CAMICO Claim Statistics. Risk Management & SSARSs Update. Agenda

Transcription

1 Risk Management & SSARSs Update Presented by: Duncan Will, CPA/ABV/CFF, CFE Loss Prevention Manager and Accounting & Auditing Specialist, CAMICO Agenda CAMICO Claims Statistics Common Claim Themes SSARSs Update Peer Review Implications Documentation Tips Hot Topics Best Practices Wrap Up and Questions CAMICO Claim Statistics 1

2 Average Claim Size Type of Service From Inception through 12/31/15 Audit $ 321,000 Review $ 199,000 Compilation $ 129,000 Tax $ 47,000 Bookkeeping $ 95,000 Investment Advice/PFP $ 159,000 Trust $ 97,000 Business Valuations $ 95,000 Other $ 85,000 All Scopes of Practice $ 91,000 Audit Claims Three-Year Average ( ) Other 18% Sale/Purchase 3% Defalcation 17% Expertise 8% Fee 1% Fraud 8% Business Failure 45% Tax Claims Underpayment 14% Three-Year Average ( ) Defalcation 7% Planning 4% Remedial 2% Missed Election 2% Fee 1% Compliance 21% Missed Deadline 11% Other 21% Advice 17% 2

3 Fraud Claims Three-Year Average ( ) Compilation 26% Bookkeeping/ Accounting 12% Mgmt. Consulting Services 6% Tax 24% Review 3% Audit 20% Other 7% Exec./Trustee 2% Frequency vs. Severity All Claims by Scope from Inception through 12/31/15 Common Themes 3

4 Rules in the Malpractice World [Brackets] = Jury Speak Professional acts and decisions will be judged in hindsight CPAs are independent and objective Professional standards are merely the floor The professional is knowledgeable [smarter than client] and thorough [no loose ends] [get it right] Your liability will be based on the Geometry of Duty to your client CPAs are scriveners [show me, don t tell me] Rules in the Malpractice World Continued The CPA s job is to advise of opportunity and warn of risk Fraud and embezzlements are commonplace An auditor s [CPA s] job is to catch fraud [get it right; warn] Bank reconciliations are fraud detection devices Preparing a tax return is an ADVISORY service Guilt by association [White Hats vs. Black Hats] Bad things shouldn t happen to good people Proactive Defense Plan Focus on the fundamentals Maintain objectivity Be skeptical Use common sense Don t get lost in the forest Don t be fooled by the Myths The financial statements are management s responsibility CPAs are not responsible for uncovering fraud CPAs only need to follow professional standards 4

5 Your Duties and Role Accounting issues are your clients issues Clients have the burden to satisfy the CPA in all services SSTSs, Circular 230 and other laws/regulations A CPA s duty is to report, not account or present Duty to follow GAAS, SSARS. Options: 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 slow-moving inventory, sales returns) Revenue recognition issues Related-party transactions Plaintiff s Attorney s Playbook Attorneys start by looking at what you wrote: Engagement letters Representation letters Planning memos Completion memos Significant issues memos Correspondence Risk assessments Passed/Proposed journal entries Materiality assessments s 5

6 Risk Management Best Practices Tax Loss Prevention Best Practices FIRAC [Facts, Issues, Rules of Law, Analysis/Argument, and Conclusion] Move FBAR question to organizer s FIRST page and have client initial YES or NO Don t sign IRS settlement agreement even if POA allows If no signed EL, get signed organizer [Get EL] Extension consent/documentation Contemporaneously memorialize and communicate interactions with other professionals (e.g., attorneys) Read and follow guidance of Treasury Circular 230 Inform/advise/consent Loss Prevention Best Practices Formal re-acceptance list services identify conflicts and risks Perform background/credit checks (Google/Bing?) Engage and disengage in writing Risk mitigating EL clauses: Indemnification, limitation of liability, and stop work Realize professional standards are lowest hurdle Retain your working papers 6

