Is Membership in the Center for Plain English Accounting Worth the Money?

The AICPA's CPEA provides technical support to CPAs

One of my readers asked me to write a review concerning my firm’s membership in The Center for Plain English Accounting (CPEA). So here it is. (These are my personal thoughts and not necessarily those of my firm.)

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

My firm joined the CPEA about six months ago. What led to that decision? We used the AICPA hotline for several years, and the experience was positive. But as you may (or may not know), the AICPA hotline does not offer written responses. I would send the hotline an email with a technical inquiry, and the AICPA would call me–usually within 24 hours–with an answer. I would document that discussion in my engagement file. But, in the back of my mind, I always longed for a written response. Why? These were usually thorny, high-risk problems.

The CPEA provides written responses to inquiries.

What Does the CPEA Do?

Here’s an excerpt from their website:

The Center for Plain English Accounting is the AICPA’s National A&A resource center, available exclusively to members of the Private Companies Practice Section. The CPEA’s team of experts assists member firms in understanding and implementing accounting, auditing, review, compilation, and quality control standards by sharing technical advice and guidance in a straight-forward manner. CPEA professional staff provide A&A support by describing “how to do” what you “need to do” in implementing the authoritative literature.

In short, the CPEA provides information about evolving technical issues and answers to specific questions.

Cost to Join

What’s the cost of joining the CPEA? For our firm, it is $1,495. So this is not a cheap decision. But I felt like my company received its money’s worth in the first month. We have posed several questions since joining, and we have received timely written responses — every time. For firms that don’t have a national office (and most of us don’t), this is an excellent solution.

For more information about joining the CPEA, click here.

How to Submit Questions

How do you submit your questions to the CPEA? With an online form such as the following:

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Are there other benefits?

I often hear CPAs lament about keeping up with new standards, and I feel their pain. So how can we do so?

The CPEA provides information in the following ways:

  • Webcasts
  • Emails with summaries of new information
  • Website

Here’s a screenshot showing recent reports and alerts that the CPEA has provided:

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Worth the Money?

For me, the cost of membership has been worth the money. If your firm desires to keep up with evolving standards, the CPEA is a great choice. (I have received no compensation for this recommendation.)

ASU No. 2016-02 Leases Issued by FASB

Accounting Standards Update No. 2016-02, Leases (Topic 842) was issued on February 25, 2016.

Effective Dates

For a public entity, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, for a calendar year-end public entity, the changes take effect beginning January 1, 2019).

For this purpose, a public entity is any one of the following:

  1. A public business entity
  2. A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
  3. An employee benefit plan that files or furnishes financial statements with the SEC.

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020.

Early application of the amendments is permitted for all entities.

To see the new standard, click here.

Do the Group Audit Standards Apply When Only One Firm Audits Consolidated Financial Statements?

Understanding when the group audit standards apply and the related documentation requirements

Do the group audit standards apply when one firm audits all of the entities comprising a consolidated whole?

Yes.

You say, “confusing.” I say, “I agree.”

The confusion–at least for me–lies in the pre-clarity auditing standard, AU 543, Part of Audit Performed by Other Independent Auditors, which focused on who was performing the audit. The clarity standard, AU-C 600 Special Considerations — Audits of Group Financial Statements, focuses on what is being audited. The word group (as applied to the group audit standards) does not mean more than one auditor.

Regarding applicability (of the group audit standards), we look at the entities and business activities being audited rather than how many audit firms are involved. We used to focus on the interaction with other auditors; now we focus on the risks associated with the group financial statements.

Businessman holding a transparent screen with an inscription a auditing. Business, technology, internet and networking concept.

The picture is courtesy of DollarPhotoClub.com.

Group Audit Standards When There is Only One Audit Firm

The AICPA’s Technical Questions and Answers (8800.24) says the following about the applicability of AU-C Section 600 (Audits of Group Financial Statements) when only one engagement team is involved:

Inquiry—Company X consolidates the operations of Entity A. The same group engagement team that audits Company X also audits Entity A. Because only one engagement team is involved, does AU-C section 600 apply? If so, what does AU-C Section 600 require that is not already covered by other auditing standards?

ReplyAU-C section 600 applies to all audits of group financial statements, which are financial statements that contain more than one component. In the circumstances when the same engagement team audits all components of the group, the considerations addressed in AU-C Section 600 that relate to component auditors are not relevant. However, considerations addressed in AU-C section 600, such as understanding the components; identifying components that are significant due to individual financial significance and the significant risk of material misstatement; determining component materiality; understanding the consolidation process; and addressing the risks, including aggregation risk, of material misstatement in the group financial statements; are relevant in all group audits.

What does this mean?

