My 10 Most Popular Blog Posts

In the last year, CPA-Scribo.com has been visited over 75,000 times. (I never dreamed this would happen.) Thank you!

In light of this milestone, I thought I’d share my top 10 list. So here goes.

Below are the top ten most popular posts (starting with number 10 and working down to number 1).

10. The Power of Story in Teaching CPAs

9. Seven Deadly (Audit) Sins

8. FRF for SMEs – The Lowdown

7. Evernote for CPAs

6. An Auditor’s Cell Phone

5. Five Disbursement Fraud Tests

4. SSARS 21 – The Lowdown

3. Local Government Internal Controls – A List

2. Audit Lessons from a Brain Tumor

and drum-roll………..

1. Simple Compilation Reporting – Tax Basis, Substantially All Disclosures Omitted

Your responses to some of these posts have surprised me. I almost did not post Audit Lessons from a Brain Tumor, thinking no one would be interested. And who would have thought a post about compilation reporting would be number one?

Some of you (like Armando Balbin and Jim Ulvog at Attestationupdate.com) have been steady at my side, encouraging me to press on. I appreciate the friendships I have made thus far and look forward to getting to know others of you as we continue on CPA-Scribo.com.

Click my About page link (if you’d like to know more about my journey as a CPA and what this blog is about). If you have suggestions for making CPA-Scribo.com better or if you have ideas for future posts, please share those below. Thanks.

SSARS 21 Financial Statement Options

SSARS 21 is effective for periods ending on or after December 15, 2015 with early implementation permitted. I am already seeing CPAs early-implementing this standard.

There are basically three options for financial statement issuance (when a review or an audit is not performed):

  1. Financial statements with the words “no assurance is provided” on each page
  2. Financial statements with a disclaimer paragraph
  3. Financial statements with a compilation report

Section 70 (Preparation of Financial Statements) of SSARS 21 provides guidance for options 1. and 2.

Section 80 (Compilation Engagements) of SSARS 21 provides guidance for option 3.

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The Twin Life

I have been a twin all my life. I guess that’s how it works, if you are a twin.

That’s Harry on the left and me on the right.

Here are a few things I’ve experienced, learned, and wondered about as a twin.

You Can Be in Two Places at the Same Time

I have had occasions where I couldn’t be somewhere, but Harry (my twin) could. I’m sure he fills in better than me anyway.

ESP Doesn’t Work (at least for us)

When we were young, people would ask us if we had ESP and knew each other’s thoughts. Well no…not exactly. We have always been close enough that I can tell you what he’s about to say and, yes, sometimes I do know what he’s thinking–but only because I know him so well. No Twilight-Zone stuff.

I May Not Be Who I Am

Yes, you read that right. I’ve always wondered if the nurses got us mixed up on day one and I’m really Harry (that is, my name is Harry), but I don’t know it.

Mama Loved Me Best

Harry tells me our mother said the same thing to him, but I’m betting I’m right. Smothers Brothers’ thinking. I digress. (You young folks wouldn’t understand.)

Truth: We’re Not Really Twins

Harry and I were born on the exact same day and same year, but, truthfully, we are not twins. If you know the answer to my riddle, please post.

We Once Were Rock and Rollers

In the mid-seventies Harry and I played rock and roll in a group called Smokin’ Topaz. Long hair, strobe lights, LOUD music (think ZZ Tops). How did I ever become a mild-mannered CPA?

 

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It’s Great to Have a Best Friend All Your Life

Seriously, one of the greatest blessings of my life has been having Harry Hall as my brother. He’s always encouraged and supported me. He blogs about project management at projectriskcoach.com.

SSARS 21 Compilations: What Changed?

Much of the recent conversation surrounding SSARS 21 has been about Section 70 — Preparation of Financial Statements. In this post, we’ll take a look at Section 80 — Compilation Reports.

What changed? What’s the same?

First, here’s a short video to give you an overview (and the secret to the most expeditious way to issue compilation reports).

What’s the Same?

So what is the same (when comparing SSARS 21 compilation guidance with SSARS 19)?

  • Compilations are still a nonassurance service (the CPA is not verifying anything)
  • Compilations are an attest service
  • The accountant must prepare an engagement letter
  • The accountant must read the financial statements
  • The accountant must report any material departures from the reporting framework
  • The accountant must report the omission of notes (if they are omitted)
  • Selected disclosure is permissible
  • The accountant’s lack of independence should be noted in the compilation report

What’s Different?

What’s different (when comparing SSARS 21 compilation guidance with SSARS 19)?

  • Compilation report language and formatting (see example below)
  • The engagement letter must be signed by the accountant and the client
  • The preparation of financial statements is a separate nonattest service (and the compilation engagement letter should refer to the preparation service as such)

Here is the relevant sample paragraph from Illustration 1 of the compilation engagement letters in Section 80 of SSARS 21:

You are also responsible for all management decisions and responsibilities and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

Compilation Report

The standard SSARS 21 compilation report follows:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

Notice the sample report has no report title.  It also is not addressed to anyone. For a comparison of the new compilation report with the SSARS 19 (old) report, click here.