7 Loss Prevention Best Practices Continued Recognize and communicate conflicts Don t sue for fees Suggest fraud hotline [but don t offer] Offer two-tiered bank reconciliation services Don t offer comfort letters Client portal Ethical firm = ethical clients = fewer malpractice claims Loss Prevention Best Practices Continued Learn what is being communicated to Board of Directors and assess adequacy Assess materiality regardless of service Respect Don t dabble Implement former ET 400 Warn of embezzlement risk Detail bill Preliminary Draft For Discussion Purposes Only Client screening: ask why me? [now, not later] Loss Prevention Best Practices Continued Encourage specialization Partner involvement Buy-sell agreements Maintain your objectivity Emphasize defensive documentation Consult your risk advisor Recognize and address the Expectation Gap Stay on the side of the angels 7

8 SSARSs Update History of Unaudited Financial Statements SSARS 1 Ends Era of Plain-Paper Financial Statements 12/1/1978 SSARS 21 Issued Effective for Periods Ended > 12/14/2015. Early Implementation Permitted. 10/23/ /8/ Tenants Corp. v Max Rothenberg and Co. 10/1/2000 ARSC Issues SSARS 8 Management- Use-Only FS 12/29/2009 SSARS 19 Issued Effective for Periods Ended > 12/14/2010. SSARS No. 21 New Requirements for Review (AR-C 90) and Compilation (AR-C 80) Report headings now required (Review Only) New objective (Comp & Review) New requirements, commonly followed (Comp & Review): Client-signed engagement letter Add preparation service to ET clause Report must include CPA s city and state Consider known departures from applicable reporting framework and disengage if report modifications are inadequate 8

9 SSARS No. 21 Compilation Standard (AR-C 80) Report always required Management-use-only SSARS No. 8 financial statements are no more Standard report = one paragraph Impaired independence must be acknowledged in report and engagement letter SSARS No. 21 Preparation Standard (AR-C 70) Applies when CPA is engaged to prepare financial statements, but not to audit, review or compile them Does not require a report Requires a legend on each page stating no assurance is provided Requires an engagement letter Independence is irrelevant Preparation Engagement Loss Prevention Best Practices and Nuances Engagement Letter Client must sign Add preparation service to ET clause if maintaining independence State not an audit, review or compilation engagement Disclaimer Report Only for use when legend option not viable Otherwise don t disclaim; disengage 9

10 Preparation Engagement Loss Prevention Best Practices and Nuances Continued Bookkeeping Services Professional standards don t mandate engagement letter, but jury standards do! State engagement does not contemplate preparing or reporting on FS The Legend Intent = No CPA provides any assurance Indicate in engagement letter CPA s name not required terrible marketing idea (But good risk management) Preparation Engagement Loss Prevention Best Practices and Nuances Continued Unilateral Engagement Letter Prohibited CPA and client must sign Evergreen Engagement Letter Bad idea Use clause indicating each year stands on its own Comparative Engagements Prior year s report not required Preparation Engagement Loss Prevention Best Practices and Nuances Continued Peer Review Implications No peer review if preparation highest service If firm is subject to peer review, preparation engagements will be subject to peer review Matching cufflinks Mandatory EL and clauses Departures from framework New reports 10

11 SSARS No. 21 Loss Prevention Best Practices and Nuances Continued Recognize ET (Formerly Int ) Implications Educate Clients and Their FS Users Other Risk Management Nuances When known departure exists upgrade the engagement from preparation to a compilation. Should engagement letter reference AICPA Code of Conduct? When true, indicate Disclosures Omitted in FS title. Avoid using transmittals for prepared FS. Common Engagement Letter Issue I will provide you with a monthly computerized financial statement consisting of a balance sheet, income statement and supporting statements for cost of goods sold and operating expenses. Does not indicate the level of service Is not SSARS 21 compliant Does not restrict use of the financial statements Does not indicate whether substantially all disclosures are omitted Does not state independence is impaired 11