If your firm audits consolidated financial statements, then the group audit standards apply, and you do need to comply with certain provisions (even though your firm audits all entities included in the consolidation). Consequently, you have some additional documentation requirements. Your audit file should contain the following documentation:

  • Your understanding of the components
  • Your identification of significant components (due to financial significance or risk)
  • Component materiality
  • Your understanding of the consolidation process
  • How you plan to address the identified risk of material misstatement (including aggregation risk)

Group Financial Statements

What are group financial statements? They are statements that include the financial information of more than one component.

Here are examples of components:

  • Subsidiaries
  • Geographical locations
  • Divisions
  • Investments (equity method)
  • Products or services
  • Component units of a state or local government

You can see from these examples of components, the concept of group financial statements is broader than that of consolidated or combined financial statements.

The idea behind the group audit standards is to highlight the risk of material misstatement whether at the group level or a lower level. If for example, a component is not financially significant but it has particularly risky assets (e.g., derivatives), then the group audit standards direct our attention here.

Examples of When Group Audit Standards are Applicable

Here are examples of when the group audit standards are in play:

  • Consolidated subsidiary
  • Combined financial statements due to common control
  • Investment accounted for using the equity method
  • Consolidated affiliate (due to variable-interest considerations)

Notice we made no mention of other auditors in these examples. It is possible that another firm may audit a subsidiary (for example), but this factor is not the determinant of when the group audit standards apply.

Seven Deadly (Audit) Sins

Sometimes we sink our own ships

Seven deadly audit sins can destroy you.

You just completed an audit project, and you have another significant write-down. Last year’s audit hours came in well over budget, and at the time you thought, “This will not happen again.” But here it is–again.

Here are seven deadly (audit) sins that cause our engagements to fail.

Seven Deadly Audit Sins

Picture is courtesy of DollarPhotoClub.com

1. We don’t plan.

Rolling over the prior year file does not qualify as planning. Including PPC programs–though I use them myself–is not planning.

What do I mean? The engagement has not been properly scoped. We don’t know what has changed and what is required. Each year, audits have new wrinkles.

Are there any fraud rumors? Has the CFO left without explanation? Have cash balances decreased while profits increased? Does the client have a new accounting program? Can you still obtain the reports you need? Are there any new audit or accounting standards?

Anticipate issues and be ready for them.

2. SALY lives.

Elvis may not be in the house, but SALY is.

Performing the same audit steps is wasteful. Just because we needed the action ten years ago does not mean we need it today. Kill SALY. (No, I don’t mean your staff member; SALY stands for Same As Last Year).

I find that audit files are like closets; we allow old thoughts (clothes) to accumulate without purging. It’s time for a Goodwill visit. Are all of the prior audit procedures relevant to this year’s engagement?

Will better planning require us to think more in the early phases of the engagement? Yes. Is this hard work? Yes. Will it result in less thinking and work (for the overall project)? Yes.

3. We use weak staff.

Staffing your engagement is the primary key to project success. Excellent staff makes a challenging engagement pan out well. Poor staff causes your engagement time to balloon–lots of motion, but few results.

4. We don’t monitor.

Partners must keep an eye on the project. And I don’t mean just asking, “how’s it going?” Look in the audit file. See what is going on. In-charges will usually tell you what you want to hear. Their hope is to save the job on the final play, but a Hail Mary pass often results in a lost game.

Charles’ maxim: That which is monitored, changes (for the good).

Or as Ronald Reagan once said: Trust but verify.

5. We use outdated technology.

Are you paperless? Using portable scanners and monitors? Are your auditors well versed in Adobe Acrobat? Are you electronically linking your trial balances to Excel documents? Do you use project management software (e.g., Basecamp)? How about conferencing software (e.g., Zoom)? Do you have secure remote access to audit files?

6. Staff (intentionally) hide problems.

Remind your staff that bad news communicated early is always welcome.

Early communication of bad news should be encouraged and rewarded (yes, rewarded, assuming the employee did not cause the problem).

Sometimes leaders unwittingly cause their staff to hide problems; in the past, we may have gone ballistic on them–now they fear the same.

7. No post-reviews.

Once our audit is complete, we should honestly assess the project. Then make a list of inefficiencies or failures for future reference.

If you are a partner, consider a fifteen-minute meeting with staff to go over the list.

Your Ideas

What do you do to keep your audits within budget?

Can Uncollected Prior Year Fees Impair Your Independence?

Is a CPA independent when prior year client fees have not been paid?

Answer: It depends. If a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year before the date of the current-year report, he is not independent.

Section 1.230.010 (Unpaid Fees) of the Code of Professional Code states:

Threats to the covered member’s compliance with the “Independence Rule” would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards if a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year prior to the date of the current-year report (my bold). Accordingly, independence would be impaired. Unpaid fees include fees that are unbilled or a note receivable arising from such fees.

