Accounting Industry News

Here is the doorway to hundreds of articles, publications and resources that, from a professional perspective, practicing accountants will find priceless. Regardless of the area of specialization, this site offers up technical help, operational guidelines, industry information, breaking news and a toolbox of strategies to make running a business just a bit simpler.

• 2021 Standard Mileage Rates Decrease
  

  By Sally P. Schreiber, J.D.

  The optional standard mileage rates for business use of a vehicle will decrease once again in 2021 after increasing significantly in 2019, the IRS announced in Notice 2021-02. For business use of a car, van, pickup truck, or panel truck, the rate for 2021 will be 56 cents per mile after decreasing to 57.5 cents per mile in 2020, down from 58 cents per mile in 2019. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

  Because the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, suspended the miscellaneous itemized deduction under Sec. 67 for unreimbursed employee business expenses from 2018 to 2025, the notice explains that the standard mileage rate cannot be used to claim a deduction for those expenses during that period.

  However, self-employed taxpayers can deduct automobile expenses if they qualify as ordinary and necessary business expenses. And an exception to the disallowance of a deduction for unreimbursed employee business expenses applies to members of a reserve component of the U.S. armed forces, state or local government officials paid on a fee basis, and certain performing artists. They are permitted to deduct mileage expenses on line 11 of Schedule 1, Additional Income and Adjustments to Income, of Form 1040, U.S. Individual Income Tax Return, and may continue to use the 56 cents-per-mile business standard mileage rate.

  The standard mileage rate also can be used under Rev. Proc. 2019-46 as the maximum amount an employer can reimburse an employee for operating an automobile for business purposes without substantiating the actual expense incurred.

  Under Notice 2021-02, driving for medical care or for certain limited moving expense purposes for members of the armed forces may be deducted at 16 cents per mile, which is 1 cent lower than for 2020.

  The TCJA repealed the moving expense deduction for individual taxpayers from 2018 to 2025, except for U.S. armed forces members on active duty who move pursuant to a military order and incident to a permanent change of station to whom Sec. 217(g) applies.

  The rate for service to a charitable organization is unchanged, set by statute at 14 cents per mile (Sec. 170(i)).

  The portion of the business standard mileage rate that is treated as depreciation will be 26 cents per mile for 2021, 1 cent less than 2020.

  To compute the allowance under a fixed-and-variable-rate (FAVR) plan, the maximum standard automobile cost is $51,100 for 2020 for all automobiles (including trucks and vans), $700 more than in 2020. The FAVR amounts were recalculated in 2018 after the TCJA retroactively amended the bonus depreciation rules. Under a FAVR plan, a standard amount is deemed substantiated for an employer’s reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer. Those rules were also updated in IRS regulations (see T.D. 9893).

  — Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

  Source: The Tax Adviser, December 22, 2020 (https://www.thetaxadviser.com/news/2020/dec/2021-irs-mileage-rates-decrease.html)

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• 6 Tips For Cpas On Newest Round Of PPP Funding
  

  By Ken Tysiac

  Business leaders and the CPAs who serve them will need to use a variety of strategies all at once as they pursue economic support in the newest round of Paycheck Protection Program (PPP) funding.

  Borrowers will need to be aggressive, as the AICPA has mentioned, to get applications filled out in a timely fashion. They will need to be patient, as the U.S. Small Business Administration (SBA) and Treasury may take more time than in the past to screen applications and reduce the risk of fraud. Finally, borrowers will need to be vigilant and watch for changes to guidance that might affect their applications, funding, or loan forgiveness.

  “Overall, the process isn’t new,” said Kari Hipsak, CPA, CGMA, a senior manager with the Association of International Certified Professional Accountants. “So at least there’s familiarity with the program and how to go through the program. There are changes, though, in the new round of PPP funding, so as before, everyone will have to stay cognizant of any new rules and regulations, but the familiarity of the program should help.”

  Following an early opening for community financial institutions, the PPP opened for first-draw and second-draw loans from lenders with $1 billion or less in assets Jan. 16 and began accepting applications from large lenders Tuesday.

