Posted on Nov 5, 2016

After a formal audit, audit rules require a management communication letter presented to the owners, leaders and/or audit committee that outlines control deficiencies. The individual(s) overseeing the audit process will need to confirm receipt of the management letter and sign off on the stated deficiencies and/or demonstrate how they have already been handled in a formal response. Financial institutions may request copies of these audit findings from the company.

 If there are deficiencies that require immediate or timely improvements by the company, the company will have to show how and when those deficiencies will be addressed and communicate the plan to the financial institution(s).

Beyond that, the audit team’s “job” is done. It is up to the company to determine how to make internal controls or process improvements that support compliance. However, a knowledgeable audit team will give leaders and owners some items to think about beyond fulfilling the requirements of the management communication letter.

Typically, a senior member of the CPA firm will follow up with the owner, CFO or accounting staff and talk to them about operational or financial health and efficiency. It is this discussion — before, during and after the audit — that sets audit teams apart. During that follow-up call, the audit team sets the tone for an ongoing relationship with management and business owners. Ideally, clients will contact the audit partner with questions or concerns throughout the year — for compliance and growth considerations. Owners may have questions about employment growth and overtime rules. They may want to know if an employee benefit plan audit is required, or the timing of a merger. Audit teams can often be the first people who see the advantages of a change in entity structure.

A proactive follow-up by your audit team can make the difference between a dreaded annual obligation and an anticipation of true advisory support. It may never be an amusing experience to see your audit team, but the right team can give leaders the value from their many years of reviewing financial statements, putting issues in context and identifying a new direction for the coming year. For us, it’s not just a job. It’s a relationship that begins — or strengthens — once your audit is complete.

Download the Whitepaper: The True Benefits of an Audit or Review of Financial Statements

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 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 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.