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Summing It Up

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To Reduce the Risk of Lending, ABL’s Need to Scrutinize Audit Opinion Letters

Author: Robert Wood

Different types of opinions have different implications for understanding the issue of “going concerns”

Accountants reconsider the “going concern” assumption each time they audit a financial statement. When the long-term viability of a borrower is in doubt, it may cause a CPA to issue a qualified audit opinion. And in a worst-case scenario, the accountant may withdraw from the job altogether.

Financial statements are typically prepared with an assumption that the company will remain a going concern. That is, the entity is expected to continue to meet its obligations in the ordinary course of business and generate a positive return on its assets.

Viability Concerns affecting Financial Statements

At times, auditors discover adverse events and conditions that can cast substantial doubt on a company’s ability to continue as a going concern over the next year.

Some possible red flags include:

  • Working capital deficiencies,
  • Loan defaults and debt restructurings,
  • Pending lawsuits and investigations,
  • Negative operating cash flow, and
  • Labor union conflicts and work stoppages.

When an auditor rejects the going concern assumption, he or she may adjust balance sheet values to liquidation values, instead of historic costs. Footnotes can also report going concern issues. Moreover, the auditor’s opinion letter (which serves as a cover letter to the financial statements) could be downgraded when uncertainties arise.

Understanding an Audit Opinion

An audit opinion can vary depending on available information, errors discovered during audit procedures, financial viability and other limiting factors. The cleanest and most desirable type of audit opinion is known as an “unqualified” one. With this type, the auditor states that the business’s financial condition, operations and position are fairly presented in the financial statements.

If there are any uncertainties regarding the going concern assumption, the auditor will likely issue a “qualified” opinion and disclose the nature of the uncertainties in the footnotes. An auditor may also choose to issue a qualified opinion if the financial statements seem to contain a small deviation from Generally Accepted Accounting Principles (GAAP), but they’re otherwise fairly presented — or if the borrower limits the scope of audit procedures.

But there are much less desirable opinions, known as “adverse opinions.” They indicate that there are material exceptions to GAAP that will affect the financial statements as a whole.

But by far the most alarming opinion is a disclaimer. It occurs when the auditor gives up mid-audit. Reasons for a disclaimer may include significant uncertainties and scope limitations within the subject company itself. Many lenders won’t accept financial statements that have this designation. In addition, lenders are likely to call the loan unless the borrower takes corrective action.

Unexpected change of auditors

Some auditors will pull the plug on long-term audit clients before they even start fieldwork if they believe there’s a need to issue a disclaimer or an adverse opinion. Sometimes the client replaces their auditors if they question long-term viability.

No matter who initiated the switch, a sudden, unexpected change of auditors could lead to going concern issues.

The future of going concern assessments

As of now, an auditor will assess a period of one year beyond the financial statement date when evaluating the going concern assumption. But last summer, the Financial Accounting Standards Board (FASB) proposed a rather controversial change to GAAP that would mandate more frequent going concern assessments and require a longer assessment period.

Under the proposal, a client’s footnotes would discuss when it’s “more likely than not” that a business won’t meet its obligations within a year without taking action outside the normal course of business — or if it’s “known or probable” that it won’t meet these obligations within two years.

Over the last five years, businesses, regulators, auditors and other stakeholders have tried to determine how to reduce diversity in financial reporting about going concern issues. A final amendment to these rules isn’t expected until FASB can work out the problems in its latest proposal.

Monitoring viability

So, what’s the bottom line? Lenders should pay attention to audit opinion letters. The type of opinion expressed can have serious implications about your client’s ability to operate as a going concern. And downgraded opinions warrant your immediate attention.

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asset based lendingFreed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can  help you reduce the risk of lending or assist your clients with our business advisory, audit, fraud detection and prevention, and tax services.

For more information about our business advisory, audit, and other accounting services contact us here, or call us at 716-847-2651.

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Seeing Comments on Your Management Letter- A Consultant Can Help!

By Chris Piedici

Auditor comments within a management letter help address deficiencies with financial reporting so that board members and management can make informed and timely business decisions; with the ultimate goal being to strengthen the collection of data for financial reporting.

