Challenges Facing Accounting Professionals The Past, The Present and The Future

Transcription

1 Course Introduction Welcome to this online CPE course. At various times throughout this course, participation pop-ups will appear. These pop-ups are a required tracking mechanism that tracks your active participation throughout the course. In order to receive CPE credit, you must click 75% of the pop-ups. Upon successful completion, you will receive an with your CPE certificate, and your certificate will also be posted to your CAMICO LearnLive University. Handout materials can be accessed by clicking the Media tab below. Enjoy the program. Challenges Facing Accounting Professionals The Past, The Present and The Future Presented by: Duncan Will, CPA/ABV/CFF, CFE Loss Prevention Manager Accounting and Auditing Specialist Course Description The CPA profession is under scrutiny. CPAs must be prepared to meet the challenges of that scrutiny, which means paying more attention to risk management practices. CAMICO understands the profession and has developed this presentation to help you gain a better understanding of the practice risks in today s volatile legal environment. Join our expert for a candid discussion on techniques to avoid getting into trouble by making risk management a profitable part of your practice. 1

2 Topics Business Associate Agreements Claim Statistics Client Screening DOL/Peer Review Issues EBP Audit Issues Ethics Codification Peer Review Concerns New SSARS Plaintiff s Attorney Playbook Recent and Often Overlooked Standards War Stories and Common Claim Scenarios Jury Question In a recent poll, how did a jury respond to the following statements? a. Agree Strongly b. Agree c. Neither d. Disagree e. Disagree Strongly Accountants should be very conservative and should advise their clients to take only those tax deductions that are clearly justifiable. 70% 57% 60% 50% 35% 40% 30% 20% 10% 0% 0% Disagree Strongly 4% 4% Disagree Neither Agree Agree Strongly 2

3 During an audit, auditors are responsible for digging well beneath the surface of financial statements to learn the truth about a company. 70% 52% 60% 50% 40% 29% 30% 20% 10% 0% 9% 10% 0% Disagree Strongly Disagree Neither Agree Agree Strongly A professional accounting firm that does not catch a company s fraud should pay a severe penalty. 70% 60% 50% 42% 40% 25% 30% 20% 10% 0% 9% Strongly Disagree 12% Somewhat Disagree 12% Neutral Somewhat Agree Strongly Agree 3

4 CAMICO Average Claim Size From Inception Audit $ 362,000 Review $ 204,000 Compilation $ 127,000 Bookkeeping $ 102,000 Tax $ Investment Advice/PFP $ 155,000 Business Valuations $ Trust $ 101,000 Other $ 90,000 All Scopes of Practice $ 99,000 51,000 90,000 Frequency vs. Severity All Claims by Scope from CAMICO s Inception Tax Audit Review Compilation Frequency Bookkeeping Severity Investment/Advice Trust Litigation Support Other 0% 10% 20% 30% 40% 50% 60% 70% Audit Claims Three-Year Average 4

5 Tax Claims Three-Year Average Fraud Claims By Engagement Three-Year Average So, How Bad Is Fraud? An Analysis of Claims over $100, % Frequency 50.0% Severity 40.0% 30.0% 20.0% 10.0% 0.0% Compliance Expertise Bus. Failure Fraud/ Bad Deals Defalcation Other 5

6 LP Filter Risk Impact F amiliarity I ntegrity L ength T echnical E xperience R esponsiveness Client Evaluation form courtesy of 6

7 Risk Is High for Beginners! Loss Ratios by Service Concentration Loss Ratio 250% % of service concentration 200% 150% All Claims LR=80%Avg 100% 50% 0% 15% 15 65% 65+% So What Should You Do? Focus on the fundamentals Don t get lost in the forest Use common sense Be skeptical Maintain objectivity 7

8 Don t Be Fooled by the Myths The financial statements are management s responsibility CPAs are not responsible for uncovering fraud CPAs following professional standards are safe Remember Your Role Accounting issues are your clients issues Clients have the burden to satisfy the CPA CPA s duty is to report, not account or present You re expected to be skeptical Why? Your duty is to follow GAAS and SSARS when assessing clients representations Common A&A litigation themes: CPAs often assume too much of the burden CPAs often don t run the option 8

9 What Reporting Options Do We Have? Standard report GAAP departure Emphasis of a matter Qualified Scope limitations Adverse Disclaimer Key Accounting and Audit Areas Going concern Valuation of intangibles Impairment of long-lived assets Loan covenants Reserves (e.g., bad debts, obsolete or slowmoving inventory, sales returns) Revenue recognition issues Related-party transactions Plaintiff s Attorney s Playbook Attorneys start by looking at what you wrote: Engagement letters Risk assessments Representation letters Passed/proposed journal entries Planning memos Completion memos Significant issues memos Materiality assessments s Correspondence 9

