Jim Ulvog

Will SAS #115 increase or decrease Significant Deficiency comments?

Here is a question for thought:  Do you think the change from a bright line definition of significant deficiency in SAS 112 (greater than remote chance of more than inconsequential error, etc.) to a very loose definition in SAS 115 (something the auditor believes should be brought to the attention of those charged with governance) will increase or decrease the number of significant deficiency comments? 

To frame up the discussion, I am thinking about the smaller entities, perhaps from $1 to $15 million of revenue in the non-profit community.

My thought process is that by calling something a “significant deficiency” and putting it in the same letter as the comments on material weaknesses we are clearly saying this is a ‘biggie’.  Don’t have any technical words now to describe that categorization like we did before, but we are obviously calling a lot of attention to the issue.  We still have the letter of recommendation as a tool to communicate suggestions, ideas, opportunities to improve internal control, or scold management for those pesky technical things we always comment on (you know, document every credit card purchase, list the who and why for all meal purchases, please get the fixed asset detail to tie to the general ledger). From my perspective, I think there are probably more items that will drop from the SD list to the LOR than move up from the LOR to the SD letter.  Possibly will be some SD comments that don’t need to be mentioned.  There are a lot of comments we auditors give to our clients that really should be fixed, but don’t seem to be serious enough to frame them up as a ‘biggie’.

One of the major CPA firms working in the non-profit community thinks the volume of comments will go up.  Another person in that school of thought was the presenter at a class I attended a while back.  His perspective, coming from running a very large volume of yellow book audits in his firm, is the volume of SD comments will increase.  If I recall correctly, his line of reasoning is if there is something that the auditor firmly believes in and is worth putting in writing, and then the issue probably should be brought to the attention of the board and thus is an SD. 

Had a fun visit with a colleague at another firm recently.  His thoughts are that the volume will increase.  I will rephrase his comments to reflect my expanded perspective of the issue.  So, this is partly my description, not completely his.  Since we as auditors are now freed of the bright line definition, we can reposition the comments as helpful ideas instead of problems at the mid-level of severity.  Instead of being a ‘problem’ to be fixed, the SD comments can now be phrased as something that we (the auditors) really thing you (the board or those charged with governance) should think about and work on.  How does this work for a characterization:  the SD letter become more of a structured ‘lets talk’ framework instead of ‘fix this problem’ notification.

One more idea – – since the definition is much more subjective, do you think there will be serious push-back from management during single audits?  Seems to me there will be massive push-back to prevent something that is only an opinion (without support of a bright line) from going to the federal agencies in writing.

So, those are my thoughts.  Perhaps this blog is too young for a conversation to begin. However, if you wish to comment, I would welcome the conversation.  Remember this is an evolving idea. Since it will take a few years to develop a wide consensus for the impact of the new definition, all opinions expressed here (including mine!) are subject to change and revision when we feel like it!

Merger and acquisition accounting

New accounting rules for mergers and acquisitions of nonprofit organizations are now in effect.  In the past, when two nonprofit organizations came together, the accounting was essentially to combine the accounting information of the two entities.  This is no longer allowed.

Under the new rules, there are mergers and acquisitions. The accounting for each is quite different. …

Type I and Type II are no more

Type I and Type II subsequent events don’t exist anymore.  The two types of subsequent events are now called ‘recognized’ and ‘non-recognized’ by FASB statement 165, now located at ASC 855-10-50-1.  The terms we grew up with have disappeared.  I’m still trying to work that into my audit memorandums.  May take me a while for that to become second nature.

Here is the original FAS 165, but remember it has been superseded. Go to the codification web site to read the authoritative ASC. (If you haven’t been there before, you have to register to use the site.)

Disclose date of subsequent events evaluation

Don’t forget that FASB statement 165, now located at ASC 855-10-50-1, requires disclosure of the date that the organization has evaluated whether there are any subsequent events that need to be reflected in the financial statements.  That date needs to be described as either the issue date or date the financials were available to be issued.  Unless you are working in the public company arena, I think you will find that ‘available to be issued’ is the norm.

You can read the original FAS 165 here, but remember it has been superseded. Need to register at the FASB web site to read the ASC.

Delay in effective date for all of the rewritten, clarified auditing standards

The Auditing Standards Board is in the process of rewriting all of the Statements on Auditing Standards. They are using a new format for all the clarified and redrafted statements.  The effective date was previously scheduled for periods ending on or after December 15, 2010.  The ASB has moved the effective date back to periods ending on or after December 15, 2012. …