Audits

Economic destruction from lockdown continues to expand.

There is severe danger that a growing number of businesses are going to look like this over the next few months. Abandoned Safeway store [01] by Ben Schumin is licensed under CC BY-SA 2.0

Going concern thoughts for accountants:  I have stopped cross posting all my comments on the pandemic to this blog. The focus here is accounting and attestation issues.

The following conversation is worth listing here, so you can bring into consideration what is going on in the broader economy as you ponder your client’s going concern assessments. The economic damage from the shutdown is an issue for audits, reviews, and comps.

You might pay particular attention to comments by  the Atlanta Fed on near-term GDP forecasts.

 

The damage from the lockdown is spreading. More news is emerging about the devastation that took place in just the first full month of the closure.

The damage will continue to grow the longer the shutdown continues. At some point it will start compounding, growing at a faster rate out of proportion to the time that is passing. Keeping the economy closed now is unnecessarily so the compounding damage is a choice.

Merely a few of the articles in recent days:

  • Guess on GDP shrinkage in next quarter
  • Disproportionate number of poorer households hit by job losses
  • Collapse of tax revenue in New York state
  • Collapse of home sales in Southern California
  • Another retail chain announce store closures and another announces liquidation

It is imperative to reopen the economy in full, not just for ‘curb-side delivery.’ If we don’t open soon, I fear the following articles will be mild in comparison to what we will see in the future.

This discussion will be posted on several of my blogs.

5/16/20 – Fox Business – US GDP could sink over 40%: Atlanta Fed – Federal Reserve Bank of Atlanta is forecasting a 42.8% drop in GDP for the second quarter of  2020.

Issues for auditors to consider as result of pandemic.

Image courtesy of Adobe Stock.

This economic catastrophe is giving auditors lots to think about during audits. Reviews and comps are also affected.

Going concern will be a major issue on all engagements for a long time to come.

Goodwill impairment will be more important and more difficult.

Finally, consider that the rules for PPP eligibility are being rewritten after the first round of loans have already been approved by SBA and funded.

Going concern

4/23/20 – Bloomberg tax – Dave & Buster’s “Going Concern” Warning Signals Wave to Come – Management issued a going concern warning. For nonaccountants this means the company concluded “there was a substantial risk that the entertainment company would not survive the next 12 months.”

Article reports many companies are doing a much more in-depth analysis of the going concern assessment.

Economic damage from shutdown – 4/15.

Image courtesy of Adobe Stock.

A few more articles on damage we are seeing from the economic shutdown.

Guess on California unemployment rate

April 2020 – Eberhardt School of Business, University of Pacific – Initial Estimates of Employment Impacts of Covid-19 Pandemic – The school of business estimates an unemployment rate of 18.8% in California for the month of May 2020.

This is in contrast to 2010 rate of 12.2% and 2019 rate of 4.0%.

Likely increase in bankruptcies

4/13/20 – Washington Examiner – Pandemic likely to exceed Great Recession in number of bankruptcies – Economists from a leftist think tank and a conservative think tank both guess that the  number of bankruptcies from the current shutdown of the economy will exceed the number from the Great Recession.

Collateral damage from shutdown.

Image courtesy of Adobe Stock.

The damage from the shutdown of the U.S. economy will be severe. Having ‘flattened the curve’, rapidly expanded hospital capacity, and kicked critical production lines into high gear, it is time open up the economy before the second order impacts cause more health damage and death from the shutdown than from the coronavirus.

(Cross-post from my other blog, Nonprofit Update.)

4/10/20 – originally posted on Medium but was pulled; do a bit of reading and then make your own assessment why the site didn’t want the article to remain visible to the public – Eight Reasons to End the Lockdowns Now – article was written by five medical doctors and one Doctor of Nursing Practice.

The eight reasons:

News For CPAs During The Pandemic: AICPA guidance on accounting, reporting, and auditing – 4/10

Image courtesy of Adobe.

Guidance from AICPA can help with financial reporting and auditing. Also, there is a need for COBOL programmers.

If you had not noticed, the California Society of CPAs is offering a lot of CPE webcasts on tax and auditing issues during the pandemic. Many of them are free. Yeah, no charge CPE. How ‘bout that?