 

Stealing While Dying (with Video)

In one of the stranger frauds I’ve seen, the bookkeeper was stealing money while dying. Going to meet your Maker with the fresh scent of theft on your hands is not a good way to go.

I had provided external audit services to this health department for years and knew the bookkeeper (we’ll call her Susan) quite well. She sent me thank you cards – yes, thank you cards – for my audit work. Susan was polite, well spoken, and great at her job. If ever I thought there was someone who would not (and could not) steal, it was (you guessed it) Susan.

But external circumstances can make even the best of people do the impossible. During the course of one audit year, Susan developed cancer. The medical treatments resulted in numerous medical bills, many of which were received while she still worked off and on. Sadly she eventually died.

Knowing that Susan had passed away, I knew the audit would be challenging, especially since the health department board had not hired anyone to replace her.

Upon my arrival I requested the bank statements, but the remaining employees could not locate them (not a good sign). I thought maybe she had taken the bank statements home and had not returned with them due to her illness. After the employees had searched for some time with no result, the client requisitioned the bank statements and cleared checks from the bank (this was some twenty years ago, before electronic access).

In reviewing the cleared checks, I quickly noticed round-dollar vendor checks written to Susan. The first one was for $7,000. My first thought was, “not Susan, I’ve known her too long. No way. Surely there’s a reason for this.” But then there was another and another…

Reporting the theft to the health department board was difficult. Here was an honest person who had stolen money because she felt she had to.

This is one case where I wanted to just let it go, to walk away and pretend it didn’t happen. But I knew that was not an option. Can you imagine being the board member that called Susan’s husband – just months after her death – and informed him of the theft?

Fraud is an ugly thing.

If you ever need a reason to communicate control weaknesses in an open manner, here’s one – for the employee’s own safety (not to mention your own). Sometimes money is too tempting, even for the best of people.

Fraud Triangle

So what led to the theft?

  1. Pressure (need for cash)
  2. Opportunity (almost no segregation of duties), and
  3. Rationalization (Susan’s unselfish desire to leave her family with no medical bills).

Susan was authorized to sign checks. Though the checks required two signatures, the bank cleared these checks with just Susan’s signature. Since Susan keyed all transactions into the computer and reconciled the bank statements, she had the keys to the castle. (I was thankful that our firm had – in the prior audits – communicated the lack of segregation of duties.)

The guy or gal you’re auditing is too honest to steal? Maybe. But you never know what is going on in their lives – or what will come.

Lessons Learned

  • When records go missing – pay attention
  • When you see round-dollar vendor checks – dig deeper
  • When your client lacks segregation of duties – raise your antenna

Your Fraud Story

What strange occurrences of fraud have you seen?

Extraordinary Items – RIP

The Financial Accounting Standards Board (FASB) just released Accounting Standards Update No. 2015-01 titled Income Statement–Extraordinary and Unusual Items.

Presently (and for many years) a transaction was assumed to be ordinary unless it was unusual in nature (possessing a high degree of abnormality) and infrequent in occurrence (not reasonably expected to recur in the foreseeable future).

With this standard (ASU 2015-01) FASB is eliminating the option to report a transaction as extraordinary; the new standard states the following:

Eliminating the concept of extraordinary items will save time and reduce costs [my bold for emphasis] for preparers because they will not have to assess whether a particular event or transaction event is extraordinary (even if they ultimately would conclude it is not). This also alleviates uncertainty [my bold for emphasis] for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.

Effective Date

ASU 2015-01 states:

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.

Free Download

You can download the new standard here.

Fraudulent Payments Without Being on the Signature Card

Auditors often focus on authorized check signers when considering who can fraudulently disburse funds. But might it be possible to make payments without being on the bank’s signature card?

Courtesy of a DollarPhoto.com
Courtesy of a DollarPhoto.com

Here are a few ways to disburse funds without being on a signature card:

  1. Forgery
  2. Unsigned check
  3. Wire transfer (sometimes person can just call or visit the bank)
  4. Electronic bill pay (if person has access to passwords)
  5. Signing checks with accounting software (signature built into accounts payable module)
  6. Use of a signature stamp

Forgery

Since banks don’t usually inspect checks as they clear, a forged check will normally clear the bank.

Unsigned Checks

Again, since banks don’t normally inspect checks as they are processed, an unsigned check can clear the bank.

Wire Transfer

Many times, at the client’s direction, banks allow wire transfers with just one person’s involvement. I have also seen small town business accountants simply drop by the local bank and tell them to move money. Banks, desiring to be accommodating, often do so.

Electronic Bill Pay

Anyone with the right passwords can make payments to themselves or anyone else.

Signing Checks with Accounting Software

This one scares me the most.