10 Document, Document, Document Workpapers may one day be prefaced with, Ladies and gentlemen of the jury SO DOCUMENT Client requests CPA/client interactions Your decisions Management s representations Professional judgment CPA evaluation of client estimates Assessments of GAAP issues Client s consent Understanding with management regarding services Significant findings or issues Defensive Documentation Tips Make documentation a habit Document ASAP Use engagement letters for ALL engagements and changes Document all disengagements Follow up on oral advice Document only the facts 10

11 History of Unaudited Financial Statements: Compilations and Preparation ARSC Issues Exposure Draft Re-Write 10/23/2013 SSARS 1 Ends Era of Plain-Paper Financial Statements Comments Were Due 12/1/1978 5/2/ /1/2000 ARSC Issues SSARS 8 ManagementUse-Only FS Effective for Periods Ending > 12/14/2015. Early Implementation Permitted. Four New SSARS Codified Review Standard Revised Compilation Standard When a CPA is engaged to compile FS One-paragraph report New Preparation Standard When a CPA is engaged to prepare FS New Association Standard ~ AU 504 When a CPA permits use of his or her name in a document containing financial statements on which the CPA did not report CPA need not have prepared the FS Four New SSARS XXX Codified Review Standard Revised Compilation Standard When a CPA is engaged to compile FS One-paragraph report New Preparation Standard XXXXX When a CPA is engaged to prepare FS New Association Standard ~ AU 504 When a CPA permits use of his or her name in a document containing financial statements on which the CPA did not report CPA need not have prepared the FS 11

12 SSARS No. 21 Compilation Standard Report will always be required Standard report = 1 paragraph Management-use-only financial statements will disappear Impaired independence will be acknowledged in report and engagement letter Will require signed engagement letter Effective Periods > 12/14/15 Early Implementation Permitted SSARS No. 21 Preparation Standard Will apply when CPA is engaged to prepare financial statements, but not to audit, review or compile them Will not require a report Will require a legend on each page stating no CPA provides any assurance Will require signed engagement letter Independence is irrelevant Effective Periods > 12/14/15 Early Implementation Permitted Compilation Compile Compilation vs. Preparation Preparation The standard will apply when the CPA is engaged to: FS Prepare FS Will an engagement letter be required? Yes Yes Will the CPA need to determine whether independence is impaired? Yes No Will lack of independence need to be disclosed? Yes N/A Will a report be required? Yes No Can the financial statements be disseminated to people other than management? Yes Yes Can the financial statements omit disclosures? Yes Yes 12

13 SSARS No. 21 Compilation Loss Prevention Best Practices Compilation Engagement Letter Client must sign Add preparation service to Interpretation clause New objective Compilation Report Don t hesitate to add EOM to one-paragraph report Paragraph describing special reporting framework SSARS No. 21 Preparation Loss Prevention Best Practices Engagement Letter Client must sign Add preparation service to Interpretation clause State not an audit, review or compilation engagement Disclaimer Report When legend is not viable Don t disclaim; disengage Bookkeeping Loss Prevention Best Practices Engagement Letter Not required, but practically required State not preparing or reporting on financial statements 13

14 Converting to SSARS No. 21 Don t dabble SSARS No. 19 and SSARS No. 21 aren t mutually exclusive but could trip you up Interim and annual financial statement engagements When not compelled, plan to convert midyear SSARS FAQ Does SSARS No. 19 require reports for court accountings? Yes, unless litigation exception Consider SSARS No. 21 Preparation Service Does SSARS No. 21 address prospective financial statements? The ARSC considering AR 120 in 2015 SSARS No. 21 Implications AICPA Peer Review Board No peer review if preparation highest service Preparation service will be subject to peer review when subject to peer review 14

15 Proposed Ethics Codification 1st Step: Identify Threats 2nd Step: Evaluate Threats 3rd Step: Identify Safeguards If no threats Proceed If threats are acceptable Proceed Consider existing and potential safeguards If remaining threat level is acceptable Proceed Stop if Unacceptable Threat Level Proposed Ethics Codification Continued Preface Applicable to All Members Part I Applicable to Members in Public Practice Part II Applicable to Members in Business Part III Applicable to All Others Codification is effective 12/15/2014 Conceptual Frameworks are effective 12/15/2015 Proposed Ethics Codification Continued Interpretation (New ET 1.295) Financial statement preparation Cumulative impact on independence of providing multiple nonattest services 15