  Some lenders are requiring PPP borrowers to apply for forgiveness on their first-draw PPP loan before they file to seek a second-draw PPP loan. This is not a requirement of the SBA and Treasury, which run the PPP, so CPAs may want to encourage business clients to consider other lenders that will process the second-draw loan application without the business having to file for forgiveness on their first PPP loan.

  CPAs and their clients should also know the following as they participate in the latest round of PPP funding:

  Data is critical. The first step in applying for a PPP loan is gathering all the relevant data borrowers will need. Information such as average monthly payroll amounts and (for second-draw PPP borrowers) quarterly revenue comparisons is necessary.

  As a resource in gathering the necessary data, practitioners can use a financing platform for CPA firms, the CPA Business Funding Portal, which was created by the AICPA, CPA.com, and fintech company Biz2Credit to assist with PPP loan forgiveness and has been updated to accept applications for the latest round of PPP funding. The CPA Business Funding Portal started submitting applications Jan. 15.

  “Take the time to make sure the correct data is submitted,” Hipsak said. “This program isn’t new anymore, but there are changes [in the second-round rules]. Make sure you’re aware of the changes. Make sure your clients are aware of the changes, and make sure that they’re integrated into any application you submit.”

  CPAs need to be aware of the differences between first-draw and second-draw loans and understand that second-draw applications require borrowers to prove they have experienced at least a 25% reduction in gross receipts as a result of the pandemic.

  Gather and keep documentation. Retaining documentation that backs up the information submitted in application forms is critical.

  “Be prepared,” Hipsak said. “Supporting documentation for the average monthly payroll calculation used to calculate the maximum loan amount can be obtained from clients to support those amounts they come up with and will be helpful in the future, as it drove the amount of the PPP funds the borrower received.”

  Understand the new expenditures eligible for forgiveness. New guidance makes certain covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures eligible for PPP forgiveness.

  “They are applicable to past and future loans unless the loan has already been forgiven,” Hipsak said. “You can’t go back and make adjustments to the loan if it’s done. If you haven’t submitted your PPP forgiveness application, there’s an opportunity to go back and use those additional expenditures because the act did make them retroactively available.”

  Prepare for possible new clients. The latest round of the PPP opens funding to certain categories of clients that weren’t permitted to apply for earlier PPP funding.

  Certain 501(c)(6) not-for-profits, such as chambers of commerce; destination marketing organizations; certain housing cooperatives; and some local newspapers, TV, and radio stations may now apply for PPP loans. Borrowers’ eligibility is subject to certain restrictions. Be sure to review all eligibility criteria when applying for PPP funds.

  Be prepared for a longer approval process. It may take a bit more time for the SBA to approve PPP funding than it did the last time because reviews are being done more carefully to check for potential fraud and validate applications.

  Hipsak said it’s important to assume good intent on the part of the SBA as it seeks to help businesses and the economy weather the pandemic.

  “Let’s keep in mind that everyone is trying to ensure that the funds are used appropriately,” Hipsak said. “That means that when you go into the PPP application, make sure the correct data is submitted to avoid drawing out the review process.”

  Watch for updates. Changing guidance is an almost inevitable feature of governmental programs that are rolled out quickly.

  “Be aware of what’s happening,” Hipsak said. “We’re getting new guidance frequently.”

  Attending AICPA Town Halls, seeking other AICPA resources, and reviewing JofA updates can help CPAs remain informed. In addition, a summary of the PPP and the changes made under the Economic Aid Act is available for download in PDF format. Users must have or create an aicpa.org user account to access the document, but the PDF and the user account are free.

  Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.

  AICPA experts discuss the latest on the PPP and other small business aid programs during a biweekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.

  The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.

  For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page or subscribe to our email alerts for breaking PPP news.

  — Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director. Jeff Drew, a JofA senior editor, contributed to this article.

  Source: Journal of Accountancy, January 21, 2021 (https://www.journalofaccountancy.com/news/2021/jan/new-ppp-funding-tips-for-cpas.html)

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• Assessing Audit Risks During the Pandemic
  

  By Maria L. Murphy, CPA

  Auditors’ assessments and responses to risks of financial statement misstatement and fraud are critical to audit quality. Risk assessments in the current environment are unlike any others, as clients are dealing with significant changes to their businesses, the work environment, and the economy overall as a result of COVID-19. Despite the added complexities, auditors must continue to focus on high-quality audits that fully comply with standards for objectivity and professional skepticism.

