Survival of the Fittest...CPA Firms!

Remember the old joke about the two ostriches? As they walked down the beach, one stuck his head in the sand and said "Where did that other fellow go?" This ostrich was blinded by his own actions. This is sometimes true for many of us. We may get so caught up in our day-to-day work responsibilities, putting out client fires and trying to live life that we don't see the signs of the times.

A recent news article in the WebCPA Daily reported that about half the small and medium-size CPA firms surveyed believe economic recovery is on the horizon in the fourth quarter of this year. I hope they are correct but I doubt it. In fact, I believe the signs I see on the horizon are growing darker. Increasing unemployment, new tax increases everyday and runaway government spending aren't the combination of events most CPAs and business persons see as recovery!

Like the economic recession of the 1980s, CPA firms that survive and grow in the years ahead won't be those with their heads in the sand! Survival of the fittest CPA firms depends on more than becoming "mean and lean" by cutting operating costs and terminating employees. Successful firms will be those that take the time NOW to rethink their objectives, types of services, staff development and target client profiles.

Many CPAs and business persons rely on the cycles of history as their basis for decision making. Because of the worldwide causes of the current recession, and because of the influential supporters of worldwide solutions to our problems, it is safe to say "We have not gone this way before!" CPA firms, particularly smaller ones, must get ready for the events of the next few years.

Over the next few months we'll be providing many detailed articles and updates for the Update Subscribers on our website, www.cpafirmsupport.com . At CPA Firm Support Services, LLC, our objective is to help smaller CPA firms succeed in the months and years ahead. Please visit our site and join us as we get ready for the future together!

SFAS No. 167, Amendments to FASB Interpretaion No. 46(R)

The FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) in June 2009 to improve financial reporting by enterprises involved with variable interest entities. One of the reasons for this Statement is that the issuance of SFAS No. 166, Accounting for Transfers of Financial Assets eliminated the qualifying special-purpose entity concept which effected certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. A second reason is that constituent are concerned about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.

It is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.

It retains the scope of Interpretation 46(R) and adds entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in Statement 166.

This Statement amends Interpretation 46(R)

· To require an enterprise to perform an analysis to determine if the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity.
· To require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.
· By replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach which focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This approach will be more effective for identifying which enterprise has a controlling financial interest in a variable interest entity.
· To require enhanced disclosures for any enterprise that holds a variable interest in a variable interest entity.
· To add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. A troubled debt restructuring is such an event.

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What Smaller CPA Firms Can Do About Standards Overload

CPA firms are beginning to rethink their policies regarding the application of accounting standards. Here are a few ways some firms are coping with standards overload:

1. When complex standards like FIN 45, FIN 46 and FIN 48 and others are required in GAAP basis financial statements, some CPAs are recommending noncompliance. Many users of small entities’ financial statements don’t care about application of such standards. Managements’ disclosures of departures from GAAP appear in footnotes and the auditor’s and accountant’s reports contain departure paragraphs describing the noncompliance.
   
   
2. Evaluating the effects of complying with some accounting standards often reveals immaterial affects on financial statements. In such circumstances, applicable standards do not have to be applied or disclosed in financial statements.
   
   
3. Interpretive Rule 203-1 of the AICPA Code of Professional Conduct states “This rule therefore recognizes that upon occasion there may be unusual circumstances where the literal application of pronouncements on accounting principles would have the effect of rendering financial statements misleading.” In such cases, departures from GAAP may be justified and disclosed by managements and accountants.
   
   
4. Using an OCBOA, such as income tax basis or modified cash basis, greatly limits the application and disclosure of many accounting standards. Required disclosures for OCBOA presentations primarily include the significant differences from GAAP and other disclosures necessary to prevent the financial statements from being misleading.
   
   
5. Standard-setters are required to issue exposure drafts of new standards for public comment prior to finalization. Frequently visiting the exposure drafts sections of standard-setters’ websites will provide smaller CPA firms the opportunity to have a voice in their future.

Engagement Planning for Going Concern Issues

Here are some practical questions accountants and auditors may wish to incorporate in the planning documentation of every audit and review engagement for the foreseeable future.

