Why Higher Risks Should Result in Higher Priced Audits

Risk equals uncertainty. So, shouldn't higher risk audits cost more?

Audit risk increases uncertainty–and price. At least, it should.

audit pricing risk-adjusted

Picture is courtesy of AdobeStock

Factors that Increase Audit Risk

Factors that increase audit risk include:

  • Entity (audit client) that is about to be sold
  • Records not reconciled on a timely basis (including bank accounts, inventory, accounts receivable, and accounts payable)
  • Business with a high debt load and covenant violations
  • Known existence of fraud
  • Inexperienced management in a complicated business
  • Known legal proceedings against the company
  • Unusual estimates (e.g., environmental liabilities)
  • Complex transaction cycles with varied accounting systems (systems differ at each location)
  • Group audit situations with subsidiaries audited by other audit firms (especially if the components are foreign entities)
  • Entities with severe cash flow deficiencies

A Risk Perspective

Pretend, for a moment, that you are a representative of a professional liability insurance carrier, and you’ve been assigned the duty of reviewing an audit firm’s book of business. How would you rate–from an insurance perspective–audits of the following entities?

  1. The City of Perfect has a CPA as its finance director. For the last twenty years, they have received the financial reporting Government Finance Officer’s Certificate of Achievement. They have never had a significant fraud. The city’s net position is strong, and it has no debt.
  2. Shazaam, Incorporated, is a high-tech company funded with venture capital. Operations began two years ago. Shazaam has weak cash flow, but the company has successfully created one new whiz-bang product, making it a highly desirable acquisition target. Potential suitors have already made visits to the company’s headquarters inquiring about a purchase.
  3. Sterling Parts, Incorporated, sells auto parts mainly in the United States, but it also has manufacturing operations in Germany. The company has eight subsidiaries, one of which is the German production component. This entity has been cited for contaminating the Rhine river. The cost of cleanup and damages are not known. The foreign entity uses an accounting system that is entirely different from the other companies. A German accounting firm audits the manufacturing component.

Would you price the insurance for all three engagements the same? Certainly not. The City of Perfect is…well perfect. The second and third audits have risk elements.

So if we–as auditors–examine prospective audit clients purely with an eye on risk, there should be a premium (higher fee) for those with increased risk. Why? There is a higher probability that the audit firm will suffer loss. The inherent risks in examples 2 and 3 increase the chance of faulty financial reporting, which increases the possibility a suit against the audit firm.

From a project management perspective, will all three engagements take the same amount of time? Obviously no. The higher risk engagements will require more resources, effort, and time.

Risks Require More Time

You might think of the additional time element in this way:

Risk = Additional Time = Higher Price

Too often, CPA firms fish for audits without giving appropriate consideration to risk. Then, the flat fee creates pressure to ignore risks, because, after all, the audit firm wants to make a profit. It is critical that auditors incorporate a pricing premium for identified risks.

Unidentified Risks

But what about unknown risks (those that exist before starting the engagement)?

Well, that’s another story. Discovering fraud, for example, may require an expansion of the engagement scope. As with any project, when the scope increases, price increases. But the price increase is dependent upon the size and complexity of the theft. If the fraud is nominal and requires little additional time, then no price increase is necessary. But if the theft is broad and complex, a contract amendment may be needed.

Client Acceptance And Continuance

Does your firm use any type of risk score in your new client acceptance or in your annual continuance decision? If yes, how do you do this?

How to Hire and Retain Great CPA Firm Employees

Many CPA firms find it difficult to hire quality staff

Do you desire to hire and retain great CPA firm employees? Today we’ll discuss how you can do just that.

Last month I visited two small CPA firms, one in Georgia and one in North Carolina. Both firms are located in remote areas, so it’s difficult to attract solid talent. Also, firm fees are lower and–as a result–wages are less. Consequently, these firms are not able to provide compensation comparable to Atlanta or Charlotte.

Nevertheless, I found that both firms have great people. So, how did they do it?