  “We have gone back to the basics of audit risk, risk of material misstatements, and detection risk, and encouraged our practitioners to reconsider risks throughout the audit cycle,” said Jen Haskell, CPA, chief auditor at Deloitte. Some industries have been more affected than others by COVID-19 and by the economic volatility, both positively and negatively, and auditors need to be especially mindful of new or elevated risks for companies in those industries.

  Since the pandemic developed in February, auditors have needed to keep their finger on the pulse of changes worldwide. In March, as many firms were completing year-end 2019 audits, there were some impacts to certain clients’ operations. As the pandemic continued, more audit procedures had to be modified for subsequent reporting cycles, and macroeconomic forecasts became increasingly important.

  “Auditors have had a number of months to adapt to this environment, have conversations with clients, and assess the challenges,” said Jeff Kovacs, CPA, CGMA, assurance partner at Cohen & Company. “They cannot sacrifice audit quality despite the circumstances.”

  Know your clients

  To assess risk, auditors must understand the client’s industry, operations, and capital structure. “There are different risk assessments in industries like restaurants or real estate that have highly elevated risks because of the pandemic, as compared with industries like frozen foods that have benefited from it,” said Satpal Nagpal, CPA, partner and leader of the audit practice at Green Hasson Janks.

  Kovacs said: “There must be a heightened awareness of clients’ daily operating environments, business models, and how revenues are generated.” A “same as last year” approach to audit planning and risk assessment is never a good strategy, and it is especially risky now. Auditors may need to reassess past management judgments, along with their audit approach. Management may no longer have reliable information that is auditable as the basis for their judgments, which affects the quality of audit evidence.

  Challenges of remote work

  Many auditors have not been at client locations since March. Access to client documents has changed, along with the ability to sit down with client accounting personnel, requiring more robust planning upfront. “Conversations could be more informal before, but you can’t walk down the hall to the client’s office anymore, so you must organize this from a virtual perspective,” Haskell said. However, she finds the firm’s ongoing investment in technologies made the transition easier.

  Both Nagpal and Kovacs said their firms have been able to adapt, and they have been pleasantly surprised by their clients’ reactions to remote work. They attribute this to being engaged with their clients and to their staff working remotely pre-pandemic.

  Changes in firm practices

  Remote working has driven changes in how auditors work, regardless of office size or location.

  Green Hasson Janks has a single office with 150 employees. “We have online audit planning meetings and created a remote auditing task force that has come up with consistent processes and procedures across audits, toolkits, and checklists,” Nagpal said. “Audit seniors are making recommendations about risk assessments and explaining why they are changing risk ratings, so they learn to think about risks more critically. Accountability has increased.”

  At Cohen & Company, which has more than 650 professionals in 10 offices, audit teams have meetings to kick off the audit season. “Each engagement partner takes a highly active role in planning and directing audit team focus on areas that need heightened skepticism and judgment and crafting the appropriate audit response,” Kovacs said.

  Staff training is especially important because employees are not in the office. Many firms are conducting training remotely, including targeted training on audit risks during COVID-19. In addition, firms are holding monthly remote audit department meetings and issuing periodic guidance to make sure all staff are up to date. “In the current environment, it’s important to remind people of the foundational principles of documenting judgments and conversations, gathering and evaluating audit evidence, and exercising professional skepticism,” Haskell said.

  Technology

  The transition to remote work has been made possible by leveraging technology, and firms of all sizes are investing in transformation tools and innovation technologies. “Use of technology has made our and our clients’ jobs easier,” Nagpal said. “It has been brought to the forefront, and people have been empowered.”

  Auditors are using data tools to extract client general ledger data and perform analysis remotely, which takes some of the burden of providing audit support off clients. Auditors can look at large amounts of data and relationships, filter data to identify and focus on higher-risk transactions, and craft responsive audit steps.