• Does the accountant’s or auditor’s understanding of the client’s business and industry reveal any information contrary to the going-concern assumption? Such information may include current and expected recurring operating losses, cash flow problems, defaults on debt obligations, inability to obtain financing or renewals of existing credit lines, an industry significantly affected by the recession, customers and vendors with going-concern problems, decreasing assets valuations, statutory noncompliance, and external matters such as lawsuits, loss of franchise, dealership or licenses, etc.
• Does management have any concerns about the entity’s ability to continue in business for at least a year or possibly longer?
• What are management’s plans to mitigate any revealed threat to continued existence?
• Are management’s plans realistic and are they capable of carrying them out?
• What procedures will be necessary for the engagement team to evaluate management’s plans to overcome going-concern problems?
• What effects are the going-concern issues likely to have on the basis of preparation of the entity’s financial statements?
• What effects are the going-concern issues likely to have on the accountant’s or auditor’s report?
  
  

The FASB is still deliberating on its proposed statement, Going Concern, which was issued 10/9/08. The planning suggestions above will facilitate compliance with the final SFAS and with existing SAS No. 59. You can download a copy of the proposed statement from the Exposure Drafts section of www.fasb.org .

Exposure Drafts for Compilations and Reviews

The Accounting and Review Services Committee of the AICPA has published exposure drafts of three proposed Statements on Accounting and Review Services:

• Framework and Objectives for Performing and Reporting on Compilation and Review Engagements
• Compilation of Financial Statements
• Review of Financial Statements
  
  

Here are the significant proposed changes:

1. Practitioners will be able to express review assurance when independence has been impaired due to performing non-attest services designed to assist entities in preparing better financial statements (internal control services).
2. Accountants will have the option to disclose the reasons why they are not independent in performing compilation services.
3. Engagement letters will be required for both compilation and review services.
4. Terminology will change; limited assurance will change to moderate assurance, review risk will be added and defined and review evidence will be explained.
5. New documentation requirements for reviews will include managements’ responses to inquiries regarding analytical procedures fluctuations and other significant matters.
6. New compilation documentation requirements will include any fraud communications to management and significant findings or issues coming to the accountant’s attention, as well as questions about how they were resolved.
   
   

Exposure drafts of these proposed pronouncements can be downloaded from www.AICPA.org. by clicking on Professional Resources, Accounting and Auditing, Audit and Attest Standards and Exposure Drafts of Proposed Statements. Responses may be sent to mglynn@aicpa.org no later than July 31, 2009.

Codification Launches July 1, 2009

The FASB voted on June 3, 2009 to approve the FASB Accounting Standards Codification™ as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (GAAP). It will launch July 1, 2009.

The Codification will be effective for interim and annual periods ending after September 15, 2009. This means that preparers must begin to use the Codification for periods that begin on or about July 1, 2009.

Calendar year-end companies would initially apply the Codification to their third-quarter interim financial statements.

All existing accounting standard documents are superseded. With the launch of the Codification all other accounting literature not included in the Codification will be considered nonauthoritative.

The FASB's website is www.fasb.org.

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Not-for-Profit Entities: Mergers and Acquisitions

Effective for reporting periods ending after December 15, 2009 SFAS No. 164 establishes principles and requirements for how a non-profit entity:

• Distinguishes between a merger and an acquisition
• Applies the carryover method when accounting for a merger
• Applies the acquisition method for acquisitions
• Determines required disclosures
  
  

SFAS No. 142, Goodwill and Other Intangibles, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements are made applicable to nonprofit organizations in this pronouncement.

SFAS No. 164 recognizes the unique features of nonprofit organizations, such as the lack of ownership interests. Nonprofit organizations' mergers and acquisitions, therefore, focus primarily on carrying out the mission, governance and programs of the organization rather than providing returns to shareholders. Many nonprofit organizations do not involve the transfer of consideration but are nonreciprocal transfers; an acquiree's assets are contributed to the acquirer and recorded as an inherent contribution.

This statement requires the "carryover method" for mergers of nonprofit organizations. This method is similar to the old pooling of interests method in ARB 51 and APB 16. The merged organizations form a new entity with a new governing body. An acquisition is accounted for using the acquisition method.

Since information about goodwill may be of limited use to potential contributors, this statement requires an acquirer that expects the operations of the acquiree as part of the combined entity to be predominantly supported by contributions and returns on investments to recognize goodwill as a separate charge in its statement of activities.

