their day-to-day operations.

FASB Chair Golden Speaks Out

Here’s what Financial Accounting Standards Board (FASB) Chair Russell Golden has to say about the new standard on accounting for leases, according to a FASB News Release on February 25:

“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities. It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions. The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard.”

Financial Reporting Incentive to LeaseRoughly 85% of these leases aren’t reported on company balance sheets, according to estimates made by the Financial Accounting Standards Board (FASB). But that’s going to change under a new accounting standard — Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) — that was issued on February 25.

Management may decide to lease assets for a variety of reasons. For example, they may not have enough cash for downpayments or access to financing — or they may not want to bear the risk that equipment will become technologically obsolete or property values will nosedive. In essence, leasing can allow companies to be more flexible, lower risk and adapt to changing market conditions.

From a financial reporting perspective, leasing offers an added bonus: Under the existing rules, a lease obligation is reported on the balance sheet of the company that leases the asset (the lessee) only if the arrangement is similar to a financing arrangement — then it’s considered a capital (or finance) lease. Otherwise, it’s an operating lease, which is expensed as lease payments are incurred and the terms are disclosed in the footnotes.

For example, if you lease a computer for most of its useful life and can purchase it for $1 at the end of the lease term, the arrangement would likely qualify as a capital lease. But it you sign a five-year lease on office space, it would probably be classified as an operating lease under current practice.

Globally, this treatment has allowed companies to hide trillions of dollars of operating leasing obligations in their footnote disclosures, rather than report them on their balance sheets.

The FASB Finalizes Long-Awaited Leasing Standard

The lease accounting project has been on the FASB’s agenda for more than a decade. In 2013, the FASB proposed the latest round of changes to lease accounting, which were largely aligned with an international accounting proposal on leasing. But these proposals were met with significant opposition across the world. So, the FASB and the International Accounting Standards Board subsequently abandoned their effort to create a converged lease accounting standard and separately went back to their own drawing boards.

The finalized standard on lease accounting under U.S. Generally Accepted Accounting Principles is a watered down version of the FASB’s 2013 proposal. It still allows for a distinction between how capital and operating leases are reported on the income statement and statement of cash flows.

Under the new standard, on income statements, capital leases will continue to be treated as financing transactions, meaning interest and amortization will be calculated with rent expense. Because interest is calculated on a declining balance over time, the cost of capital leases will look more expensive at the beginning of a lease. Leases that qualify as operating leases will be treated as simple rentals on the income statement. So, companies with rental-type contracts would report lease payments evenly over time.

The big difference under the updated guidance is that all leases with terms of more than 12 months will be reported on the balance sheet. In other words, lessees will report a liability to make lease payments, initially based on the net present value of those payments, and a right-to-use asset for the term of the lease. Companies can also elect to capitalize leases with terms of 12 months or less under the new standard.

In addition, lessees will need to expand disclosures about the terms and assumptions used to estimate their lease obligations, including information about variable lease payments, options to renew and terminate leases, and options to purchase leased assets. As a practical expedient, the new standard allows private companies and not-for-profit organizations to use risk-free rates to measure lease liabilities.

The new standard also provides guidance on how to determine whether a contract includes a leasing arrangement and, therefore, must be reported on the face of the balance sheet. For example, some “combined” contracts include lease and service provisions. These components generally need to be valued separately, because ASU 2016-02 requires companies to report only lease provisions on the balance sheet. For simplicity, however, the FASB allows companies with combined contracts to elect to also account for nonlease provisions under this guidance, if they prefer.

The FASB defines a lease as, “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset.”

Updated International Rules Issued in January Regarding Lease Accounting

On January 13, 2016, the International Accounting Standards Board issued its updated guidance on accounting for leases. The FASB and IASB agree on how to report leases on balance sheets. The main difference between the two standards is how expenses are reported on the income statement.

In general, all lease expenses will be treated as financing transactions and capitalized under the international standard. For companies that follow the international accounting standards, the effects will spill over to their income statements and statements of cash flows, not just their balance sheets.

The international rules also permit exemptions for certain small ticket items, such as copiers and coffeemakers. But there’s no specific threshold for which assets are considered “small ticket,” requiring companies to exercise judgment.