  Technology capabilities of clients and staff can be a significant challenge. Kovacs directs audit innovation at his firm and has worked to train staff “to think like data scientists.” Some clients have sophisticated systems and professionals, but others do not. “The quality of client transactional data is paramount to transforming the audit,” Kovacs said. “If the data quality is not sufficient to permit the use of transformative technology, you cannot raise audit quality.” In these situations, Kovacs and his firm help clients understand what good data looks like so they can move toward improving the data and systems used to collect it. Auditors may have to modify their procedures to work with the data they do have.

  Nagpal said, “One positive thing that came out of this crazy year is that some old-school clients who did not have technology really didn’t have a choice. It was the only way to have their accounting team function and get the audit done.”

  Internal control

  Changes in operations and office closures as a result of the pandemic significantly affect controls and risk assessments. “Clients are doing the best they can to control and process transactions, but for many no enhancements are possible,” Kovacs said. If controls are not in place, risks are higher. “We expect the biggest risk is review of transactions,” he said. “Segregation of duties is always a significant issue, but some duties are currently not being performed. There also may be weaknesses in governance over financial reporting because of remote work and people being less engaged.”

  Even when auditors are not required to test controls, they must understand the design and implementation of controls. Controls may have changed for basic processes, and auditors cannot observe the controls in operation. An example is approvals of cash disbursements. “We may need to increase the sample size for substantive testing and design additional procedures,” Nagpal said. “We can run criteria reports from general ledgers to look for new vendors and additional payments to certain vendors, but there is room for error and the risk of fraud.”

  Forecasting

  The ability to forecast has been challenging for clients due to uncertainty about the economy and the pandemic and creates risks in accounting areas that rely on forecasted results. “In several different forums, Deloitte has heard from companies that this has been their biggest challenge from COVID-19,” said Eric Knachel, CPA, senior partner at Deloitte.

  Companies are forecasting more frequently or forecasting multiple scenarios and weighting the outcomes for probabilities. “Some companies have a bias to start with pre-COVID results as an initial target, and once pre-COVID results are achieved, assume they will resume normal growth, but this may not be reasonable if the pandemic results in a ‘new normal’ economy and business model,” Knachel said. “Companies need to be cautious about leveraging the 2008–2009 financial crisis as a benchmark to project their recovery in the current environment, because the issues are not fundamentally the same.”

  Nagpal’s clients have also been challenged by forecasting. “We have a client in the retail housewares business, and most of their business came from Walmart stores,” he said. “They had to change their business model to all online sales. They had inventory on hand but not of items that were selling, and they had to forecast demand and supply from China but did not have a historic business model to use. They hired an outside consultant to help them with their forecasts.”

  Challenging accounting issues in the current environment

  The following accounting areas will present challenges and can be high-risk areas for upcoming audits.

  Impairment: There is increased potential for tangible and intangible assets impairment. “For 8–10 years while the economy was expanding, this issue was not at the top of the risk list, but now it is a wider issue,” Nagpal said.

  “Impairment accounting requires reliable client data to predict future cash flows, and auditors must apply significant skepticism when looking at client models,” Kovacs said. “These can be challenging conversations to have with clients, and once assets are written down, they cannot be written back up if things improve.” Goodwill impairment tests for calendar year-end companies frequently use an Oct. 1 date, but in this environment fourth-quarter events, including stock market changes, may require companies to revisit their impairment analysis.

  Going concern: “This is a huge issue now, as companies must expect to have sufficient cash flows and liquidity one year from the report date,” Kovacs said. Auditors need to understand clients’ future operating models and assess the quality of the underlying data and forecasted cash flows.

  Auditors know their clients and understand their industries and should anticipate going concern issues, along with management’s ability and willingness to assess going concern and have proactive conversations upfront. “Auditors need to be transparent and manage this issue so there are no surprises,” Kovacs said. Going concern issues can affect the type of audit opinion, which can be important to financial statement users.

  Estimates: Auditors must evaluate estimates and assumptions, including the use of third-party data. “The quality of any estimate is a function of the availability, reliability, and relevance of the information management uses, and historical experience may not be that helpful in estimating for current and future periods,” Kovacs said. Clients may try to rely more heavily on auditors than in the past. “There need to be more conversations about independence, which can be a challenge if clients do not have the skills and look to their accountants for guidance in coming up with estimates,” he said.