Since there are these and other differences in accounting for mergers and acquisitions of nonprofit organizations, accountants and auditors should become familiar with the details of this pronouncement. A complete copy of SFAS No. 164 can be downloaded from www.fasb.org. The components of the statement will also be presented in FASB's Accounting Standards Codification.

Individuals subscribing to our update service on www.cpafirmsupport.com can access practical summaries of this and other proposed and new pronouncements on our Subscription Plan page.

10 Things To Help Your CPA Firm Thrive

1. Review your business plan. Don't have one; get one. A business plan helps you plot the course of your business. It does not have to be elaborate. The Small Business Administration (SBA) has business plan forms on their website. It is rather a long and involved. Your business plan can be very simple. Start by answering the following questions.

What is my business? This covers exactly what you meant your firm to be. Does your firm to do audits; taxes; serve small businesses. What are the specific industries you service?

Who is the client? Individuals; retail stores; professional groups?

What size do I want my firm to be? Today? In the future? This covers whether or not you want the firm to grow in a specific area of practice or industry.

2. Train your staff to appreciate that the client the firm’s most valuable asset.

3. Is your staff doing a good job? Not in the peer review sense but in service to clients. How do you know? Ask somebody you trust and your staff doesn't know to call to inquire about your services. You may be surprised at what you'll find out.

4. Sweat the small stuff. Take a good look at your office. Look at it with an unbiased eye. Is the furniture looking worn out? Could everything be used in a coat of paint? Is your office welcoming and comfortable? A fresh coat of paint is inexpensive and rearranging the reception area can make a big difference in the impression your office looks to new and current clients.

5. Develop a support system. Form a networking group of other business owners. Meet on a regular basis to share concerns and successes. Make sure that this group has a set of guidelines that help each of you thrive in this present economy. This is not a place to share doom and gloom. Instead, it can become a place acknowledge problems and seek solutions. Each member of the group should be a person who will keep an open mind and leave the “yes buts” at the door.

6. Get more training for yourself. Find classes, seminars, books and such things as marketing, speaking and writing.

7. Evaluate your marketing plan. A marketing plan covers everything that pertains to how potential clients see you and your firm. This means looking at everything from your stationary to the organizations you and your staff members belong to.

8. Evaluate the services you provide and when you provide them. Can you build on the services you presently offer? (Don't forget to see how they fit in your business plan). Are your office hours convenient for clients? In this economy, you may have to open earlier and stay open longer.

9. Evaluate your website. Don't have one? Get one. Have clients give you their email addresses and offer planning tips on such things as running a business, financial literacy, and tax planning. Take a look at the social networks. Many CPA firms are using them to promote the firm and the services they provide. Get your youngest staff member to put information about the firm in a blog.

10. Love what you do. Accounting is one of the most awesome professions there is. A good accountant can help his or her clients, not only survive, but thrive in any economy. If you love what you do you will be able to maintain existing clients and obtain new ones.

Standard Setters Bend to Political Pressure

Accounting standard-setters are under much pressure to conform to the will of politicians and world-wide governments. An article in the WebCPA Daily e-letter entitled “Political Pressure Threatens Accounting Boards” included these paragraphs:

“Members of the International Financial Crisis Advisory Group warned at a meeting in London that the political pressure on accounting standard-setters posed a threat to ‘the very existence of international accounting standards.’ The group, which includes members of the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, talked about recent actions that have forced the boards to alter the standards for financial instruments such as mortgage-backed securities to deal with the credit crisis. The IASB has come under pressure from the European Commission, as well as French and German governments, to relax the IAS 39 standards on asset impairment, while FASB has been pressured by Congress to loosen FAS 157 standards on fair value and mark-to-market accounting.”

As we follow the publishing of exposure drafts by FASB, as well as the AICPA Auditing Standards Board, comment periods are being reduced in some cases to less than two weeks! Professional standards are being created and modified without consideration of the opinions of CPA practitioners and managements of smaller businesses and other organizations. This should concern us!

Smaller CPA firms, businesses and other organizations are quickly losing a voice in their future. As the standard-setters move rapidly toward one world standard, regulations and compliance will be forced upon us. Even standards for compilations and reviews, as well as OCBOAs, are being influenced and changed to conform to international rules. This process is accelerating and will not stop unless standard-setters hear our voice!