Picture is courtesy of DollarPhotoClub.com.

The picture is courtesy of DollarPhotoClub.com.

Applies to All Fees

Note that the rule states that independence is impaired if a covered member has unpaid fees from an attest client for any previously rendered professional service. Impairment exists when any prior year fee has not been paid, including tax or consulting work.

Billed or Unbilled Services

Also, the CPA should look back one year from the report date to see if billed or unbilled amounts exist. Here’s an example:

  1. The CPA provided tax services to ABC Company on April 25, 2015.
  2. The CPA billed for the tax services on June 1, 2015.
  3. ABC Company needs an audit report with a May 15, 2016, date.
  4. ABC Company has not paid the June 1, 2015, bill.

Is the CPA independent? If the audit report is dated May 15, 2016, the CPA is not independent.

Why? If we look back one year from the report date of May 15, 2016, we see that unbilled work from April 25, 2015, has not been paid. So an unpaid service for more than one year before the report date exists. The CPA, in this example, would be in violation of the Code of Conduct.

An Odd Collection Procedure

Oddly, the potential impairment of independence may assist you in collecting past-due accounts. If the client needs the current year attest work and the CPA can’t provide it to him without payment for the prior-year work, then collection may occur.

How to Prevent the Theft of Fixed Assets

Why it's so easy to steal equipment and electronic devices

A USA Today article began with, “Stolen and sensitive U.S. military equipment, including fighter jet parts wanted by Iran…have been available to the highest bidder on popular Internet sales sites.” The article went on to say that the equipment, “purchased with taxpayer money,” was available for purchase on eBay and Craigslist and included “components from F-14 fighter jets” and “used Nuclear Biological Chemical protective suit.”

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

Why do thefts of physical assets occur?

The main culprit is usually a lack of accountabilityMany companies and small governments do not perform periodic fixed asset inventories. (Fixed assets are also referred to as plant, property and equipment in commercial businesses and as capital assets in governments.) Often equipment is purchased and added to the depreciation schedule, but no one–at a later date–compares this master list of fixed assets to what is (or should be) physically present.

Most external auditors audit the additions and reductions of fixed assets in a given year but seldom, if ever, audit existing fixed assets–those that were owned at the beginning of the year. Consequently, theft of fixed assets may go undetected even when annual audits are performed. So what should you do?

Nip It in the Bud

To use the words of the inimitable Barney Fife, “Nip it. Nip it. Nip it in the bud.” But how?

It’s quite simple (though it can be time-consuming).

Have your department heads perform an annual inventory of the assets, comparing the master list of fixed assets purchased with what is physically present; then this annual reconciliation should be reviewed by someone outside the department. You should also, by policy, assign responsibility for each fixed asset to a particular employee (e.g., department head). For example, a city could assign responsibility for all public works equipment to the public works director. Once the director has completed the annual inventory reconciliation, an outside person (e.g., the finance director or an external auditor) should review it. If any of the equipment in that department is not present, then the director is accountable.

Train your personnel to take annual inventories, and let everyone in the organization know about your fixed asset policy. Transparency and accountability are critical; if each asset is not assigned to a particular person, you will make little progress in decreasing theft.

Capitalization Thresholds

Most organizations adopt a threshold for additions to the depreciation schedule (fixed asset inventory). For example, a business might use a $2,000 threshold; all fixed assets purchased for less than this amount are not capitalized (added to the depreciation schedule)–they are expensed (and not added to the depreciation schedule). Using a capitalization threshold is good, but there is a problem: Smaller dollar assets are more likely to be stolen (think iPads), especially if they are not inventoried.

If you adopt a capitalization threshold for your depreciation schedule (e.g., $2,000), consider maintaining a second list of all equipment purchases above a lower dollar level (say $250). Assign the responsibility for these lower value items to someone in each department. Inventorying small dollar items is sometimes critical.

The Wall Street Journal reported that the U.S. Marshals Service had lost a few thousand encrypted communication devices (mainly radios); such devices, in the wrong hands, can allow persons to listen in on policing operations and, as a result, potentially compromise the safety of officers and citizens. And what was the cause of the loss of these devices that ranged in prices between $2,000 to $5,000? A lack of appropriate inventorying software and accounting.

GFOA Capitalization Guidelines

The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds:

  • Potentially capitalizable items should only be capitalized if they have an estimated useful life of at least two years following the date of acquisition
  • Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables) unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district)
  • In no case should a government establish a capitalization threshold of less than $5,000 for any individual item
  • In determining capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds more than certain specified amounts
  • Governments should exercise control over potentially capitalizable items that fall under the capitalization threshold

Your Capital Asset Procedures

How does your organization lessen the threat of theft?