  Fraud: Fraud risk factors are increasing, and auditors should be aware of them. “If there was ever a time when management had incentives and pressures for management to commit fraud, it is now, as many businesses are struggling with revenues, cash flows, debt, and payroll,” Kovacs said. There are also economic pressures for employees and their families that change the motivation to commit fraud. “Because internal controls may not be as strong as normal, we must apply procedures that include elements of unpredictability,” Nagpal said.

  Contractual modifications: Changes to contracts as a result of COVID-19 and economic pressures affect accounting for revenue, compensation, and leases. This is a complicated area with different accounting models to apply, which requires significant judgments.

  Government grants: Government programs can increase risks of noncompliance. It is important to understand terms and provisions of the grants. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and the Paycheck Protection Program have provided funds to many companies, but the program requirements are complicated and have changed over time. Countries around the world have versions of the CARES Act, and U.S. companies with operations outside the United States have to deal with their criteria and complexity.

  “Many companies have not received grants before and do not have an accounting policy for them,” Knachel said. “GAAP provides flexibility in the choice of accounting model, with different accounting results.” Haskell recommends that auditors look at the client’s processes, controls, and accounting policies to assess the risk of material misstatement in this area.

  Inventory observations: Since client locations are closed, auditors are using technology, including videoconferencing, Zoom, and FaceTime, to perform remote observations. This requires different planning from the past, Wi-Fi may not be available, and it is more feasible for inventories less prone to movement.

  Companies should recognize that audit plans are not set in stone. “In a normal environment, auditors would reassess audit risks if there were company changes during the year,” Knachel said. “In this environment many of the changes are driven by COVID-19, but companies recognize things happen that must be evaluated and then worked through with the auditors.” Knachel advises auditors to expect the unexpected because new issues will continue to arise, including fourth-quarter events, and they may result in business changes and changes to the risk assessment and audit approach.

  Source: Journal of Accountancy, December 9, 2020 (https://www.journalofaccountancy.com/news/2020/dec/assess-audit-risks-during-coronavirus-pandemic.html)

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• How to Innovate within a CPA Firm
  

  By Jody Padar

  Innovation: It’s one of my favorite things. It can push CPA firms past the old school ways of thinking and outdated processes. It ensures we’re providing clients what they really want. Once CPAs adapt a truly innovative mindset, their whole approach to business and client relationships change.

  Recently I spoke with Heath Alloway, director at Upstream Academy, on this very topic. He shared some really interesting perspectives on CPA firm innovation. We talked about misconceptions surrounding innovation, how to foster an innovative mindset, choose ideas to develop, bringing innovative ideas to market, and more.

  As we get ready to kick off a new year, and in the spirit of starting fresh, here are tips for how to innovate in your CPA firm.

  What do CPAs think innovation is?

  Innovation can be scary. It can mean different things to different people. The way that many CPAs view innovation, according to Alloway, often revolves around misconceptions. Clearing up what innovation is, and what it is not, is a good first step to creating that innovative mindset.

  Alloway explained that innovation doesn’t have to be something new. It doesn’t need to be some new invention or process. It can be an incremental change. This is an easier pill to swallow, right? You can still innovate your CPA firm in small steps, over time.

  Second, innovation in technology doesn’t actually have to involve tech. Yes, often a firm that is undergoing change is also reevaluating its tech stack. But that’s not always the case and that’s fine.

  Third, and this one is big, is that innovation doesn’t have to come from the person in charge. More than likely, firm partners are the ones hindering innovation. They’re scared, don’t want to rock the boat, whatever the case may be. Innovation can start anywhere in the firm. In my experience, innovation usually happens from the bottom up, because those are the people closest to the problems.

  Finally, innovation is not imitating what everyone else is doing. Alloway said if you’re looking at the competition and launching a new service line, you’ll never be innovative. You’re just copying others.

  “Anyone in your firm can innovate at any time,” he said. "It’s more of being able to identify problems and then working to provide solutions to bring value.”

  That’s what innovation is — it’s not a big, open-ended goal that always involves technology and originates in the corner office. Innovation is more nuanced and uniquely adapted for each CPA firm environment.

