Written by T. Steel Rose, CPA
Reviews of financial statements will be in the eye of the storm when the JOBS (Jumpstart Our Business Startups) Act rules are finally enacted by the SEC. Startups are expected to begin raising equity capital on websites at the start of 2013 based on this legislation signed into law in April of this year. Against the railing of Congress that the SEC is tantamount to being in “contempt of Congress”, the rules are still forthcoming.
The impact on CPA firms will be substantial. CPA firms across the country have expressed a wide array of opinion on the new opportunity and associated risks. To provide CPAs insight on this new practice arena CPA Magazine talked with CPA audit partners in firms literally across the country. Phil Holmes, CPA is audit partner with Hartman Leito & Bolt with offices in Dallas and Fort Worth, Texas. Shreedhar Kothari, CPA is a shareholder with Gumbiner Savett practicing in Los Angeles, California. Will Russell is a partner with Jarrard, Nowell & Russell with offices in Charleston and Summerville, South Carolina.
Expressing both optimism and concern, these intrepid CPAs who are well versed in Reviews and small firm audits offer clear perception of the Review landscape ahead.
CPA Magazine: What do you like best about being a CPA?
Phil Holmes, CPA: I enjoy providing service to clients.
Shreedhar Kothari, CPA: Being a CPA with owner operated companies has helped me be a business advisor; and keeping up with the laws is what I enjoy. I am part of the Indian Film Festival Board and it’s because of my involvement I am involved with both.
Will Russell, CPA: Being self employed; selfemployed in a profession I enjoy.
CPA Magazine: How does your firm approach a Review engagement for a firm that has not been reviewed or audited before?
Holmes: We typically start by interviewing management and taking a look at the financials they are currently using to get a sense of how knowledgeable management is over their financial reporting; so we can identify areas that may need more attention and could be of higher risk.
Russell: We utilize the Thompson Reuters risk assessment forms to assist us in analyzing the organization. Any organization that has not had an audit or Review is subject to more analysis due to the uncertainty.
Kothari: We understand the nature of the business and how they are doing things to determine which areas will require more focus for us and for management. We emphasize planning [in order] to educate management to get them in GAAP format. We have to get the books to a point to do the Review. Most are not prepared to prepare financial statements in a GAAP format; and the rules are changing all the time.
CPA Magazine: How many staff does it take?
Holmes: Typically two onsite in addition to the manager and partner.
Kothari: An audit partner and manager are assigned along with one staff member.
Russell: Each engagement is different; it depends on many factors such as size, industry, complexity, number of locations, etc.
CPA Magazine: How do you budget for the engagement and how long does it take to complete a Review on average?
Holmes: Most reviews are within a general parameter of hours, but we will budget more or less depending on the degree of complexity and strength of financial management. I would say 150 to 175 hours on average.
Kothari: A day of field work and less than a week for planning and completing the opening and closing trial balance and completing the permanent files.
Russell: Once we determine the areas we will focus on for the engagement we can then determine the staffing needs as well as the time each area will take. Upon completion we can then budget the entire engagement. It takes 3-4 weeks.
CPA Magazine: What problems do you encounter?
Holmes: Problems encountered typically relate to companies who may not have faced much scrutiny on their accounting methods. This could lead to adjustments being made to not only the year-end being evaluated but also prior year-ends so that beginning balances can be adequately relied on. Many times, companies are using some type of modified cash basis with a focus on tax reporting. When we start conducting a review based on GAAP, numerous consultation meetings along with booking adjustments are necessary to arrive at good financials prior to beginning the Review process. Most are using QuickBooks. Obviously the conundrum we face is not assisting with the preparation of the financial statements, but clients need help to pull together the financials.
Kothari: Their books may not be in shape; they may be unfamiliar with GAAP. You find the problems; you inform the client that complying with GAAP may be cost prohibitive.
Russell: Issues vary by engagement. Sometimes the clients don’t understand what we need so it is difficult to accomplish our objectives.