12 Section 70 Preparation of Financial Statements Continued If management refuses or cannot include the legend, the accountant can: Print on paper pre-printed with desired legend Issue a disclaimer report Perform a compilation, review or audit engagement, or Resign Section 70 Preparation of Financial Statements Continued When does Section 70 apply? Does not apply when the accountant has been engaged to merely assist in preparing financial statements or when the accountant prepares financial statements as a by-product of another engagement, BUT will need an engagement letter to prove AR-C 70 does NOT apply. Don t provide by-product financial statements. Section 70 Preparation of Financial Statements Continued Report is not required even if financial statements are expected to be used by a third party Not required, but DON T report! Not prohibited from including a cover sheet with the firm name Not prohibited, but LIMIT association of firm name with Preparation FS! Requires a legend on each page of the f/s stating that no assurance is being provided Normally placed on the bottom of each page of the financial statements including related notes Not precluded from including accountant s or accountant s firm name in the legend Not precluded, but DON T! Accountant is not precluded from including positive statements in the legend Not precluded, but DON T! 12

13 Section 70 Preparation of Financial Statements Continued Examples of language that can be used in the legend are as follows: No assurance is provided on these financial statements. These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them. No assurance is provided by ABC CPAs on these financial statements. ABC CPAs did not perform an audit, review or compilation engagement on these financial statements, and no assurance is provided on them. ABC CPAs adhered to Statement on Standards for Accounting and Review Services (SSARS) No. 21 issued by the American Institute of Certified Public Accountants in the preparation of these financial statements. No assurance is provided on these financial statements. CAMICO believes the best legend is No CPA provides any assurance on these financial statements. Inquiry Prospectus Issue CPA compiled financial statements for a church. The church has just called and requested CPA s consent for including their report in church s prospectus for a $5M bond offering. Response Don t consent unless/until convinced work performed would equal or exceed work had CPA known of offering, AND Follow guidance in withdrawn proposed Association Standard Offer to perform preparation engagement Inquiry FS Preparation Services Issue In most cases, I don t produce the financials. I just inform my client the books are reconciled, and they can view/print financials if they choose. In that case, do I have a SSARS 21 engagement? Response No, since NOT engaged to prepare financial statements. If you aren t being engaged to prepare financial statements DON T prepare financial statements and ADD This engagement does not contemplate the audit, review, compilation or preparation of financial statements. 13

14 Inquiry FS Preparation Services Issue Are there any gotchas I should be aware of? I only intend to use a preparation agreement for my cloud clients who share or fully perform the bookkeeping work and do not require a higher level of reporting. Response Yes: 1. Obtain a signed engagement letter. 2. Specify that you will not be reporting. 3. Highlight that EACH page of the financial statement will contain a legend indicating something like No CPA Provides Any Assurance on the Financial Statements. 4. Your peer reviewer may select these financial statements AND the engagement letter for review. 5. Don t ignore any FS presentation issues identified. Inquiry Significant Subsequent Event in No Disclosure FS Issue Client s property was sold at auction in May 2016 for book value. Bank assessed a $117K deficiency judgment. Should this be reflected in the client s December 2016 compiled/no disclosure financial statements? If so, how? Response Modify report to include an emphasis of matter paragraph referencing the subsequent event. The P&L and BS impacts should NOT be impacted, but the disclosure should describe the impact. The transaction should be described in the footnotes of the financial statements as a subsequent event. Described substantially all disclosures omitted disclosure requirements. Inquiry Client Acceptance Issue For cost reasons, a small client doesn t want CPA to issue FS and just wants CPA to assist their bookkeeper with creating client s FS. CPA doesn t think the bookkeeper is competent. I really don t want to make ANY journal entries in their QuickBooks without considering it a compilation service and issuing compiled financial statements. Am I being overly conservative? Response CPAs may perform bookkeeping services for clients without being compelled to prepare or compile their financial statements Consider all factors when making your client acceptance decision Disengage if you believe the bookkeeper lacks the skill, knowledge and experience needed to generate accurate financial statements 14

15 Inquiry Lender Required FS Issue Client is applying for a home loan. Lender desires a FS. CPA proposes performing a preparation engagement, but client asks CPA to sign, date and write phone number on FS that client will forward to lender. CAN client forward to lender? Response Don t consent Complying would associate CPA with financial statements Inform client that each FS page will state No CPA provides any assurance on these financial statements Inquiry Printing QuickBooks FS Issue I obtain an Accountant s Copy of the client s QB files, make adjustments necessary to prepare an income tax return, then give the file back to the client. The client does not necessarily want me to print the financials out for them. Will it be safe for me to use the preparation standard and not issue compiled financial statements with a report? Response If your client does not wish for you to provide financial statements Don t Modify the terms of your engagement to specify that no audit, review, compilation or preparation of financial statements is contemplated Inquiry Full Service Accounting + Review Issue I have found preparation and compilation full service engagement letters on the CAMICO Members-Only Site, but can t find a full service review engagement letter. Where should I be looking? Response Not per se prohibited, but Bookkeeping is nonattest service. Can do nonattest services, but ET now requires consideration of cumulative impact of nonattest services. Consider bifurcating engagement with another CPA. 15