  How can CPA firm leaders help to foster innovation?

  I strongly believe if you’re doing best practices, you’re not innovative. What we’re looking for from innovation arenext practices. Radical firms that want to foster this sort of open-ended, solution-based environment can start by understanding that they don’t need a perfect plan.

  This isn’t counterintuitive at all, by the way. Perfection is the enemy of completion, as the saying goes. As a CPA firm leader you can help jumpstart an innovative mindset when you provide clarity that you and your team don’t need the perfect plan.

  Your plan “is going to evolve over time … that adaptive mindset and culture [are] the biggest takeaways,” said Alloway.

  How do you know which ideas to act on?

  Most innovation happens from the bottom up. The challenge for firm leaders once they make it known that they’re open to ideas is sorting out the so-called million-dollar ideas from the ones that maybe need a little more work. Alloway suggested creating a process around innovation. I love this because innovation and efficiency require effective processes.

  There are three buckets he recommended:

  • Generating and tapping into innovative ideas
  • Deciding whether to act on ideas
  • Taking an idea to market

  The real task for the second bucket is figuring out whether to fail fast or move forward. This mentality suggests that there are no “bad” ideas, but the timing may not be right or the details need to be worked out.

  Alloway shared three questions to ask when making this determination:

  • Can it make money?
  • Do our clients want it?
  • Can we build it or purchase it?

  Don’t make assumptions. Talk to your clients. Run the numbers.

  How do you take an innovative idea to market?

  Let’s say you have a virtual suggestion box and someone submitted a really great idea. It’s potentially profitable. You’re reasonably sure there’s a demand. You need to take the idea to market. Start by getting out of the “services” box and think like a product developer. Actually, create a prototype.

  “This could be a sketch on a whiteboard. It could be putting [the prototype] on paper,” Alloway said.

  Then, go to three or four of your top-level clients. Have a conversation and find out what they would want, need and use.

  Don’t just focus internally and assume you know what clients would want. And don’t get hung up on trying to develop the perfect service or product offering. Take what you know, roll it out, test it, and learn as you go.

  How do you build an innovative culture?

  Saying that innovation is important and demonstrating that it’s important are two very different things. For the firms that want to grow, they need to challenge themselves a little. An innovative culture is one where everyone knows it’s okay to fail. Not all great ideas will work. And you will invest money on a project that doesn’t deliver. People need to know that you will spend time working on these innovative ideas, even if nothing happens. That’s okay. Give your people permission to fail. That’s first.

  Second is to understand that for innovation to happen, the traditional billable hour model has to be modified. I’d say eliminate it totally, but for many firms that’s out of the question – at least at the beginning. What you don’t want is someone investing four or five hours per week or per month into developing an idea only to punish them for not hitting their utilization rates.

  Third is to create a safe space for people to share ideas. This could be in team meetings or you can send out surveys. Ask staff to identify their greatest asset, challenge and opportunity. See what they come up with. In meetings, pose a problem and ask people to bring their best idea to the table. Vote on the top ideas and start developing those ones a little more. Either of these activities will help foster a sense that firm leadership wants to get better and hear from everyone.

  As your CPA firm is building out or refining a plan for 2021, make sure innovation is at the center of it. There are many ways to grow, but only one that will ensure long-term, sustainable growth that puts clients and staff first. There is no better time to begin investing in innovation … and the future of your firm.

  Source: Journal of Accountancy, December 9, 2020 (https://www.journalofaccountancy.com/news/2020/dec/auditing-tips-in-coronavirus-environment.html)

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• Tips For Auditing In A Covid-19 Environment
  

  By Ken Tysiac

  Operational changes, remote procedures, and new risks associated with the coronavirus pandemic have made the audit environment much different than it was in the days before COVID-19.

  George Botic, director of the PCAOB’s Division of Registrations and Inspections, provided observations on the new environment Wednesday during the AICPA Conference on Current SEC and PCAOB Developments.

  He addressed audit best practices, common and recurring deficiencies identified in PCAOB inspections, reminders related to the pandemic, and other issues.

