The Prudent Accountant

At the recent AICPA National Advanced Accounting and Auditing Technical Symposium (NAAATS), one of the outstanding speakers was Mary Eklund. Those of you who’ve heard Mary speak know she can be entertaining while at the same time scaring you to death. Mary is an attorney who defends accountants in law suits. She does a lot of work for CAMICO, the insurance company that insures accountants (Disclosure. Mary presented one of the keynote speeches and was sponsored by CAMICO). One of the points she made is that we all need to keep in mind is that a bad economy leads to more lawsuits and threatened claims. Why? Because everyone is looking for money.

Some of the people who are looking for money are:
Clients who have had employees embezzle funds.
Clients who have lost money on investments.
Clients going through a divorce.
Clients in partnerships that are breaking up.
Third parties for clients involved in insurance or other financial fraud.

If you think about it I bet you could come up with a lot more to add to this list.

How do you protect yourself? Mary had some suggestions and I'll give you two of them that stuck in my mind after we review what we already know. As a reminder, here are just a few suggestions.

Have good quality controls in place.
Evaluate your clients not just when you acquire a new client but make it a practice to re-evaluate them on a regular basis to see if you want to keep them as clients.
Make sure the client writes the representation letter on their letterhead.

The AICPA has quality control standards that provide guidance to CPA firms for their system of quality control for their accounting and auditing practice. And of course there is the Code of Professional Conduct. And don’t forget Practice Alert 03-3, Acceptance and Continuance of Clients and Engagements.

Mary Eklund said two things that really stuck in my mind: (1) Apply professional skepticism and (2) stay away from emails!

About those emails. Don’t put anything in an email you wouldn’t want to see in court. We all know that stuff put in a computer is not really gone when we hit delete. It just gets written over. There are companies that make a very good living finding “deleted” information.

One other thing. It’s probably not a good idea to sue a client over nonpayment or to turn them over to a collection agency. Suing a client quite often leads to counter-suits.

Naturally we’re not giving any legal advice nor was Mary Eklund in her remarks. If you stop and think about it, everything she said and what you have read here is what the “prudent accountant” should do in managing an accounting firm.

You might want to consult your own attorney on how you can protect yourself from potential lawsuits, or at least mitigate the effects.

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Highlights from NAAATS

I attended the AICPA National Advanced Accounting and Auditing Technical Symposium (NAAATS) July 16th and 17th, 2009. Here are a few highlights from that conference. (In many cases the speakers from the various organizations were discussing activities that they have completed over the last year.)

FASB

The big news of course is that the FASB Accounting Standards Codification™ was launched July 1, 2009. It is now the single source of authoritative nongovernmental U.S. GAAP. All other accounting literature not included in the Codification is nonauthoritative.

FASB Standards as we know them are now “legacy” standards. They will continue to be available on the FASB website. Individual standards will be issued in the form of Codification Updates numbered according to year and the order in which it is issued. So the first update of 2010 will be 2010-01.

All existing accounting standards documents are superseded as described in SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.

The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

The FASB is working on the following major projects:
Conceptual Framework
Reporting Discontinued Operations
Financial Statement Presentation
Revenue Recognition
Leases
Emissions Trading Schemes
Financial Instruments with Characteristics of Equity
Financial Instruments-Improvements to Recognition and Measurement

PCOAB

News from the PCAOB is that financial statements of non-public broker-dealers for fiscal years ending after December 31, 2008 must be certified by a registered public accounting firm.

The PCAOB has two proposed auditing standards, out for comment Proposed Auditing Standard — Engagement Quality Review (EQR) (March 2009) and Proposed Standards Related to the Auditor’s Assessment of and Response to Risk out for comment (December 2008). The latter is a suite of seven new auditing standards related to the auditor's assessment of and responses to risk and related conforming amendments.

The PCAOB has a concept release, Audit Confirmations Concept Release (April 14, 2009) and two Staff Audit Practice Alerts, No. 3, Audit Considerations in the Current Economic Environment and No. 4, Auditor Considerations Regarding Fair Value Measurements, Disclosures, and Other-Than-Temporary Impairments.