Hire and Retain Great CPA Firm Employees

Mine Locally

First, they are mining the gold locally. What do I mean? Well, they are constantly looking in their own neck of the woods for talent. Is there a local college student majoring in accounting. They are inquiring. Has a new CPA moved into the community? They are putting out feelers. If there is a possible match, they are digging for it.

Give Them What They Want

Second (and I think this is key), they are giving new-hires what they want. No, they are not offering Atlanta or Charlotte wages. They can’t. But they are offering other things. Like what?

Well, first of all, flexible hours. If a young female accountant has children at home and desires to spend time with them, then these CPA firms are crafting work schedules that allow Mom to be with her children but still work. For many people–especially Millennials–being able to put family first is everything. Give them what they want. This is good for the employee and the firm. Why? Happy staff members make for productive and loyal employees.

Employment should always be win-win. Too many CPA firms think only about what is good for them, and not their employees. But this is a mistake–is it not? There are two parties. The firm and the employee. Both need to be happy.

Ask yourself, “Is the firm better off with an excellent employee for twenty hours a week or a bad one for forty?” You know the answer.

And while we are talking about giving them what they want, let’s discuss remote work.

Working From Home

Many smaller CPA firms require their employees to come to the office, but what if a potential new-hire lives two hours away? Both of the companies mentioned above allow employees to work from home. While this arrangement has its challenges, consider the option anyway. Ask yourself: “Are you better off with a great remote worker or no worker at all?” I know, getting the technology working can be challenging. But look at what you gain. A competent employee that is not available in your locale.

You may be wondering, “Charles, do you do this?” Yes. My administrative assistant lives in Colorado (I’m in Georgia), and one of my associates works in South Carolina. May I say, “They are awesome!” I don’t know what I’d do without them. Resolving technology and training issues requires effort. But I’m telling you, my employees’ distance has almost no downsides (other than I’d like to see them sometimes).

These two employees have remote access to our paperless files (we use Caseware). And Basecamp (project management software) enables us to stay on the same page. Additionally, we use Zoom for conferencing purposes. So, I can share my computer screen and talk with them about anything. It’s almost better than being in the same room.

One other ingredient to hiring and retaining wonderful employees is having a positive work environment.

All in the Family

One thing I noticed in the two CPA firms is a sense of family. You could tell everyone enjoyed being there. 

If you want your employees to feel like family, treat them that way. Say thank you — a lot. Give unexpected gifts. Celebrate achievements. Have a Thanksgiving and Christmas dinner together. Go to an Atlanta Braves game (and do the tomahawk chop). Give them a day off for their child’s sporting event. Culture matters.

And this may sound silly but love matters. (Yes, I used the L word–going out on a limb.) We might be accountants but we are still humans, people that desire approval and genuine concern.

Great or Mediocre Employees — It’s Your Choice

If you’ve had no success in attracting talent to your small- to medium-sized CPA firm, think about the above. Too many firms can’t hire quality personnel because they refuse to change their hiring practices or work environments. But we live in a different world today. Millenials don’t think like the Baby Boomers. So maybe the Boomers need to think like Millenials. Then those great employees might magically appear on your doorsteps.

How to Create New Accounting Products and Services

Here are steps to ensure the success of your new projects

This is a guest post by Harry Hall, the Project Risk Coach. Harry is a speaker, teacher, and blogger who helps leaders and project managers get results. Harry has managed projects–mainly for insurance companies–for more than 17 years. He also teaches project management courses to CPA firms. Harry lives in Macon, Georgia with his wife Sherri. He can be found on LinkedIn.

Are you wondering how to create new accounting products and services? In this post, I’ll explain how.

how to create new accounting products and services

Imagine an accounting firm (we’ll call it Premier CPAs) that has struggled in recent years. Revenue is down, and the firm has lost several top clients. To make matters worse, the firm recently received a fail report in its peer review.

The partners recently met and were brutally honest with one another. Something has to change.

Premier CPAs has a great team of auditors. However, they are failing to understand their client’s needs, and they are not changing their business model accordingly. Over time, competing CPA firms have created superior products and services.

