auditor

Evaluating going concern issues

Financial statements are generally prepared under the assumption that the business will remain a “going concern.” That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business. But sometimes conditions put that assumption into question.

Recently, the responsibility for making going concern assessments shifted from auditors to management. So, it’s important for you to identify the red flags that going concern issues exist.

Make the call

Under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management is responsible for assessing whether there are conditions or events that raise “substantial doubt” about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued — or available to be issued. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)

When going concern issues arise, auditors may adjust balance sheet values to liquidation values, rather than historic costs. Footnotes also may report going concern issues. And the auditor’s opinion letter — which serves as a cover letter to the financial statements — may be downgraded to a qualified or adverse opinion. All of these changes forewarn lenders and investors that the company is experiencing financial distress.

Meet the threshold

When evaluating the going concern assumption, look for signs that your company’s long-term viability may be questionable, such as:

  • Recurring operating losses or working capital deficiencies,
  • Loan defaults and debt restructuring,
  • Denial of credit from suppliers,
  • Dividend arrearages,
  • Disposals of substantial assets,
  • Work stoppages and other labor difficulties,
  • Legal proceedings or legislation that jeopardizes ongoing operations,
  • Loss of a key franchise, license or patent,
  • Loss of a principal customer or supplier, and
  • An uninsured or underinsured catastrophe.

The existence of one or more of these conditions or events doesn’t automatically mean that there’s a going concern issue. Similarly, the absence of these conditions or events isn’t a guarantee that your company will meet its obligations over the next year.

Comply with the new guidance

Compliance with the new accounting standard starts with annual periods ending after December 15, 2016. So, managers of calendar-year entities will need to make the going concern assessment starting with their 2016 year-end financial statements. Contact us for more information about making going concern assessments and how it will affect your financial reporting.

© 2017

Use qualified auditors for your employee benefit plans

Employee benefit plans with 100 or more participants must generally provide an audit report when filing IRS Form 5500 each year. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Select a qualified auditor

ERISA guidelines require employee benefit plan auditors to be licensed or certified public accountants. They also require auditors to be independent. In other words, they can’t have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition.

But specialization also matters. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data, and party-in-interest and prohibited transactions.

Ask questions

Employee benefit plan audits are a matter of more than just compliance. The auditor’s report highlights any problems unearthed during the audit, which can serve as a springboard for improving plan operations. The conclusion of audit work is a good time to ask such questions as the following:

  • Have plan assets covered by the audit been fairly valued?
  • Are plan obligations properly stated and described?
  • Were contributions to the plan received in a timely manner?
  • Were benefit payments made in accordance with plan terms?
  • Did the auditor identify any issues that may impact the plan’s tax status?
  • Did the auditor identify any transactions that are prohibited under ERISA?

Experienced auditors can also suggest ways to improve your plan’s operations based on their audit findings.

Protect yourself

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company can’t afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. Contact us for more information on hiring a plan auditor.

© 2017

Related-party transactions: Think like an auditor

Issues between related parties played a prominent role in the scandals that surfaced more than a decade ago at Enron, Tyco International and Refco. Similar problems have arisen in more recent financial reporting fraud cases, prompting the Public Company Accounting Oversight Board (PCAOB) to unanimously approve a tougher audit standard on related-party transactions and financial relationships. To prevent your company from issuing financial statements with undisclosed or misleading information about these relationships, think like an auditor.

It’s all relative

Under PCAOB Auditing Standard No. 18 (AS 18), Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions, and Other Amendments to PCAOB Auditing Standards, related parties include the company’s directors, executives and their family members.

Ultimately, companies are responsible for the preparation of their financial statements, including the identification of these related parties. However, auditors are on the lookout for undisclosed related parties and unusual transactions.

Where to look

Certain types of questionable transactions also might signal that a company is engaged in related-party transactions. Examples include contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold.

Where can you find evidence of undisclosed related parties? Auditors are trained to consider these types of source materials:

  • Proxy statements,
  • Disclosures contained on the company’s website,
  • Confirmation responses, correspondence and invoices from the company’s attorneys,
  • Tax filings,
  • Life insurance policies purchased by the company,
  • Contracts or other agreements, and
  • Corporate organization charts.

Auditors also scrutinize compensation arrangements and other financial relationships with executives that may create incentives to engage in fraud to meet financial targets.

Leave no stone unturned

AS 18 requires public company auditors to obtain a more in-depth understanding of every related-party financial relationship and transaction, including its nature, terms and business purpose (or lack thereof). Moreover, it requires auditors to communicate with the audit committee throughout the audit process about related-party transactions — not just at the end of the engagement.

Related parties present risks to all kinds of entities, not just public companies. Smaller companies and start-ups also tend to engage in numerous related-party transactions, such as rental and compensation arrangements. These arrangements increase the risks of fraud and legal violations, warranting increased attention for companies of all sizes.

© 2016