4/8/20 – Journal of Accountancy – AICPA issues audit and accounting guidance FAQs on COVID-19 – The AICPA published a 21 page document on accounting and audit issues: Audit Matters and Auditor Reporting Issues Related to COVID?19

Articles for CPAs during the pandemic: CECL postponement & going concern – 4/4

Your new office. Image courtesy of Adobe Stock.

A few more articles as you work through your audits, reviews, and compilations during the pandemic, plus a video on how to make your own cloth masks out of a t-shirt.

Key issues in this post:

  • Postponement of new CECL accounting
  • Deep dive into going concern assessment

3/26/20 – Nicola White at Bloomberg Tax – Congress Poised to Derail Biggest Bank Accounting Change in Decades Congress put a provision in the giantic CARES Act to postpone CECL until 12/31/20 or when the governemnt declares the pandemic over.  CECL otherwise went into effect on 1/1/20.  This is the first time Congress has dictated accounting rules.  Article mentions this is a reminder of the debate over mark-to-market during the Great Recession.

Articles for CPAs during the pandemic – 4/2

The new conference room. Image courtesy of Adobe Stock.

A few more articles as you work through your audits, reviews, and compilations during the pandemic. Stretch question at the end: what are going concern implications if a third of grad MBA students will defer classes a year if they are not on campus and just under half expect a large tuition discount if classes are online?

3/25/20 – Financial Management – Ethical leadership at a time of crisis – Encouragement to maintain high ethical standards in time of turmoil and uncertainty.  Summary of tips:  Be transparent, be empathetic, be available.

4/1/20 – AICPA – Addressing pandemic-related audit challenges – Reminder that while creative techniques can be used to perform audit steps, the professional standards have not changed. Article points to following document:

4/1/20 – AICPA’s Center for Plain English Accounting – Consequences of COVID-19 –  Potential Auditing Challenges Agility and creativity is needed to complete audits. Document is a reminder that the professional standards still need to be complied with because they have not changed.

Document reminds us there are a range of possible scope limitations in an audit. Discussion includes a range of issues:

Articles for CPAs during the pandemic.

Image courtesy of Dollar Photo Club before their merger into Adobe Stock.

Lots of articles are appearing that can help CPAs during the pandemic. There are new and depressingly creative ways this is going to affect financial reporting. I’ll start mentioning some of those articles that grab my attention and may be of interest to you.

3/31/20 – FEI Daily – How Lease Accounting Will Be Affected by Coronavirus – Turmoil in leasing office space will create lots of complications under ASC 842, the new lease accounting rules. Article calls attention to: rent concessions, discount rate, fair market values, impairment, partial termination, reassessment, full termination abandonment, and information delay.

3/29/20 – Forbes – For Higher Education, Nothing Matters More Than September – …

Financial reporting issues to consider during early stages of COVID-19 pandemic

Image courtesy of Adobe Stock.

A range of financial reporting issues need careful attention during the COVID-19 pandemic. These issues are old news in the professional literature but need to be considered more intentionally.

The AICPA published a special report on March 18, 2020. The report, Consequences of COVID-19 Financial Reporting Considerations, was drafted by the Center for Plain English Accounting and is available at no charge.

On 3/14/29, I was Pondering impact of coronavirus prevention steps on financial statements. An auditor’s perspective. The AICPA report goes into far more detail.

Here, in bullet point italics, are the items mentioned for your focus, with a few of my comments for highlight:

  • Subsequent Events

Type II subsequent events are those which take place after the financial statement date which are so significant that they warrant mention in the financial statements to keep those statements from being misleading.

  • Subsequent Events – Market-Value Declines

A technical Q&A (TQA 9070.06) indicates there are some occasions that can arise which warrant adjusting financial statements based on subsequent declines in market value.

  • Subsequent Events – COVID-19

Pondering impact of coronavirus prevention steps on financial statements. An auditor’s perspective.

Image courtesy of Adobe Stock.

If you are an auditor getting ready to issue opinions on client financial statements, you might want to ponder the subsequent event implications of the U.S. shutting down large portions of the economy this week. Might want to take a closer look at going concern assumptions.

If you happened to have slept well last night, you might ponder the impact on the financial statements you released a couple weeks ago.

Subsequent events

Here are some initial thoughts for consideration as disclosable material subsequent events and perhaps contingent liabilities:

Disciplinary actions by California Board of Accountancy in first half of 2019.

That view is enough to make you cringe. Sort of like some of the situations recently addressed by the Board of Accountancy. Image courtesy of Adobe Stock.