The partners selected a team to go offsite and develop a strategic plan. The group was challenged to perform an assessment of where the firm is and where it needs to go.

The top strategies identified were to:

  • Implement a more modern auditing software solution
  • Map and re-engineer Premier CPAs’ audit processes
  • Implement a small customer service center

How to Make Your Dreams Come True

Great ideas, but how do we make them a reality? It’s easy to talk about things, but it’s another matter to plan and execute new ideas.

Well, you could do this like many lack-luster firms. Just do the projects willy-nilly. Do it as you have time. Find a few warm bodies who are not busy to do the work. Maybe assign the activities to the IT guy.

Will you get there? Maybe, but how long will it take? How much further will you fall behind your competition?

Take a different approach. Focus on your goals and strategies. Be intentional.

How to Create New Accounting Products and Services

The following steps can put you on a fast track to greater success:

  1. Define your projects. In the initiation of your projects, define them with project charters. Spell out the problems you are attacking, your goals, what you will deliver, the assumptions of the project, the constraints of the project, key stakeholders, top risks, and who will serve on the project team.
  2. Assign project sponsors. Select partners and senior management who will define and cast the vision for the projects. These leaders should have the authority to provide resources and money to complete the projects. While the project team does most of the work, the sponsors are ultimately responsible for ensuring success (and should be held accountable).
  3. Create project teams. One of the most important things you can do for your projects is to staff the teams. Carefully select individuals who have the knowledge and skills to deliver the project in a timely manner. There will likely be some opportunity cost in this equation. You may have to assign some audit personnel to perform the project work.
  4. Kick off projects. Get your project team and key stakeholders together for the project kick-off. The sponsors should share their vision for the project. The individual leading the project (i.e., project manager) should review the project charter, ensuring that everyone understands the project and their roles.
  5. Monitor progress. The project managers should periodically meet with their team members to check the status of the project and to plan their next steps. The project managers report to the sponsors, and in some firms, the sponsors report to senior management and partners. Doing so provides transparency throughout the firm’s leadership.
  6. Celebrate success. Create a robust project culture by celebrating when teams hit milestones or complete projects on time and under budget. Thank your teams.
  7. Perform benefits realization. How do we ensure that the projects produce the desired results? Measure your results at designated times (e.g., six months and twelve months after the completion of each project).

Parting Words…This Is NOT Easy

These steps may require a significant transformation in the firm’s culture. Changing what people believe, their attitudes, and their behavior is the toughest part of creating a productive project culture.

First, leadership is required, not optional. Without a firm hand, people will fall back into old bad habits. The senior leadership team of the firm must consistently communicate their expectations and lead by example. Make sure there is a high level of accountability with appropriate rewards and recognition for high performing teams.

Second, train your teams in project management. At a minimum, identify and train individuals who will serve as project managers. You may want to get a project coach to work with your firm. Many progressive firms require their project managers to get project management certifications.

Lastly, all of these actions must be performed with an eye on your firm’s strategic goals and objectives. Make sure the changes align and support your vision, mission, and goals.

Your best days are ahead!

Twenty Mistakes that CPAs Make

Some mistakes cost us dearly

Twenty Mistakes that CPAs Make

Here are twenty mistakes that CPAs make:

  1. We hire people without sufficient knowledge and temperament
  2. We accept more work than we can possibly perform
  3. We don’t cull our bad clients (which contributes to #2.)
  4. We work without taking breaks
  5. We don’t exercise
  6. We try to be experts in too many industries
  7. We use outdated computers and software (e.g., we are not paperless)
  8. We don’t plan our continuing education (and take anything we can find at the end of the year)
  9. We have no strategy, moving from one engagement to another because it’s pressing
  10. We work sitting down all day (when standup desks are available)
  11. We bill our clients months after the service is provided (rather than a couple of weeks)
  12. We allow email to drive our day (we are reactive)
  13. We don’t express sincere appreciation to our peers and employees (those fully deserving of “thank you!”)
  14. We don’t use engagement letters to define our work
  15. We have no exit strategy, hoping someone will knock on our door and offer to buy the practice
  16. We ignore those we love (because we are overworked and irritable)
  17. We don’t stay current on evolving standards
  18. We don’t fire unproductive or difficult employees
  19. We don’t deal with problems (bad clients or employees) because doing so is awkward
  20. We never pause to evaluate our lives
Twenty Mistakes that CPAs Make

