Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Kimberly Wood, an Audit Senior Manager and one of the faces of the PKF Texas Transaction Advisory Services Team. Kimberly, welcome back to The Playbook.

Kimberly: Thanks for having me.

Jen: Last time, you mentioned getting your financial house in order. What does that look like for a company?

Continue Reading The Importance of Getting Your Financial House in Order

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here today with Ryan Istre, an Audit Director and a member of the PKF Texas SEC team. Ryan, welcome back to The Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, with the revenue recognition rules for ASC 606 that have come out and were applicable as of January 1, 2018, what do we need to know about that?

Ryan: That’s a good question, Jen. So, the SEC hasn’t had a whole lot of new comment letters come out about ASC 606. We do probably expect a lot of those to come out right around February and March of next year, because that’s when the companies will have a full cycle of revenue recognition under their belt for the full year.

Jen: So, do you expect them to come out with anything else?

Ryan: Again, they haven’t ever said officially. We’ve just sat through forums and a lot of CPE updates, and what we’ve heard to this point is that the SEC is suggesting that while most of the companies that they’ve been reviewing have been meeting the minimum requirements, they are suggesting that there are still a few more quarters that are available for the rest of the year for them to actually beef up their disclosures. So, we’re thinking they might believe a little deficiency is there but probably not enough to issue a formal comment letter so far.

Jen: Now, are there things in the disclosures that you’re recommending be enhanced based on that?

Ryan: Yes. So, what we’ve heard is that they’re recommending enhanced disclosures around what constitutes a specific performance obligation and what management is determining is the actual point in time in which the companies are meeting those performance obligations.

Jen: Okay, so it sounds like there’s definitely more information to come and that they should if they’re looking at it at all they need to contact someone like you so that we can give them guidance on what to do.

Ryan: Exactly. That would be a good idea; definitely contact the auditors, contact us. What we’ve heard in recent forums is that the Office of the Chief Accountant will continue to respect companies’ disclosure practices and procedures if those disclosures are well-grounded and based upon the principles of the new revenue recognition guide. So, I guess we’ll have to wait and see.

Jen: Yeah, so, let’s get some real-world application and see if it makes common sense maybe?

Ryan: Common sense, principles-based – it’s a toss-up, but only time will tell.

Jen: Perfect. Well, we’ll get you back once we know more information.

Ryan: Definitely.

Jen: Thank you. For more about this topic, visit our Revenue Recognition Central page on PKFTexas.com. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here again with Ryan Istre, one of our audit directors here at PKF Texas. Ryan, welcome back to the Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, how has the process of the PCAOB inspections of auditors of broker dealers impacted us and what we’re doing with our broker dealer clients?

Ryan: That’s a good question. About four years ago, the PCAOB began inspecting auditors of broker dealers. What that means for us is that there’s a new level of rules that we have to play by, however, if you were a client of ours, you would probably not even know the difference. Over all of the previous years that we’ve been doing audits, we’ve been under inspections for AICPA rules, PCAOB rules and various other organizations that ensure our audit quality is up to par. So, from a client’s perspective, you probably wouldn’t even notice a difference.

Jen: So, has anything changed at all then?

Ryan: There are a few changes that have happened. With the PCAOB being the official body over this inspection process for broker dealers, one of the rules has been changed recently is that there’s a concept of what’s called an “engagement quality reviewer.” That is not the lead partner on an engagement, but it’s the second partner to ensure quality control. The PCAOB rules specifically disallow partners who’ve participated in the previous two engagements as the lead partner from turning into that engagement quality reviewer. So, that basically allows for new sets of eyes to happen with regard to the quality controls over the audit.

Jen: So, does any other information come out of the PCAOB’s inspection process?

Ryan: There’s been some good information that’s come out of it. PCAOB is in what they consider their interim inspection period right now. So, while they’re not posting auditor-specific reports as they do with their normal public companies, they’re going to be posting general guidance around what they’ve learned from the inspection process. Unfortunately, there’s been several deficiencies that they’ve found in their audit inspection process – probably higher than I’d like to let onto – but it’s going to be a good thing, because a lot of the infractions that they’ve noticed probably were fairly minor. But there have been some that have been more serious, such as independence infractions and partner rotation rules for some of the smaller firms that may not have been super familiar with the PCAOB’s rules.

Jen: Well, good. And I know our audit team really sticks on to those PCAOB rules.

Ryan: Absolutely. You have to, you have to.

Jen: Perfect. Well, we’ll get you back to talk a little bit more.

Ryan: Yep, sounds good.

Jen: Thank you. This has been another Thought Leader production brought to you by PKF Texas Entrepreneur’s Playbook. Tune in next week for another chapter.

Do you prepare internal financial statements for your board of directors on a monthly, quarterly or other periodic basis? Later, at year end, do your auditors always propose adjustments? What’s going on? Most likely, the differences are due to cash basis vs. accrual basis financial statements, as well as reasonable estimates proposed by your auditors during the year-end audit.