Auditing Standards Board

The ASB is currently working on:

Revisions to SAS 74 and other confirming changes to PCIE report
Revisions to SAS 70
Revisions to auditing estimates and fair value
Finalizing SAS 69 to remove GAAP hierarchy for FASB, GASB, and FASAB incorporation
Revising AU 534, “Financial Statements Prepared for Use in Other Countries” because IFRS is now recognized as equivalent U.S. GAAP.

The Board also has two exposure drafts:

Proposed Preface to the Codification of Statements on Auditing Standards
Proposed Statement on Auditing Standards Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.

Watch for more details on activities of professional standard setting bodies at www.cpafirmsupport.com

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Strategies for Small Audits

Many firms are realizing that profitability on small audits can’t always be obtained by utilizing the “one-size-fits-all” practice aids purchased from major publishers. Profitable small audits require unique engagement strategies.

An audit strategy for small audits that includes compliance with generally accepted auditing standards and that, at the same time, maximizes engagement profitability will normally include the following components:

• Making and responding to client acceptance and retention evaluations.
• Completing only core planning practice aids.
• Reading the client’s general ledger account activity to provide low-cost substantive evidence and risk-assessment procedures.
• Preparing internal control flowcharts and memos that can be carried forward.
• Performing systems walk-procedures to reduce the assessed risk of material misstatement.
• Performing maximum analytical procedures during planning, engagement performance and engagement review to reduce detailed tests of balances.
• Performing only necessary tests of control and tests of balances procedures.
• Determining tolerable misstatement by financial statement classification to minimize auditing procedures.
• Making decisions not to sample to save time.
• Completing a planning document to facilitate planning meetings and the audit team leader’s involvement.
  
  

My Small Audits Documentation Manual is being built around these strategies and should be available later this fall. In the intervening months, I’ll be sharing the contents of the Manual with our subscribers. Please visit our website, www.cpafirmsupport.com, to learn more about our Subscription Plan.

Larry Perry, CPA

Small Audits Made Easy and Profitable

Can small audits be profitable? Some practitioners think this question is an oxymoron, i.e., that the word profitable can’t be applied to small audits! My experience has shown otherwise.

Over 20 years ago I authored a Small Business Audit Manual that was designed to comply with the requirements of existing professional standards and, at the same time, minimize engagement time charges. Many smaller CPA firms have used the operating philosophies in that manual to achieve profitability on small audits for decades. Here, in a nutshell, are some of those operating philosophies:

• Involving leadership throughout engagements to establish and communicate the “tone at the top.”
• Meeting personal and firm ethical requirements.
• Accepting and serving high-quality clients.
• Hiring outstanding staff persons.
• Maximizing the benefits of CPE and on-the-job training for staff personnel.
• Assigning the right people to engagements.
• Providing the right level of supervision for engagement personnel.
• Planning, assessing risk and performing engagement procedures to produce the optimum mix of quality and profitability.
• Monitoring quality control for engagements and firm administration.
  
  

Over the next few months, our subscribers at www.cpafirmsupport.com will received detailed information on each of these operating philosophies.

FASB ASC--Can Small Users Afford It?

The FASB Accounting Standards Codification online could be the best accounting research system available! In fact, it was designed to become the single source of authoritative U.S. accounting and reporting standards, except for SEC rules and interpretive releases. Having used the system extensively during its verification phase, we were excited about its launch on July 1, 2009.


We were stunned, however, to learn at the last minute the fee for single, non-concurrent use is $850! For small nonpublic and nonprofit entities, and many smaller CPA firms serving them, we believe this fee is inappropriate. Since smaller entities and their CPAs may be required to report in accordance with generally accepted accounting principles, they will be forced to pay this fee or use other less-current, harder-to-use reference materials.


The economic realities facing smaller entities and CPA firms are not being considered by the FASB in pricing the ASC! If this is to change, our voices must be heard. It's time for small entities and CPA firms to seek alternative pricing from the FASB. COMPLAIN! Go to the websites for the FASB, AICPA, IMA, GASB, state societies of CPAs and other industry associations to send your complaint and ask them to help influence the FASB pricing of the ASC. If it is to be the one authoritative source of U.S. GAAP, it should be available for everyone!


Weigh in about how you feel by commenting on this post. Visit us at www.cpafirmsupport.com, or email me, Larry Perry, at larry@cpafirmsupport.com and let us know how we can better serve you.