With the understanding that charter school boards vary in size and qualifications, the average board comprises 10 people and at least one person with a background in financial management. Charter boards have a fiduciary responsibility over budgeting and financial reporting, but are less likely to oversee the day to day control over human resources and financial processes. These challenges can make it difficult to obtain the right staffing to reduce deficiencies that are of high importance to remediate. Incorrect reporting of financial data can impede the progress of the future success of the educational system. With the source of funds from state aid flowing through Public School Districts to the Charter Schools, it’s especially important that Charter Schools are being fiscally responsible. The benefits of a consultant with backgrounds in Public Schools and Charter Schools can help reduce the burden of meeting the fiscal recommendations of management letters.

Consulting firms can assist with:

  •     Quarterly reviews of the financial data,
  •      Being an intermediate level of oversight between the auditor, internal finance positions and the board,
  •    Analysis of contract costs,
  •    Assessment reviews and recommendations of internal operations and,
  •    Development of Financial projections.

We understand the challenges that charter schools face with staffing limitations and can help provide remediation. For further information on the most recent audit guidelines please visit the NYS Department of Education:

http://www.p12.nysed.gov/psc/documents/NEWYORKSTATEEDUCATIONDEPARTMENTAUDITGUIDE-12.31.12-F.pdf

 

 

Charter schools are part of a broad movement in public education toward results based accountability. Charter Schools began operating in New York through the New York Charter School Act of 1998. Although charter schools have been in operation across the U.S. for nearly 15 years and in New York for ten, much of the current knowledge base is about the setup, financing, and funding of charter schools. This includes state charter school finance systems and education metrics for the students, all of which are important pieces but leave a gap in ensuring a proper financial management system is in place within these schools.

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Sailing Through a New York Sales Tax Audit

Author: Amanda Roth, CPA

What does this image make you think of? It makes me think of all the recent sales tax audits I have been involved in.  The most dreaded letter to get in the mail is the one that reads “We’ve scheduled an audit of your New York State sales and use tax records”. Even if all your records are in order and all your sales tax has been paid, the process can be overwhelming and you may not know what to expect. If you feel anxious, terrified, or even a little nauseous at the prospect of an audit, you are not alone, many feel as you do. It can be a daunting task to get organized for an audit. But don’t panic, these tips may help your audit go more smoothly.mail-1.jpg

Surviving a Sales Tax Audit

  1. Locate all your records – Make sure you can find all the records the auditor is asking for, if not try to obtain them from other sources (tax returns from your CPA, bank statements from online or from your local branch, etc.)
  2. Get Organized – Organize all your records according to the request list and present them in an organized manner (i.e.: by year or alphabetically).  As a CPA I recommend setting up a binder, printing the request list and setting up tabs that correspond to each item requested. Some items, such as invoices, are too large to put in the binder. For these types of documents, a box will suffice, and then reference their location in the binder. Purchase invoices should be grouped together per vendor and listed in date order. This is usually done to make it easier to pull out the applicable invoices if a test period is chosen, or to search a particular vendor file quickly if the auditor wants to view certain expenses.
  3. Be prepared - Always make sure you have what the auditor has requested before scheduling an appointment. No one likes wasting time and it will make the audit move along more quickly.
  4. Put your best foot forward – Always look at everything you provide an auditor and ensure all work papers tie out to reports and/or returns provided. Present and retain records as organized as possible and ensure the records you print agree to reports or returns. Sometimes if you rush and just gather the information, errors can occur.   
  5. Make sure you have your “A Team” - Decide if you will be representing yourself or if you will be getting your CPA involved to help in the process. Most businesses feel they can handle an audit on their own to save on costs. However, there are times where having a representative saves money in the long run. A representative allows your employees to focus their time on what they are best at (usually the operations of the company). Some considerations in deciding whether to go it alone or get your CPA involved are as follows: cost, resources, capacity, technical knowledge, business needs, condition of record or lack thereof, and knowledge of audit procedures.  

Is it time to change audit firmsThese five basic tips will help make any audit go more smoothly. I always recommend getting your CPA firm involved; they are accustomed to the many obstacles of audits and might be able to help clear a path to a smoother audit; alleviating that anxious and overwhelming feeling that many get.

Contact Our Sales Tax Professionals

If you are not sure what steps to take next, contact Freed Maxick. We can help you navigate through a sales tax audit, and help get you organized. Please contact us for more information.

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