16 Inquiry Disclosures Omitted Issue How should no disclosure financial statements be presented? Response 1. When the client has requested the financial statements omit substantially all disclosures the heading/title to each statement may be modified to include the line Substantially All Disclosure Required by <Financial Reporting Framework (i.e. US GAAP)> Omitted. MY PREFERENCE. - OR - 2. Add a note to the financial statements under a title Selected Information Substantially All Disclosures Required by <financial reporting framework> Are Not Included. Inquiry Disclosures Omitted - Continued Sample footnote for disclosure approach (2nd approach) Management has elected to omit substantially all the disclosures (and the statement of cash flows, if applicable) required by the <financial reporting framework>. If the omitted disclosures (and statement of cash flows, if applicable) were included in the financial statements, they might influence users conclusions about the entity s financial position, results of operations, and cash flows (or equivalent financial descriptions for non-gaap financial statements). Accordingly, these financial statements are not designed for those who are not informed about such matters. Peer Review Matters 16

17 Peer Review Trend Analysis 20% 10% 0% 8.9% 7.8% 8.9% 16.1% 5.0% 9.2% 18.7% 6.8% 12.0% 16.2% 13.6% 10.4% 10.3% 5.6% 2.5% 1.0% 2.7% 2.8% 3.7% 3.3% 6.5% 7.2% 4.4% 3.6% Pass w/ Deficiencies System Reviews Fail System Reviews Pass w/ Deficiencies Engagement Reviews Fail Engagement Reviews % 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Substandard Peer Review Results for Compiled Financial Statements 2.19% 2.50% 6.50% 11.24% 8.29% 13.62% 7.44% 12.35% With Disclosures Without Disclosures 4.26% 6.95% 4.26% 4.57% Documentation Tips 17

18 AU-C Section 230 Audit Documentation Report Release Date 60-Day Window Documentation Completion Date Within 60-Day Period: May update documentation May discard superseded documents If documentation is added, must indicate: Date added Who made addition Reason for change After 60 Days: No deletions Additions require explanation Auditor should prepare documentation that enables experienced auditors, with no connection to the audit, to understand a) the nature, timing, and extent of procedures performed; b) the results of the procedures performed and the evidence obtained; c) the conclusions reached on significant matters; and d) that the accounting records agree or reconcile with the audited financial statements SSARS Nos. 21 Preparation, Compilation & Review Engagements Review Comp+Prep Engagement letters Significant consultations, findings or issues and their resolution Analytical procedures Expectations Results Management responses Significant matters in inquiry Significant unusual matters considered Representation letters Oral explanations are insufficient, but in limited situations may be used to clarify or explain. 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 18

19 Hot Topics Department of Labor EBP Audit Issue DOL has selected 401(k) plan audit for review Response Consider obtaining POA Have auditor NOT on audit team peruse before giving to DOL Update workpapers and contemporaneously date as necessary Don t sign consent to distribute workpapers Agreed-Upon Procedures Safe engagement Detail procedures Restrict dissemination Maintain independence Requires written assertion* * For Attest Reports Dated on or After May 1,

20 Other A&A Best Practices A&A Loss Prevention Best Practices Conservatively implement ET Nonattest Services Consider prior year s written advice in current planning. [e.g., AU-C 260 and AU-C 265 letters] Don t cut and paste brainstorming memos Embrace EOM paragraphs Address going concern reporting early Read industry audit guides and risk alerts A&A Loss Prevention Best Practices Continued Representation letters Modify to suit Consider for compilations 20

21 Contact Information Policyholders may always contact CAMICO with risk management questions and for advice: Toll-free: (800) Via Loss Prevention: Claims: Duncan: Website: Thank You 21