CPA Magazine: What software helps with the workpapers and trial balance prep?
Holmes: We use Caseware software to capture a company’s trial balance and produce our lead schedules regardless if the engagement is an audit or a Review. Since we are only providing limited assurance with a Review, we do not use some of the other software tools that we might use in audit (e.g. IDEA for sampling).
Kothari: We use ProSystem fx Engagement. It is linked from trial balance all the way to the financial systems. We use GofileRoom which takes care of the documents.
Russell: Thomson Reuters has developed a suite of products that we utilize in our office to assist us with attest engagements including etools, practice aids and online research guides.
CPA Magazine: What is the range of costs for a Review engagement if there are no problems?
Holmes: This really depends on the size of the company, but I would say that a small company with no complex issues could be done for about $10,000. Larger companies with more accounting issues may push into the $20k range.
Kothari: The cost can be prohibitive for a raise of $500,000. Our costs may not be what is charged to the client. It all depends, but can range from 10 to 15 to 20 thousand dollars. Startups can be more difficult than other companies.
Russell: It depends on the complexity of the engagement but an estimate is $6,000 – $15,000.
CPA Magazine: What is the exposure for risk?
Holmes: A Review is conducted in accordance with SSARS; and we provide limited assurance on the financials. The level of work we perform is substantially less than an audit since we are not necessarily vouching activity and examining underlining support as we do with audits.
Additionally, we are not required to gain a detailed understanding of internal controls along with related testing, so there is a risk that the control environment could be riskier than we may perceive it to be.
Kothari: For this kind of new investment from investors that are not sophisticated, there is management fraud. The [JOBS] Act allows them to raise money. It has been widely successful in Europe. The frauds will get the most press. But it is good for the small businesses. There needs to be checks and balances. Bad actors will take advantage but the advantages outweigh the negatives.
Russell: Any time a CPA issues an attestation report there is a risk. We have to be diligent in our procedures and analysis to make certain we have accurately stated the financial position of the organization and have adequately determined the quality of information, the assessment of internal controls as well as the performance of the management team.
CPA Magazine: Do you have current or prospective clients who may seek a Review in order to be crowdfunded in 2013 in compliance with the JOBS Act signed in April of 2012?
Holmes: I have not seen any movement on this, but if the JOBS Act leads to fewer regulations to allow more small investors to get involved, I would think this could lead to a start of more small businesses that will need help from accountants.
Kothari: There are a couple of people who have inquired. As CPAs get to know it more work will come from it. The requirements had been too high for small firms to obtain funding. This may be a solution for a lot of people who did not have the option before.
Russell: Yes, however, if they haven’t begun planning yet for the Review it will be very difficult to accomplish in 2012. In order for them to meet the requirements they will need to make sure about their governance processes and procedures.
CPA Magazine: What do you think of the prospect of new companies raising $500,000 on the Internet on the strength of a review?
Holmes: If I were investing, I would lean on an audit more than a review. I would think that it would bring clients in. This should be good opportunity. When we are accepting a client we do become aware of the use for the financials. A Review is a Review regardless of where they [the financial statements] are posted.
Kothari: There are a lot of companies without the systems in place. I don’t think they are going to be ready. I agree with it [crowdfunding] philosophically. We have to evaluate the companies based on their financials. It is based on a level of sophistication, if it is a bank providing a loan, he knows the client, and knows financial statements.
Russell: I am a little nervous. The small entrepreneurs may need more structure. A review does not provide all of the confidence that an investor would need to invest in a startup. For example, we have a client that is a group of doctors that formed an RRG. A Risk Retention Group enables people to insure themselves, if they are willing to put their capital at risk. They are regulated by the State. It is a smaller version of crowdfunding. It explains the risk, requires an audit, and is the right way to do it.
CPA Magazine: What do you enjoy doing with your time off?
Holmes: Family, golf and working out.
Kothari: I enjoy tennis, cricket and bicycling.
Russell: A lot of time in the boat on the coast and college football and being the father to two children.