16 Steps to Take When Addressing Ethical Dilemmas Determine facts What, Who, Where, When, and How Identify ethical issues involved Identify stakeholders Consider threats and safeguards Study guidance Focus on your ethical values Identify potential courses of action Estimate consequences Consult with risk advisor Consider seeking legal counsel 9. Discuss choices 10. Determine best course of action 11. Document decision process Business Associate Agreements Clients request CPAs sign pro forma Business Associate Agreements that include responsibilities not required by HIPAA Indemnification Requiring expansive breach notifications CPAs asked to sign Business Associate Agreements should: Review the BAA Accept only terms required by HIPAA Not agree to terms that expand the firm s exposure 16

17 Employee Benefit Plan Audit Issues 32% deficiency rate Audit Quality Center participation Dabblers have high rate of deficiency Specializing vs. Dabbling EBP Audits Specializing 1% of Plan Auditors Dabbling 50% of Plan Auditors Audit 100 or more plans Audit 1 or 2 plans Audit 42% of all plans 91M participants 6% of all plans audited 2M participants Common Deficient EBP Audit Themes Overreliance on: SOC 1 reports Actuaries work Appraisers work Predecessor auditor work Limited audit experience Lack of skepticism 17

18 DOL/Peer Review Issue Peer review must select ERISA 4/2013 DOL shared with AICPA the names of firms being inspected for 2011 AICPA s Prism database identified considerable # without peer review Peer reviews being recalled AICPA analysis to be completed 8/14 Administering entities being contacted to initiate recall: 15-day notice 90 days to perform another peer review Recall could impact licensure Recalled peer review typically means re-peer review (120day record retention) CPA Mobility NASBA and AICPA roadmap States pursuing foreign CPAs Review state licensure/registration 18

19 System Reviews 2010 to 2013 Pass Pass with deficiencies Fail 14,167 87% 1,557 10% 457 3% Engagement Reviews 2010 to 2013 Pass Pass with deficiencies Fail 2, % 16, % % Pass w/ Deficiencies System Reviews Fail System Reviews 5.6% 3.5% 6.8% 9.3% 5.0% 2.7% 1.0% 2.5% 2.8% 8.9% 7.8% 10% 8.9% 11.7% 16.1% 20% 15.9% 18.7% Trend Analysis Fail Engagement Reviews 0% 2010 Pass w/ Deficiencies Engagement Reviews

20 Trend Analysis Impact of SSARS 19 on Engagement Reviews SSARS No. 19 Effective for compilations and reviews > Dec. 14, 2010 Pass w/ Deficiencies Engagement Reviews 15.9% 16.1% 18.7% 20% Fail Engagement Reviews 5.6% 1.0% 5.0% 6.8% 7.8% 10% 0% Engagements Not Performed in Accordance with Professional Standards in All Material Respects 2010 Type 2011 Sub Std Total % Total 2012 Sub Std % Total 2013 Sub Std % Sub Std Total % Audits A133 1, % 1, % 1, % Other Govt 1, % 1, % 1, % 1, % ERISA 1, % 2, % 2, % 1, % % 1, % 1, % % 5, % 5, % 6, % 5, % % 3, % 4, % 3, % AUP Review % 1,780 Comps With 3,694 W/O 10, % 11,404 1, % 12,447 1, % 10,598 1, % Compilations Not Performed in Accordance with Professional Standards in All Material Respects 2010 Total % 2013 Sub Std Total 4,014 % Sub Std Total % 3,317 % % 10, % 11,404 1, % 12,447 1, % 10,598 1, % With Disclosures 2.5% 2.2% 13.2% W/O Disclosures 8% 4% % 7.7% 12% 3, % 3, Sub Std 14.1% 16% Total 8.3% W/O Disclosures % 11.2% With Disclosures 2011 Sub Std 8.5% Type 0%

21 Common Issues Failing to document expectations when performing analytical review [Audits and Reviews] Engagement letters not conforming to SAS/SSARS Report not include EOM paragraph when required Not documenting significant findings or issues Compilation Substantially All Disclosures Omitted When an entity wishes to include disclosures about only a few matters in the form of notes to such financial statements, such disclosures should be labeled Selected Information Substantially All Disclosures Required by <Basis of Accounting> Are Not Included. Audit and Review Analytical Procedures Requirements Expectations Comparing results to expectations 21

22 2014 ACFE Report to the Nations Initial Detection of Occupational Frauds Rank Control 1 Tip 2 Management Review 3 Internal Audit 4 By Accident 5 Account Reconciliation 6 Document Examination 7 External Audit 8 Surveillance/Monitoring 9 Notified by Law Enforcement 10 IT Controls 11 Confession 12 Other % of Cases 42.2% 16.0% 14.1% 6.8% 6.6% 4.2% 3.0% 2.6% 2.2% 1.1% 0.8% 0.5% Contact CAMICO When you have a risk management question, contact CAMICO: Toll-free: Via lp@camico.com Website and Members-Only Site: Thank You 22