Update newsletter issue 89 for Fall 2019 has 33 disciplinary actions listed. Timeframe of the effective dates is the first half of 2019.  My recap of actions by the California Board of Accountancy is listed below. I counted as one action those situations involving a firm and the owner of the firm.

Revocations

audit fail other issue
1 3 felony
1 1 didn’t complete contracted service
1 audit fail
1 audit fail and no peer review
1 no peer review & expired license
2 probation violations
1 some deeper issues, not quite apparent from summary
4 8 total revocations

 

Of the CPAs with felony issues, two were for embezzlement, one also had an audit failure, and another ended up with conviction on 12 counts.

Two of the revocations were for rather extensive violations of a previous disciplinary action.

Revocations stayed

SEC practice ban for three accountants tangled up in KPMG/PCAOB fiasco.

Securities and Exchange Commission Building, Washington, DC.

Going Concern is doing a great job keeping us all updated on the status of the current felons / former KPMG and PCAOB staff tangled up in the inspection list theft fiasco.

Several tidbits from Jason Bramwell on 1/16/20 I just noticed:  SEC Takes Away Privileges From Another Felon In KPMG/PCAOB Scandal.

Staff who have been banned by the SEC from practicing before the Commission:

“Resources from the AICPA’s Enhancing Audit Quality (EAQ) Initiative” – PR Prompts!, part 6

Image courtesy of Adobe Stock.

In November 2019, the AICPA published the first of a new semi-annual newsletter, PR Prompts!, designed to help CPAs keep current on peer review news.

The AICPA gave me permission to reprint portions of the newsletter on my blog.

This is the last of six posts to help you stay up to date.

The following comment is quoted verbatim. For ease of reading it will not be set inside quotation marks:

 

Resources from the AICPA’s Enhancing Audit Quality (EAQ) Initiative

Through the EAQ, the AICPA provides resources and education to help you avoid the most common audit quality issues. Check out their latest resources:

Risk Assessment and Response

In a survey of peer reviewers, over 50% of firms reviewed failed to comply with the risk assessment standards. Access free risk assessment tools, including industry-specific resources, to help you avoid common issues.

Also, watch the EAQ’s ENGAGE conference presentation with methodology providers to learn how to properly apply their methodologies and avoid the areas creating the most challenges for practitioners.

Internal Control

“Auditor Reporting” – PR Prompts!, part 5

Image courtesy of Adobe Stock.

A complete overhaul of the auditor’s report for audits of 12/31/20 financial statements is going to be a very big deal. Please tune in to the new standards!

In November 2019, the AICPA published the first of a new semi-annual newsletter, PR Prompts!, designed to help CPAs keep current on peer review news.

The AICPA gave me permission to reprint portions of the newsletter on my blog.

This is the fifth of six posts to help you stay up to date.

I have looked at this page on the AICPA website. It is quite helpful. If you provide audits to your clients, it would be worth your time to find, browse, and bookmark this page.

The following comment is quoted verbatim. For ease of reading it will not be set inside quotation marks:

 

Auditor Reporting

The form and content of the auditor’s reports will change substantively which will be effective for audits of financial statements for periods ending on or after December 15, 2020. Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, was issued in May 2019. SAS No. 134 includes a new AU-C section 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and replaces the following AU-C sections in AICPA Professional Standards:

“Auditing Standards Issued in 2019: Information and Resources” – PR Prompts!, part 4

Image courtesy of Adobe Stock.

In November 2019, the AICPA published the first of a new semi-annual newsletter, PR Prompts!, designed to help CPAs keep current on peer review news.

The AICPA gave me permission to reprint portions of the newsletter on my blog.

This is the fourth of six posts to help you stay up to date.

 

I have looked at the following page on the AICPA website. It is quite helpful. If you provide audits to your clients, it would be worth your time to find, browse, and bookmark this page.

The following comment is quoted verbatim. For ease of reading it will not be set inside quotation marks:

 

Auditing Standards Issued in 2019: Information and Resources

This is an exciting time in the auditing space. Standards are changing to keep up with today’s business environment. To set you up for success, we’ve gathered resources on auditing standards that include on changes to the auditing reporting standard, the employee benefit plan auditing standard and the other information standard. These include backgrounders, FAQs and news articles.

 

As mentioned at the top of this post, this article is reprinted with permission of the AICPA.