If you think accounting firms are simply the closers of books, you may want to think again – more often than not, they are fountains of information. The COVID-19 pandemic showed consumers just how important accounting firms can be in navigating new government regulations and programs – like Paycheck Protection Program loans and the Employee Retention Credit – quickly and adeptly.
“There’s been a shift in clients looking to us to provide proactive services, rather than just compliance,” said Mark Kovaleski, managing partner of the Rochester-based Mengel Metzger Barr & Co. LLP a public accounting firm, where he has been a team member for almost twenty-five years. “There’s more of a focus now on being business advisors and providing a business advisory relationship.”
Nancy Catarisano, managing partner of Insero & Co. CPAs, LLP a public accounting firm with locations in Rochester and Ithaca has seen the same trend, noting “Since the pandemic we are doing a lot more advising of companies.”
With that mind shift, the Rochester Business Journal asked Kovaleski, Catarisano, and other leaders of accounting firms in western New York what new and emerging issues and regulations should be front of mind for businesses right now.
One of the timeliest of these issues, Kovaleski said, was an announcement of failure to file penalty relief by the Internal Revenue Service (IRS) on August 24, 2022, for businesses and individuals who did not file their tax returns on time during the pandemic.
According to IRS.gov, nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits for late filing. The refunds are automatic and most will be completed by the end of September. To qualify for the relief, any eligible income tax return from 2019 or 2020 must be filed on or before September 30, 2022.
The action is designed not only to provide relief to businesses and individuals but to help the agency focus its resources on the handling of backlogged tax returns and taxpayer correspondence with an endpoint of a return to normal operations for the 2023 filing season.
“The IRS is extremely overburdened and overwhelmed right now,” Kovaleski said. “They have millions of tax returns that haven’t been processed yet and this move will help them catch up. It’s a little bit of a reset and opportunity to get the ship righted.”
Another timely issue business owners should be aware of is a new accounting rule from the Financial Accounting Standards Board (FASB) called the Accounting Standards Update (ASU) 2016-02 – Leases or Accounting Standards Codification (ASC) Section 842 – that went into widespread effect on the first of this year.
The FASB is an independent nonprofit organization that serves as the standard-setting body for generally accepted accounting principles in the United States. This new rule requires businesses to record almost all leases longer than 12 months as liabilities. Formerly, operating lease payments were expensed as incurred.
This rule, which is a significant change in the accounting processes realm, was put into effect for public companies several years ago, but private companies did not have to comply until this year, partly due to an extension from the pandemic.
“Anyone who needs a financial statement should be aware of this change,” said Catarisano, who recommends that private business owners talk to their accountant about the lease accounting changes if they haven’t done so already. “While public companies had to do this already, it’s a new rule for private companies and adds another layer of complexity for small business owners.”
An emerging accounting issue business owners will want to keep an eye on are ESG regulations, which are requirements placed on a business by federal, state, or other entities to publicly disclose information about their environmental, social, or governance practices and performance.
In March 2022 the U.S. Securities and Exchange Commission (SEC) proposed rules that would require public companies to share specific greenhouse gas emissions metrics and climate-related financial data in public disclosures. These companies would not only have to share emissions they are responsible for but also (depending on the company’s size) from the upstream and downstream activities of vendors and other third parties connected to the company’s operations.
The comment period for the proposal drew such a heavy response it was extended from its original date in May 2022 to June 17, 2022, instead. No decision has been made by the SEC on the proposed rules yet.
David Hansen, director of risk advisory services for Freed Maxick CPA’s, which has offices in Batavia, Buffalo and Rochester, does not believe the proposed regulations are likely to stand as originally written, but will go forth in some variation and are important to get ahead of now.
“There is a tremendous amount going on in the ESG area right now and it’s not going to slow down,” Hansen said. “The proposal shows that the investor community is interested in whether companies are following through with ESG practices.”
Freed Maxick’s ESG practice is rapidly developing as several other notable changes and proposals have percolated in the past few years, like New York State’s Climate Leadership and Community Protection Act which was signed into law in 2019 and requires New York to reduce economy-wide greenhouse gas emissions 40 percent by 2030.
And earlier this year the state proposed ESG requirements for the fashion industry via the Fashion Sustainability and Social Accountability Act that would require large fashion retailers and manufacturers doing business in New York to make significant public disclosures about theirs and those in their supply chain’s ESG footprints.
The fashion industry proposal is just another indicator of what may be coming down the pike for other industries. For instance, if your company needs to invest in a new fleet of vehicles soon, you will want to consider the implications when choosing between gas or electric models.
“The unknown is always scary,” said Chad D. Ernisse, a senior manager at Freed Maxick, who encourages his business clients of all sizes and industries to be proactive and not wait for regulations to start thinking about and incorporating ESG best practices. “A lot of time regulation is viewed as a cost, but it’s also an opportunity.”
Ernisse and Hansen note that there are many doors through which ESG practices can enter a business – regulation being one of them, but another way is customer-driven and customers are increasingly interested and influenced by a business’s ESG choices and how they share them publicly.
“As the laws change it’s going to be important for companies to think upstream and downstream how ESG programs will affect their clients, vendors and the investment community,” Hansen said. “We’re here to help them assess their different programs and how they’re documenting them so that their customers can better understand what they’re doing with ESG.”
Caurie Putnam is a Rochester-area freelance writer.