Many businesses, in an effort to expedite the disbursement process, have authorized signatures embedded in the payables software, enabling the payables clerk to make a payment to anyone. If the payables clerk has access to check stock, watch out. Even if a second person is normally involved in processing checks with automatic signatures, how easy is it for the clerk to go by in the evenings and make fraudulent payments? This danger increases if the payables clerk also reconciles the bank account.

Use of a Signature Stamp

I cringe every time I see a signature stamp. Why not just ask the authorized signer to just sign plenty of blank checks. (Yes, I am being facetious.)

Just last year I worked on a case where the bookkeeper wrote manual checks to herself and entered payments in the general ledger for the same amounts as those paid to herself but–to mask the payment–entered real vendor names.

Recipe for Disbursement Fraud

Give anyone (1) the ability to sign checks, (2) access to blank check stock and (3) the ability to make the bookkeeping entry, and you have the recipe for theft–particularly if that same person reconciles the bank statement or if the person reconciling the bank statement does not examine the payee on cleared checks.

Reminder – Private Companies can Amortize Goodwill, Avoid VIE Treatment

I know many of you are presently preparing year-end financial statements for small privately-held companies.

This is just a reminder that you can now:

  • Amortize goodwill
  • Not consolidate certain leasing companies due to variable interest entity (VIE) accounting standards

Here are links to prior posts:

Click here for goodwill post.

Click here for VIE post.

Independence and Preparation of Financial Statements

For many years, preparation of financial statements was considered a part of an attest engagement (audits, reviews compilations). No longer.

The Professional Executive Ethics Committee (PEEC) recently added guidance to the “Nonattest Services” interpretation as follows:

activities such as preparation of financial statements…are considered outside the scope of the attest engagement, and, therefore, are considered a nonattest service

Consequently, if an accountant prepares financial statements (a nonattest service) and performs an attest service (e.g., audit, review, compilation), then consideration should be given as to whether: 

  • the client makes all management decisions,
  • the client properly oversees the service,
  • the client evaluates the adequacy and results of the service, and
  • the client accepts responsibility for the service

We have, for some time now, included the aforementioned language in engagement letters when we have performed both attest services and nonattest services. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be listed as another nonattest service and the requisite language concerning client responsibilities (in the previous paragraph) applies to the preparation-of-financial-statements engagement.

The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014. If you, for example, perform a compilation engagement for January 2015 (i.e., a monthly financial statement), the new guidance is applicable. Of course, with regard to compilations, you can lack independence if it is noted in the compilation report. Not true for reviews and audits. CPAs are precluded from performing reviews and audits if their independence is impaired.

Here is the sample relevant paragraph from Illustration 1 of the compilation engagement letters in Section 80 of SSARS 21:

You are also responsible for all management decisions and responsibilities and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

If other nonattest services are to be provided (e.g., tax return), they are to be listed alongside preparation of financial statements.

The client must accept responsibility for financial statements prepared as a part of an audit or a review for periods beginning after December 15, 2014. So, for example, if a client desires for you to perform a review engagement for the first quarter of 2015, the client must be able to oversee your preparation and accept responsibility for the financial statements. If the client is unable to accept that responsibility, then the accountant is not independent and would be precluded from performing the review engagement.

Simply including the standard language in the engagement letter (that management assumes responsibility) is not the same as management actually accepting responsibility.

Obviously, the determination of whether the client can (or has the ability to) accept responsibility is a subjective one. I anticipate additional guidance to be forthcoming from the AICPA to assist CPAs in making this decision.

Favorite Business Books

I always like to see what other people are reading. If I come to your home, you’ll find me in your library.

In the hope that I can pique your interest in a new read that you will enjoy, here are a few of my favorite business-related books (with favorites in bold):

Developing Focus

  • The Power of Full Engagement – Loehr, Jim; Schwartz, Tony
  • Essentialism – Mckeown, Greg
  • Brain Rules – Medina, John
  • The One Thing – Keller, Gary
  • Flight Plan – Tracy, Brian

Upping Your Game

  • Every Good Endeavor – Keller, Timothy
  • The Talent Code – Coyle, Daniel
  • The Early To Rise Experience – Traub, Andy
  • The Power of Habit – Duhigg, Charles
  • Drive – Pink, Daniel
  • Insanely Simple – Segall, Ken
  • So Good They Can’t Ignore You – Newport, Cal

Leadership

  • Encouraging the Heart – Kouzes; Posner

Creativity

  • A Whack on the Side of the Head – Von Oech, Roger
  • Aha – Ayan, Jordan
  • Accidental Genius – Levy, Mark
  • Steal Like an Artist – Kleon, Austin

 Speaking, Writing, Blogging

  • The Elements of Style – Strunk, William
  • The Power of Visual Storytelling – Walter, Ekaterina
  • Platform – Michael Hyatt
  • Talk Like TED – Gallo, Carmine
  • The Exceptional Presenter – Koegel, Timothy
  • Eats, Shoots & Leaves – Truss, Lynne
  • Presentation Zen – Reynolds, Garr

Technology

  •  iPad at Work – Sparks, David