Tag: CPA

2013 Audit Season: Joke #1


Sleeping AuditorI already wrote about subsequent-events analysis during audits in my post Ignorantly Insolent Bosses.  Payments received from customers in January and February prove the validity of sales invoices outstanding as of 12/31.  On the other hand, if you made a payment to a vendor on 01/07/13 for an invoice dated 12/08/12, which wasn't included into your accounts payable schedule – that's an error: both the liability and the related expense should've been recognized in 2012.  There are subsequent events tests for all accounting cycles – really useful, powerful, mandatory for any audit.  If done thoroughly, they can uncover all those overstated revenues and hidden costs that result in public companies' going out of business and their executives going to jail.

"If" is an operative word.  Here is an actual story that happened during the week of 02/25/2013.  An audit field work was under way at ABC International, Inc.  A mid-size NYC CPA firm has been servicing this company for a few years, covering all corporate taxation needs as well as providing their independent opinion on the annual financial statements, which the company submits to their lenders, insurance underwriters, major suppliers, and other users.  ABC has a very strong CFO and the auditors never find anything out of order in the company's books, records, and statements. 

That's great, except that the audit quality should not be affected by the previous experience.  Yet, this time around the CFO noticed that the audit manager seemed a bit lax - the test selections were smaller, there were less questions and supporting documentation requests.  She was pleased: it shortened the exam time and also signified the auditors' confidence in her own work.  Of course, there is confidence and there is negligence. 

As soon as the audit started, the CFO asked her staff accountant to generate January and February schedules of sales, receipts, vouchers, and payments (the subsequent events), which were provided to the auditors with a copy to her.  When the CFO reviewed the information to make sure that everything was in order, she has realized that the payment journal was drawn for the beginning of 2012 instead of 2013 (people do have a tendency of clicking keys without thinking).

The CFO immediately generated correct schedules and was about to email them to the audit manager, when she stopped herself.  Why the hell didn't he notice it?  Did he even looked at it?  She decided not to do anything for the moment and see what would happen.

A couple of days later, the field work was completed.  Two weeks later the CPA firm prepared the draft of their independent opinion and the footnotes, which were sent to the CFO for review (she told me she's received it today).  Nobody ever mentioned the year old supporting data.  Nobody caught it: not the auditing staff, or the manager, or the firm's quality control department.  What quality?  Please, don't make me laugh!                

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CFO Folklore: Ignorantly Insolent Bosses

Quote of the Week


Images-1INT. OFFICES OF WERTSHAFTER CPA & ASSOCIATES

TED SCHMIDT CPA, who has been fired by his boss for non-business use of the Internet on the job after 9 years with the firm, is about to leave the premises forever with his Mr. Coffee and a few personal effects in a box.

MR. WERSHAFTER

Schmidt?

TED

Yes, sir?

MR. WERSHAFTER

One more thing. Are you happy being an accountant?

TED

Happy?

MR. WERSHAFTER

Does balancing the books makes your heart beat faster?

Bummed out Ted takes a moment to contemplate the question. He sighs.

TED

No, sir, not really.

MR. WERSHAFTER

Then, I am doing you a favor. Next time find yourself something you have a passion for. Otherwise, you are just jerking yourself off.

QAF, Episode 2.2, written by Ron Cowen and Daniel Lipman

Audit Season Woes


As a corporate controller, CFO, and consultant, I've been on auditees' side of the table for the past 20 years. Yet, I still remember the gratifying excitement of coming to a company as an auditor and testing the depth of my expert knowledge in an unfamiliar territory, quickly absorbing the business's specifics and immediately identifying the scope of testing. Well, Ok, I've been called a "show-off" and "know-it-all" many times, so forget me. Over the years, there were other public accounting professionals (not many, but some), who impressed me with their knowledge and sharpness, but it doesn't happen anymore.

I've been complaining about the decline of the quality of work across all jobs, from customer service representatives on the phone to the cardiologists in fancy hospitals, for years. But somehow I still get very frustrated when I encounter the same trend in my own profession. I cannot even explain why. After all, I am very conscious of the managerial accountants' limitations. The main reason for writing "CFO Techniques" was the desire to fill their knowledge gaps. Just a few weeks ago I wrote about The Unimaginable Abyss of Accounting Ignorance in the small-business environment. So, I should not be surprised when I am faced with the same situation while dealing with financial auditors. Nevertheless, it still gets me.

It's audit season, so in the past couple of weeks I've been helping my client (a young company) to go through their very first independent year-end examination of books and records. It's conducted by a small CPA firm hired before my consulting engagement commenced.

Under my guidance, the client's accountants did what I always advise to do in preparation for an audit (see Chapter 30, What Guarantees Fast and Painless Audit, in "CFO Techniques"), i.e. they loaded the appointed auditor in advance with statements and schedules of data required to make all testing decisions. He definitely had time to prepare well.

The client is an importer of raw materials. So, the revenue/cost recognition and cut-off tests are very important. Accordingly, the auditor gives a list of sales and purchases he wants to test. We provide all supporting documents to verify the propriety and accuracy of each transaction. After a little while the auditor knocks on my door with a bunch of papers in his hands. "How do I know," he asks timidly, "if these invoices have correct dates?"

Inside my head I scream, "Are you fucking kidding me?" But this is not about my frustration, this is about my client. So, I calmly explain that he needs to compare the recording dates with the source documents proving the product's ownership transfer as defined by Incoterms. I go further and demonstrate with one of the selected items: this sales order states CIF (cost, insurance, freight), which means that the customer owns the product as soon as it's loaded on the transport; hence, your source document is the Bill of Lading (BL) attached right here to the Commercial Invoice and the Packing List; the BL's date is the sale's date.

He soon comes back with another file and he is very apologetic, "I am sorry, could you explain this to me again? I never heard of those… terms… before. What did you call them?" I help him out, "Incoterms?"

Will somebody, please, explain to me, since when it's Ok for an auditor, who is responsible to lenders, investors, and other outside users to verify the correctness of books and records, to come to the client without the full knowledge required to perform his tasks? Why is he not even embarrassed to admit that? Why the hell in 2012 it did not occur to him to get his ass onto the world wide web, as soon as he heard the word "Incoterms" from me, and study them?

I guess, that would be too much to ask. Hey, he didn't even know what a "metric ton" was and asked me for the ton-to-pound conversion ratio instead of finding it by himself. He continued coming over, I continued providing him with definitions and rules. At some point he got so comfortable with this teacher-student setup, he even asked my advice on how to "test for prepaid expenses." Seriously? Did he forget that I was their from the client's side, essentially being audited?

And here I have to bring up my book again. There is Chapter 29 in "CFO Techniques" called Choose Your Auditors Wisely… Dear business owners, CEOs, CFOs, and controllers, please, read it if you want to avoid paying $25,000 – $100,000 (average range for small businesses) for low-quality accounting services.