  Key audit takeaways during COVID-19

  Certain firms modified their internal monitoring programs to target specific engagements in industries more likely to be affected by COVID, Botic said.

  He said firms also emphasized the importance of consultation and in some cases established supplemental consultation requirements for issues including receipt of government assistance, changes to materiality assessments, market changes impacting accounting, and going concern considerations.

  The remote environment brought about big changes in inventory observations, with mobile devices and applications used in the process.

  “Using real-time video streaming, an engagement team verified the inventory location from its prior knowledge of the facility, had company personnel walk the floor, directed the selection of test counts, and performed the procedures otherwise completed in person using mobile devices,” Botic said. “I will add [that] for virtual inventory, be mindful of the need for portable power banks for the devices and ensure that connectivity is available throughout and around the entire facility.”

  Common deficiencies

  The most common deficiencies identified in PCAOB inspections included areas that have been challenges for auditors in the past:

  • Auditing revenue. The design and performance of audit procedures to address assessed risk of material misstatement related to revenue was a common challenge for practitioners.
  • Auditing accounting estimates. “We continue to identify deficiencies related to auditing estimates, particularly in the area of the allowance for loan loss and estimates used in the accounting for business combinations,” Botic said. “Auditors need to identify and understand the significant assumptions used by the company that are susceptible to manipulation or bias.”
  • Internal control over financial reporting (ICFR). Deficiencies in ICFR continue to include insufficient evaluation of whether controls with a review element selected for testing operate at a level of precision that would prevent the detection of a material misstatement, Botic said. “Auditors also did not identify or test controls that sufficiently addressed the risk of material misstatement related to relevant assertions of significant accounts,” he said. “An example would be multiple revenue streams and not testing controls over the significant revenue streams.”

  Independence remains a concern

  Auditor independence is foundational for high quality, Botic said.

  “Auditors are required to be independent of their audit clients both in fact and in appearance,” he said. “We continue to identify deficiencies that suggest that some firms may not have appropriate quality control systems in place to prevent violations of SEC and/or PCAOB independence rules.”

  He said PCAOB inspections focus primarily on four areas related to independence. Inspectors:

  • Analyze firm-identified violations of independence rules for possible quality control concerns.
  • Evaluate compliance with the independence pre-approval rules for significant nonaudit services.
  • Review firms’ communications with audit committees concerning independence matters.
  • Review the firm’s responses to past inspection quality control concerns. For example, he said, inspectors would review high rates of exceptions noted by the firm’s personal independence compliance testing.

  Best practices observed

  The PCAOB has noted some good practices developed by firms in their continuing quest to improve audit quality:

  • Some firms have created narratives of their own quality control systems and prepared process flow maps linked to quality objectives and controls, Botic said. “These facilitated the monitoring of engagement performance and enhanced the effectiveness of the firms’ root-cause analysis,” Botic said.
  • Certain firms have implemented interactive engagement team meetings often tied to particular audit milestones or phases. Coaching workshops among engagement team members also have been implemented, Botic said.
  • Partner involvement has been increased at some firms during the planning of tests of controls.

  “All these good practices should of course be adjusted for the size of the firm and the size and nature of the engagement,” Botic said.

  Emphasis on fraud

  New fraud risks have emerged as a result of the pandemic.

  Auditors may need to revisit their initial assessment of risks and modify planned procedures accordingly as circumstances evolve, Botic said. He encouraged engagement teams to consider procedures in areas that may be more susceptible to fraud.

  Examples of those areas include:

  • Estimates or valuations that are largely based on forecasts of future events, particularly given uncertainties in information.
  • Management override of ICFR in areas where there have been staff changes, staff downsizing, reporting structure changes, or any change that will impact segregation of duties.