Effective Dates of New Lease Accounting Regulations

Fortunately, you still have time to get your accounting systems and lease agreements in order. The new standard goes into effect for fiscal years beginning after December 14, 2018 (in other words, in 2019 for calendar-year public companies). Private companies have an additional year to implement the changes.

This doesn’t mean you should put this standard on the back burner for long. The changes could be significant from current accounting practices if you rely heavily on leased assets. And public companies will need to start collecting comparative data in 2017 to meet the regulatory requirements of the Securities and Exchange Commission.

For more specific information about how this new standard will affect your financial statements, contact our in-house expert, Mike Rizkal, CPA.

Posted on May 22, 2015

A Day in the Life of a CPA


I anxiously arrived at Deloitte for my first day of employment and met with my assigned mentor. He showed me the supply room and introduced me to some of the team members. I was so excited. The firm administrator, who everyone seemed to fear, delivered my business cards and gave me my first assignment. Throughout the interview process I knew I would be working on one of the largest engagements in the Tulsa office, however, it would not be starting for a couple of weeks so I got assigned to a special project working in the consulting group. I met with the consultant, Robert, to get started, and he outlined the project goals and indicated we would be working with a client located in Muskogee, Oklahoma.

The next morning we met at his house and drove to the client location. It was in January and very cold. During the 30 minute drive, Robert explained that the owner of the privately owned company, which manufactured and distributed toilet paper, was trying to understand why the manufacturing waste variance was at 27% when the industry standard was only 4%. Since we provided audit and tax services to the client, they decided to engage us to review the production records to determine the cause of the variance. Robert was certain it had to do with irregularities within upper management. Robert explained as we arrived that we were going to be disguised as the audit team starting the annual audit.

As we pulled up to the client, Robert explained things may get intense but not to worry if things get out of control. As he slid his Glock from under the seat, he reassured me that he would keep us safe if the situation became confrontational. I tried to recall from my college and CPA classes if this was something a CPA would normally encounter. I was very worried -but I was in Muskogee, Oklahoma with no car to run back to the office, so I decided to trust that it was going to be ok.

The receptionist led us to the conference room with the President and all the other officers of the client. They introduced us to our key contacts and we got started immediately. Our objective was simple: recreate ending inventory from production records. The process was tedious and the working conditions were difficult. It was 1992 and everyone that worked for the client smoked heavily so it felt like we were working in an ashtray.

As time progressed, the President and other officers became aware of our focus on inventory, so we told him that we rotated our testing and this was the year for us to focus on inventory. It was getting tense, but at the same time- we were making progress. The production manager fed us everything we needed to calculate what ending inventory should be based on production and shipments. Finally, we had the results.

We met with the owner and controller of the client to discuss our conclusions. It was obvious that inventory was being fraudulently removed from the warehouse. The owner wanted us to provide an opinion in writing that someone was stealing the inventory. We told him that under our CPA guidelines this was not possible. We could only give him the data we accumulated and he would have to handle it from there. He was furious and said he was not going to pay us and that he planned to contact his attorney to review his options of suing our firm for malpractice.

The next day we arrived at the client to gather our work papers and clear the field. It had been an exhausting 3 weeks and our efforts seemed to only make matters worse. As we were gathering our things, Robert asked me to fax his expense report to the office. The main fax machine was not working, so I asked the receptionist if there was another fax. She offered me the President’s fax machine and unlocked his office to allow me in to use it. I picked up a sheet that had been left on the President’s fax machine. It was a purchase order for toilet paper from a convenience store addressed to another company. I quickly realized the issues we had uncovered in ending inventory were directly connected to the President. He had been selling the inventory made by our client in the name of another company. I took it to Robert and by the next day they arrested the President. Robert and I went from goats to heroes, and the client was satisfied.

CPAs are called upon every day to help solve complex problems business owners face. We take both conventional and unconventional approaches to help business owners navigate seen and unforeseen challenges. We add value because our involvement provides our clients credibility in the financial markets.

I am now a partner at Cornwell Jackson with 23 years of experience. As CPAs and advisors, we work relentlessly to help our clients by going above and beyond to exceed our client’s expectations. Please contact us if you need a CPA that will provide solutions that help your business grow and prosper.

Blog post written by: Scott Bates, Audit Partner