Picture is from AdobeStock.com

Since  1984, I have worked in public accounting, a profession I dearly love. One thing I’ve noticed about CPAs is we are too immersed in our work–to a point of blindness. We don’t step back and evaluate what or how we do things. Would we be better off if we intentionally removed certain responsibilities? Might we not be even more profitable and happier? 

Two things–more than anything else–will sap your energy and productivity: (1) difficult clients and (2) unproductive or difficult employees.

The 80/20 rule is applicable in our profession. We make 80% of our money from 20% of our work. And 80% of our headaches come from 20% of our clients and employees. (Were you awake last night thinking about one of these?) While the exact percentages may not be true for you, the concept is highly relevant. 

I’ve given you twenty mistakes that CPAs make. Are there others you would add?

Are You All In or Not In at All?

Why some accountants experience genuine joy (even at work)

In the 1970s, I worked as a 4-H camp counselor. The kids who visited us were 10 to 14 years of age. My fellow counselors and I had a saying: “Love the Little People” and this we did with all our hearts. We were “all in.” (That’s me in the blue below–you can go ahead and laugh.)

Rock Eagle Counselors

Rock Eagle Camp Counselors 1978

Each week, the yellow buses would roll in and a new adventure would start. A fresh batch of little ones to pour our lives into. And we’d begin again–yelling, running, jumping, swinging, playing, swimming, crafting, laughing. We knew one thing: Love the Little People.

By Friday morning, the end of that group’s camping experience, the kids asked for autographs, gave hugs, and, yes, even cried (and we did to).

Why was this so rewarding? I think the secret lies in what Jesus said, “To find your life, you must lose it.” It’s is in giving and caring about others that real joy is found.

What did I learn from my four summers of serving others at Rock Eagle 4-H Center and Camp Wahsega?

To be fully engaged, we must be all in. We must know our mission. We must believe in the mission. We must pursue it—fully. In so doing, we become immersed. We experience what Mihaly Csikszentmihalyi calls flow. Time flies. We almost forget we exist. There is effort–sometimes great effort–but there is joy.

Why (Some) Accountants Don’t Have Joy

For most working men and women (including CPAs), life has lost its zip. We get up on Mondays because we have to. We work all week to pay the bills. And when Friday comes, we are thankful. We are not “all in.”

Can our work life be different? Yes.

No–on Friday morning–I don’t think anyone will ask for my autograph, hug me, or cry–except possibly for the joy of not seeing me a couple of days. But can we work in a way where flow happens? I think so.

How?

Traditional Services

Find your passion, your mission. What is it that elevates your pulse, that causes excitement? This passion may be, for some, the performance of traditional services. I do know CPAs that love tax planning or performing audits. Is there a niche within those areas that “floats your boat”? Maybe your thing is nonprofit audits. For you tax guys and gals, is there a specialization that gets your juices going?

Why not develop your skills and knowledge in those areas? It may take time, money and effort. But if that special place causes you to come alive, pursue it. I find far too many CPAs meander, almost by accident, into their worklife.

Why? We don’t reflect. We don’t plan. We respond. This passive approach will land us and keep us in the land of existing rather than thriving.

If you’ve grown bored with traditional services, maybe it’s time for a change.

Non-traditional Services

Others find their joy in new adventures, something not in the traditional realm. Are you into big data? You love extracting meaning from reams of numbers. You enjoy wrapping your arms around immense databases. Learning a package such as IDEA fires you up and makes you feel powerful. Then intentionally lean in that direction. Build a five-year plan to become one of the top big-data CPAs in the country.

Other non-traditional service ideas include:

  • Software training
  • SOC reporting
  • Internal control design
  • Forensic services
  • Writing accounting books
  • IT consulting
  • Project management
  • Risk management

What’s Your Mission?

