"Spread love everywhere you go. Let no one ever come to you without leaving happier.”
—St. Teresa of Calcutta (Mother Teresa)
I sat down recently with my tax-exempt partner from our Syracuse office, Gail Kinsella. Gail is the former board chairwoman for the New York State Society of Certified Public Accountants. In an ironic twist, we both had the same idea for a topical column at the same time. I must admit that I do believe in divine intervention. The topic we both selected related to the increasing number of inquiries that we are receiving from our tax-exempt clients related to the level of auditor attestation appropriate for affiliate entities that are being established.
During my meeting with Gail Kinsella, she described the topic for this column. The New York State Charities Bureau provides specific guidelines on its website (https://www.charitiesnys.com) that describe the thresholds and requirements for tax-exempts needing to submit an audit, review, or compilation of its financial statements. Gail does an excellent job of opening the “black box” of auditor attestation services.
We need an audit … or do we?
In recent weeks, I have been part of more than a handful of conversations that begin with something that sounds like “Hello, my name is Rick, and we need an audit.”
While there are certainly cases where an audit is not only desirable but required, it is well worth your time to identify what your options are and how to get the best bang for your buck. In many cases, a financial statement audit may not be the most effective tool for an organization.
It may sound odd—the auditor advising against an audit—but there are any number of circumstances where an alternate type of attestation or consulting service may be more beneficial in the long run and potentially less costly.
Unless a user (i.e., creditor, investor or regulator) has a prescribed level of reporting, you may be able to choose from a number of audit alternatives, including compilations and reviews. You may determine that financial statements that omit substantially all disclosures or conform to the cash or income tax basis (referred to as OCBOA or Other Comprehensive Basis of Accounting) are a good fit. Many times these OCBOA financial reports can provide adequate relevant information and carry a lower price of preparation than financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP). In any case, an organization should be conversant in the variety of reporting options that may be available beyond an audit performed in accordance with Generally Accepted Auditing Standards.
What is a review?
A review is defined as “performing inquiry and analytical procedures that provide that accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements for them to be in conformity with generally accepted accounting principles or, if applicable, with another comprehensive basis of accounting.” Whew, what a mouthful!
A review does not require the accountant to obtain an understanding of internal control, assess control risk, conduct tests of controls and accounting records, and a host of other procedures required in an audit. Accountants are expected to perform inquiries and analytical procedures to financial data before expressing that limited assurance. Simply compiling and reading the statements is not sufficient.
Inquiries will typically include understanding actions taken at board meetings, changes in business activities and procedures for recording, classifying and summarizing transactions as well as gathering data for financial disclosures. Accountants will inquire as to accounting principles used and events subsequent to the date of the financial statements.
Analytical procedures are used to identify relationships and trends and provide the basis for additional inquiries. These procedures often include comparing balances and results of activity against anticipated results and employing a variety of ratios and predictive tools.
What is a compilation?
A compilation is something akin to the alter-ego of an audit. In the case of a compilation, the accountant presents, in the form of financial statements, the information presented to them by management. The accountant does not express an opinion or any other form of assurance on the compiled statements. Accountants do concern themselves with whether the statements prepared are appropriate, the financial position and results of operations are presented in conformity with GAAP (or OCBOA), and whether the financial statements comply with statement on Standards for Accounting and Review Services.
Many people are unaware that the fundamental difference between the various levels of service has far less to do with the content of the statements than the accountant’s report. A quick glance at the balance sheet for an organization with an audit could look just like that of the company with a set of compiled statements.
Another helpful bit of information when you are trying to determine your best course of financial reporting action is to understand what an agreed-upon- procedures engagement is all about. Agreed-upon procedures can take many forms and are worth a conversation if a very specific inquiry, test or understanding is desirable.
Whether you are fielding a request for your company’s financial statements or have some other type of concern, be sure to consult with your CPA to find the solution that best fits your needs.
Note: I want each of you to know that we lost a saintly person who positively impacted thousands of lives in our community. Sister Seraphine Herbst, who served as executive director of the School of the Holy Childhood for more than four decades, passed away in August. I met Sister Seraphine in the summer of 1975 when I was a brash and ambitious 23-year-old. Seraphine changed my life in many ways, most notably in encouraging me to specialize in supporting tax-exempt organizations, particularly those that provide services to the most vulnerable individuals in our community.
Gerald J. Archibald, a CPA, is a partner in charge of management advisory services at the Bonadio Group, and is known for his expertise in non-profit and tax-exempt accounting, management and governance issues. He can be reached at (585) 381-1000 or firstname.lastname@example.org.
10/7/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.