Findings from Peer Reviews of Governmental Engagements

Governmental audit problem areas

The AICPA has identified governmental engagements as a high-risk area. While governmental accounting is complex, the addition of Yellow Book and Single Audit standards (when applicable) make these engagements even more challenging.

I recall in the pre-GASB 34 days reviewing physical ledger sheets that contained all of the transactions for a local government. There were no Yellow Book or Single Audit requirements. Those idyllic days of simplicity are gone, and the complexity of governmental audits has increased a hundred-fold.

Governmental regulators have complained that CPAs are not performing these audits in conformity with professional standards. In addition, these regulators are saying that the present peer review process is not identifying non-conforming engagements.

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

AICPA’s Testing of Peer Review Process

In response to these concerns–and those related to other high-risk areas such as benefit plans–the AICPA performed enhanced oversights to gauge how well peer reviewers are performing.

Here are some of the key takeaways from the oversights performed on that initial sample of engagements:

  • Approximately 40 percent of the engagements selected as part of this pilot program were identified as non-conforming with the applicable professional standards by the industry experts.
  • The peer reviewers on these engagements had identified only around one out of ten as non-conforming.
  • Over the 2012 to 2014 peer review cycle, 8 percent of the must-select engagements reviewed were identified as non-conforming by their reviewers.

Peer review statistics related to governmental engagements reflect similar dynamics:

  • Significantly more GAGAS/single audit engagements were determined to be non-conforming by the oversighters and were not recognized as being non-conforming by the peer reviewers. There was an approximate 40 percent nonconforming rate for oversights of governmental engagements while none of these engagements were identified as nonconforming by the peer reviewers.

Governmental Engagement Deficiencies

The enhanced oversights identified the following governmental engagement deficiencies (many of these are related to Yellow Book and Single Audit):

  • Compliance requirements documented as applicable, but no testing performed for the compliance requirement
  • A lack of testing of internal controls over direct and material compliance requirements
  • A lack of documentation of management’s skills, knowledge, and experience to effectively oversee nonaudit services performed by the auditor
  • A lack of documentation or incomplete documentation related to the risk assessment of type A or type B programs
  • A lack of documentation supporting the assessment that compliance requirements were not applicable for the identified major programs
  • A lack of documentation showing the consideration of fraud risk regarding noncompliance for major programs
  • A lack of documentation of the internal control assessment over the preparation of the Schedule of Federal Awards (SEFA)
  • The Schedule of Findings and Questioned Costs missing required elements
  • Financial statements presented under GAAP instead of GASB
  • No materiality calculation on opinion units
  • A lack of documentation detailing the risk of management override of controls.
  • A lack of documentation to support the client’s designation as a low-risk auditee
  • Type A programs that were designated as low risk when they did not meet all of the requirements
  • An auditor’s report on internal control that did not include all required elements
  • The report on compliance with requirements applicable to each major program and internal controls over compliance that did not contain all of the required elements
  • A data collection form that did not properly summarize the auditor’s results
  • A calculation of amounts tested as major programs that was incorrect
  • The omission of a federal program from a cluster that should have been included when testing major programs

Increased Scrutiny

Expect increased peer review scrutiny of governmental engagements in peer reviews.

The CPA community must take these concerns seriously. If we don’t, we may end up with a complete change of the present peer review process. Without positive improvement, CPA firms could, one day, be reviewed by governmental regulators — think IRS audits. It is imperative that we self-regulate in an effective manner.

Episode 7 – A Comparison of Preparation and Compilation Engagements under SSARS 21

You’ve been wondering how the Preparation of Financial Statements option in SSARS 21 compares with the Compilation Engagement option in the same standard. Maybe you’ve also been wondering, “Which is the best to use?” Here’s a brief summary of how the two standards compare as well as information about how to choose between the two.

Deep Work (2016)

I am reading Cal Newport’s new book Deep Work and gaining practical insights into maximizing my efforts as a “knowledge worker” — the term he uses for disciplines such as public accounting.

His main point: We are too distracted to reach our full potential.

Then he offers four rules (disciplines) to move people like you and me (CPAs) to a place where we think more clearly and produce better results.

I love a quote Newport provides from famed psychologist Mihaly Csikszentmihalyi: “The best moments usually occur when a person’s body or mind is stretched to its limits in a voluntary effort to accomplish something difficult and worthwhile.” This happens when we are fully focused on one goal or one pursuit.

As CPAs, we are constantly bombarded with emails, tweets, phone calls, and myriad other interruptions. The result is we are never fully engaged in any one activity and our production declines. In addition, our creativity suffers. (When is the last time you had a fresh new idea?)

Warning: You may not like all his suggestions–one being that we limit our social media consumption. But if we are to be focused and productive, changes–at least for me–must happen.