We have created a response mechanism on our website to provide quick responses to proposed changes to standards that affect smaller CPA practices and their clients. Our objective is to eventually send thousands of rapid-fire responses to these changes so that our accounting and reporting needs can be made known to the standards-setters. To make this happen, we need your participation.

Please visit our website, www.cpafirmsupport.com , click on the tab “Our Services” and then on “Subscription Plan.” When you sign up for our Subscription Plan you will receive notification of our rapid-response forms when they are available on our site for you to email to the publishing body. Together we can have a voice in our future!

During the month of June, we are offering two annual Subscription Plans for the price of one. Since each plan also contains two free accounting or auditing consultations, you can assign the annual plans to two of your firm members or extend one plan for two years. It’s time for us to be proactive! Become a subscriber today!

Major Changes to Accounting and Review Services Proposed

If you or your firm serves smaller entities then you will be very interested in the recently issued exposure draft from the AICPA Accounting and Review Services Committee (ARSC). The exposure draft contains three Proposed Statements on Standards for Accounting and Review Services. Issued April 28, 2009, the comment period ends July 31, 2009.

The proposed SSARSs contain significant proposed changes to SSARS.

Those of you who do primarily compilations will be particularly interested in the changes to issuing a report with respect to a compilation of financial statements for an entity when the accountant is not independent. The proposed SSARS, Compilation of Financial Statements, would permit the accountant to provide a general description regarding the reason that his or her independence is impaired and contains examples of general descriptions the accountant may use in his or her report.

The three proposed SSARS are:

1. Framework and Objectives for Performing and Reporting on Compilation and Review Engagement. Provides a framework and defines and describes the objectives and elements of compilation and review engagements.
2. Compilation of Financial Statements. Requires an engagement letter and contains enhanced documentation requirements, a discussion of internal control services, and allows the inclusion of a general description in the accountant’s compilation report regarding the reason(s) for an independence impairment.
3. Review of Financial Statements. Requires an engagement letter, provides expanded guidance on the performance of analytical procedures in a review engagement, and requires expanded documentation. It provides a discussion of internal control services and provides guidance to practitioners who are engaged to perform such services in addition to the review engagement and establishes the reporting requirements when the accountant’s independence is impaired due to the performance of internal control procedures.

Exposure drafts are available for download at www.aicpa.org.

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Proposed Auditing Standards Comment Periods Ended

Comment periods have ended for the following Proposed Auditing Statements

1. Exposure draft covering three proposed statements.

• Required Supplementary Information,
• Other Information in Documents Containing Audited Financial Statements,
• Other Information in Relation to the Financial Statements as a Whole.
  
  

Comment period ended May 15, 2009.

2. Proposed Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit (Redrafted). Comment period ended May 29, 2009.

3. Proposed Statements on Auditing Standards, Risk Assessment Standards. Exposure draft covering redrafting of SAS Nos. 106–110. Comment period ended April 30, 2009.

4. Proposed Statement on Auditing Standards, Consideration of Laws and Regulations In an Audit of Financial Statements. Comment period ended May 29, 2009.

5. Proposed Statement on Auditing Standards, Initial Audit Engagements, Including Reaudits—Opening Balances. Comment period ended May 29, 2009.

6. Proposed Statement On Auditing Standards, Audit Sampling (Redrafted), Comment period ended May 29, 2009.

The ASB posts comment letters received on exposure drafts at http://www.aicpa.org/ under Professional Resources, Accounting and Auditing.

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Effective June 15, 2009—SFAS No. 165, Subsequent Events

The FASB has issued SFAS no. 165, Subsequent Events. It is effective for interim or annual financial periods ending after June 15, 2009. It applies to the accounting for and disclosure of subsequent events but does not apply to subsequent events or transactions that are within the scope of other applicable generally accepted accounting principles (GAAP) that provide different guidance on the accounting treatment for subsequent events or transactions.

This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It sets forth:

1. The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements.
2. The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.
3. The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
   

Change to Current Practice

SFAS no. 165

1. Should not result in significant changes in the subsequent events that an entity reports—either through recognition or disclosure—in its financial statements.
2. Does introduce the concept of financial statements being available to be issued.
3. Requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.
   
   

How will this SFAS affect your practice?

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