So, whether your passion lies in traditional or non-traditional services, I go back to mission. What are your goals? Who do you want to become? How can you get there? In finding answers to these questions, you’ll discover that which speeds your pulse. Joy is found in the pursuit of your goals and in the use of skills learned to serve others. 

Take Time to Reflect

Consider taking a day off to just think about where you are and where you want to go. Staying perpetually busy will not allow you to “think about your thinking.” So find a quiet place where you won’t be interrupted and think. Write down your goals and then once a month review them to see if you are still on track.

Before taking time off, you may want to read Michael Hyatt’s book Living Forward. You’ll find insights into planning your life and staying on track–that way, you can be “all in.”

How Employees Steal Using a Check-for-Cash Scheme

Day 6 of 30 Days of Fraud

The Theft

Kelly is a receipts clerk in the City of Whosville. She normally collects about $25,000 each day with $8,000 of this being in cash and the remainder in checks. Kelly, in accordance with city policy, receipts all monies she receives, but she does not note on the receipt whether the payment is cash or check.

Check for cash theft

The picture is courtesy of AdobeStock.com

Kelly also opens the mail and receipts those checks. Each month the city receives about a dozen alcohol tax checks–each made out to the City of Whosville–in the range of $3,000 to $6,000 each.

Kelly wants to take a trip overseas, but she needs about $15,000 which he doesn’t have. But then she has a novel idea.

She could not receipt an alcohol tax check, place it in her cash drawer and take out an equivalent amount in cash. Since she doesn’t note whether the payments received at his cash window are cash or check, no one will know–the total amount in his cash drawer at the end of the day will reconcile to the receipts written. Over a three month period Kelly steals $17,505, and no one notices.

The Weakness

The cash receipts issued do not note whether cash or checks were received. No one–such as supervisor–is reconciling the composition (total cash received and total checks received) of payments received to the receipts (which should note whether each payment is cash or check).

The Fix

Each receipt should specify the type of payment received (cash or check). Also, the budgeted alcohol tax amount should be compared to the total received.

10 Post-Busy-Season Questions to Lower Next Year’s Stress

Evaluation is best done when thoughts are fresh

So how many 70 hour weeks did you put in this year? More importantly, is there any way to lower your stress next year?

CPA's Stress Reduction

Picture is courtesy of AdobeStock

It is best to do your post-mortem just after busy season while the pain points are fresh in your mind. Consider taking a half day off just to review your most recent tumult. Here are ten questions to ask.

  1. What can I do before the busy season? Anything–and I mean ANYTHING–that can be done before the storm hits will help.
  2. Can I hire temporary help? Can I outsource certain duties?
  3. Do I need to redesign my workflow? Maybe I need to move to a cloud-storage system.
  4. Do I need to purchase new technology (software, computers, scanners, copy machines, monitors)? If my software always runs slow, maybe it’s time to change.
  5. Should I add an extra monitor? Multiple monitors can greatly enhance your efficiency.
  6. Do I need to change my open office days? Some CPAs–especially smaller practices–close their offices on certain days so they can work without interruption.
  7. Should my book of business be leaner? Some clients are demanding. They might bring work in late and require short turn-a-rounds. They might be slow to pay, or they don’t pay at all.
  8. Do I need to replace any staff members? If an employee always works slow or is absent, it may be time to let that person go.
  9. Should I sell a part of my business so I can focus more on the more profitable sections?
  10. Will anything be different next year? You may have a partner or key staff member retiring this year. Now is the time to think about how to replace that team member. Maybe your lease runs out this year. Consider if a new location will be better.

How Internal Viruses Affect Accounting Firms

Viruses from your own staff can do great harm

Repeatedly you’ve heard about the threat of external viruses, but has anyone told you about the internal ones? These viruses do their damage quietly, but the effects can be painful.

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

Let’s look at an example.