  Final takeaways

  Botic highlighted five takeaways that practitioners should keep in mind as they work toward performing high-quality audits:

  • Care and skepticism. Exercising due professional care and professional skepticism remains important in all aspects of audit work. “While due professional care and professional skepticism should be applied at all times, the disruption resulting from COVID surges reminds of their continued importance,” Botic said.
  • Risk assessment, understanding client. Performing robust risk assessment procedures and understanding the client’s business is as important as ever. This includes understanding the impact of known and/or potential changes due to COVID-19 and other economic challenges. “Auditors should revisit their initial assessment of risk and modify planned procedures as circumstances evolve,” Botic said.
  • Renewed focus on fraud procedures. Botic encouraged auditors to incorporate unpredictability in the audit that is new and different year over year. “The auditor should guard against procedures that become all too predictable,” Botic said.
  • Materiality. Botic said auditors should establish a materiality level for the financial statements taken as a whole that is appropriate in light of the circumstances. “Economic challenges may cause the need for the auditor to reevaluate established materiality levels,” he said.
  • Supervision. “Given the likelihood of the need for the auditor to evaluate significant assumptions and judgments, audit engagement teams should consider the need for increased involvement of partners and other senior members of the engagement team in these areas,” Botic said.

  Source: Journal of Accountancy, December 9, 2020 (https://www.journalofaccountancy.com/news/2020/dec/auditing-tips-in-coronavirus-environment.html)

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• The Time Has Come To Get On With Advisory Services
  

  By Gary Bolinger

  Let’s take a trip down memory lane. Back in 1999, the AICPA launched “The CPA Vision Project: 2011 and Beyond.” It was a landmark effort for an organization with 400,000 members. One of the results of the project was the definition of the core purpose:

  CPAs are the trusted professionals who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by:

  • Communicating the total picture with clarity and objectivity;
  • Translating complex information into critical knowledge;
  • Anticipating and creating opportunities; and,
  • Designing pathways that transform vision into reality.”

  Several core competencies were identified in the Vision Project. The most relevant for the purposes of this article is strategic and critical thinking skills (being able to link data, knowledge, and insight together to provide quality advice for strategic decision-making).

  Fast-forward to 2011 and the AICPA concluded it was time for an update on the Vision Project. The result was “CPA Horizons 2025” — released in 2011. Under the category of key insights and directions, Horizons said that CPAs should “promote the CPA as the trust advisor who, in addition to providing core CPA services, develops solutions to complex problems by integrating knowledge, expertise and resources from multiple disciplines.”

  It is important to note that this insight said to promote the CPA as the trusted advisor. Unfortunately, it did not say to equip the CPA to serve in that role.

  CPA Horizons went on to say: “CPAs must continue to evolve as strategic partners of clients, business and employers, applying multidisciplinary and integrated problem-solving to expand traditional services and enhance nontraditional offerings and the perception of trusted advisor.”

  So where is the profession today?

  There will always be a need for compliance and transactional services. Compliance and transactional services will evolve as standards and government regulations change.

  Of course, there will be the impact of technology. Some technologies (artificial intelligence and robotic process automation) may render the CPA obsolete in providing compliance services. But the move to true advisory services is going pretty slowly. In some firms, it is even agonizing.

  Why? CPAs are successful. Firms are profitable. Compliance is — if you will — “comfortable.” There are rules, there are checklists, there are processes to manage risk. It is the foundation of success for most practitioners. But clients want and need more. Richard Walters notes in his 2018 book “Delivering Advisory Services: The Essential Guide” that the three most important things that clients say that they consistently want from their accountant are:

  • To understand them, their aims and their business;
  • To be more proactive; and,
  • To be in with them for the long haul.

  In short, you could conclude that clients want their CPA to be engaged with them and their business. Of course, many practitioners will exclaim, “I am already engaged!” But think about this — you must bring the following elements of engagement:

  • Big-picture perspective;
  • Use of high-quality and carefully crafted questions;
  • Interaction;
  • Images — graphics that communicate simply and clearly;
  • Collaboration;
  • Active listening; and,
  • Being forward-facing and ready with next steps.

  The transition to true value-added advisory services can be a bit daunting. Firms will ask:

  • What are the tools?
  • How do we define the process?
  • How do we better understand clients’ needs and wants (as opposed to reacting to problems that occur)?

  Tools are available to assist in this important transition. But when your practice develops the most effective systems and processes for your firm to provide forward-looking advisory services, the enhanced client relationships and financial rewards will be worth the investment.

  Source: Accounting Today, December 16, 2020 (https://www.accountingtoday.com/opinion/the-time-has-come-to-get-on-with-advisory-services)

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