Cody works for a public accounting firm, and he’s been looking for a sample fair value note disclosure — you know one that addresses the three levels and describes how fair value is determined. So Cody Googles “fair value disclosure” and Eureka! He finds it. One problem, however. The sample note is wrong. But Cody thinks it’s right, and, in his desire to help others, he emails the fair value note to his associates. The next thing you know, the deficient disclosure appears in twenty sets of financial statements.

Silently, effectively the virus spreads.

One year later, Cody’s firm is having its peer review, and the reviewer sees the faulty note in two sets of financials. Not good. Now, the firm receives a finding for further consideration (commonly referred to as an FFC). Then the firm corrects the fair value disclosure in the next year and clients are saying, “I thought the prior disclosure was correct.” Now your clients lose some trust in your firm, and we all know that trust is the foundation of any business.

Why do these types of viruses spread? Mainly because they come from a trusted source.

How can you stop them? Designate a person (or two) in your firm to vet new information before it is shared. Here are examples of new information or documents that might be reviewed before sharing:

  • Note disclosures
  • Engagement letters
  • Audit forms
  • Sample financial statements
  • Sample management letter comments
  • Sample opinions

Your designated reviewers need appropriate firm resources to aid them in their task. Those resources include:

  • Publications (such as):
    • AICPA audit guides
    • AICPA practice aids
    • PPC’s online books and SMART Practice Aids
  • AICPA’s technical hotline (free)
  • Center for Plain English Accounting (CPEA) (fee-based)

While the AICPA’s technical hotline does not provide written responses, the CPEA does — but there’s a cost.  My firm has used the CPEA for several months now, and I like what they are providing. For CPEA membership information, click here.

What Keeps CPAs Awake at Night?

Here are the results from my recent survey

In preparing for my 2016 blogging calendar, I sent a survey to my subscribers.

Picture is courtesy of DollarPhotoClub.com.

Picture is courtesy of DollarPhotoClub.com.

The last survey question was opened-ended: What one thing keeps you awake at night? Here are a few responses:

  • Is it possible to narrow it down to just one? Malpractice issues primarily?
  • Getting work done in a more efficient and timely manner.
  • Litigation/being sued.
  • The magnitude of what we need to know to operate as a sole practitioner.
  • Ever changing standards and requirements, possibility of mistakes due to standards overload.
  • Being able to maintain a thriving practice that I can receive a good return on in my retirement.
  • Increasing burden put on our profession to be the “police” for tax agencies [e.g. Obamacare compliance, state use tax.]
  • If I don’t wake up one morning, what happens to my clients?
  • Delivering what we promised on time.
  • Keeping up with the standards.
  • Plan to retire in 8 to 10 years and need to create an exit path.
  • Not having enough time to finish my work.
  • Liability…the kind that arises from something that I did not anticipate.
  • Ever changing regulatory environment and taking on too much work and not being able to deliver timely service.
  • Have I forgotten to do something for a client that I should have done?
  • Afraid of not meeting deadlines.
  • Often feel that state board and AICPA are trying to run sole props out of business. Every time I turn around they want another big fee to access the basic tools and information I need to stay in business.
  • Partners wanting to keep things the same. No growth.
  • Always feeling “behind” (not having enough competent help).
  • Not knowing what I don’t know.
  • I worry that I will be physically or mentally unable to complete the work I have taken on.
  • Staff retention.

Top Concerns

The survey revealed the following top concerns:

image

The top concerns include:

  • Getting all my work done
  • Findings answers to difficult questions
  • Picking up new clients

It’s interesting to me that a top concern is getting work done and picking up new clients — are we saying, “We can’t get everything done, but we want more”?

Answering Difficult Questions

The survey respondents said they answer difficult questions in the following ways:

image

Survey says: CPAs often perform their own research using published sources (45%) and others call an outside CPA (24%).

Change One Thing

image

These CPAs said the top thing they would change is getting work done efficientlyinterestingly, this ranked higher than making more money (almost twice as high).

Survey Participation

First, let me thank those of you who participated in the survey (which I sent to all my subscribers with an email).

You can still participate in the survey here.

Your participation will enable me to provide more relevant content to you during 2016. Thanks and happy new year.