Simplicity of Cash
Under cash basis accounting, you recognize income when you receive payments and you recognize expenses when you pay them. The cash “ins” and “outs” are totaled by your accounting software to produce the internal financial statements and trial balance you use to prepare periodic statements. Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems.

The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.

Value of Accruals
With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you this fiscal year, you recognize it when it is pledged rather than waiting until you receive the money.

Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on the GAAP basis.

Need for Estimates
Internal and year-end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible.

Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there is a reasonable estimate of the amount to be received or paid.

Minimizing Differences
Ultimately, you want to try to minimize the differences between internal and year-end audited financial statements, which can be helped by, for example, maximizing your accounting software’s capabilities and improving the accuracy of estimates.

Auditors examining a not-for-profit’s financial statements spend considerable time on the revenue figures. They look at the accounting methods used to record revenues and perform a detailed income analysis. You can use the same techniques to increase your understanding of your organization’s revenue profile.

In particular, consider:

Individual Contributions
Compare the donation dollars raised to past years to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.

Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.

Grants
Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Pay attention to trends here, too. Did one funder supply 50% of total revenue in 2015, 75% in 2016, and 80% last year? A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.

Fees for Services
Fees from clients, joint venture partners or other third parties can be similar to fees for-profit organizations earn. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for its payment. Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves.

Membership Dues
If your not-for-profit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

Once you’ve gained a deeper understanding of your revenue picture, you can apply that knowledge to various aspects of managing your organization. This includes setting annual goals and preparing your budget.

Contact us for help interpreting and applying revenue data.

Russ:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host, and I’m here once again with Kirsten Strieck, a shareholder and Director of Operations and Client Services at Joint Venture Strategic Advisors.  Welcome back to the Playbook, Kirsten.

Kirsten:  Thanks, Russ.

Russ:  You bet.  I assume in this joint venture advisory work that you guys do that there has to be an audit involved somewhere.

Kirsten:  We do many types of audits.  We do operating and capital expense audits, which are related to the joint operating agreement.  We do production revenue royalty audits.  We provide measurement audits, vendor audits, payout statement audits, final statement of adjustment audits and many more.

Russ:  So in every one of the assessments that you do, do you do all of those audits or is it kind of customized by the arrangement?

Kirsten:  It’s very customized to whatever the client’s looking at auditing, or we can go in and we can suggest an audit plan for them.

Russ:  Okay, very interesting, thanks a lot.

Kirsten:  Thank you.

Russ:  You bet.  For more about JVSA, visit JVSA.com.  This has been another Thought Leader production brought to you by PKF Texas Entrepreneur’s Playbook.

The relatively new federal procurement standards significantly alter the way not-for-profit organizations receiving federal funding handle purchasing. And while your organization may have changed its written policies to comply with the revised standards, it may be easier to follow the rules on paper than in practice.

not-for-profit procurement procedures

Summing Up the Standards
The standards, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” impose strict requirements on not-for-profits receiving federal funds. For example, you must pay attention to the amount of a purchase because it determines the procurement methods you need employ.

“Micro-purchases” of supplies or services up to $3,500 generally can be awarded without soliciting competitive quotes. “Small purchases” of services, supplies or other property that don’t cost more than $150,000 require price or rate quotes from several qualified sources.

For purchases exceeding $150,000, you must select vendors or suppliers based on publicly solicited sealed bids or competitive proposals. Select the lowest bid or the proposal most advantageous to the relevant program based on price and other factors that impact the program performance. Also perform a cost or price analysis for every purchase over $150,000, to make independent estimates before receiving bids or proposals.

Noncompetitive proposals solicited from a single source are permissible in only limited circumstances. For example, they’re allowed in the event of a public emergency where the not-for-profit must respond immediately.

Clearing Documentation Hurdles
You should already be following the revised standards, which went into effect in fiscal year 2017. However, some not-for-profits have found it challenging. Significant barriers to full compliance include culture shock and staff resistance. Also, these standards have multiple documentation requirements that few organizations previously met:

  • All procurement procedures must be documented in writing.
  • Conflict of interest policies covering employees involved in procurement as well as all entities owned by or considered “related” to your organization need to be included.
  • You must keep records detailing each procurement — including bids solicited, selection criteria, quotes from vendors and the final contract price.

Designing a checklist that outlines the decisions needed at each price level will make the process more manageable, as will keeping the required documentation.

Reduce the Risk
Failure to comply with procurement standards could result in your not-for-profit’s loss of federal funding. You can reduce that risk, though, by auditing your new procedures and processes to confirm that they’re getting the job done. Contact us for assistance.

When a donor promises to make a contribution at a later date, your not-for-profit likely welcomes it. But such pledges can come with complicated accounting issues.

Conditional vs. Unconditional
Let’s say a donor makes a pledge to your not-for-profit in April 2018 to contribute $10,000 in January 2019. You generally will create a pledge receivable and recognize the revenue for the April 2018 financial period. When the payment is received in January 2019, you’ll apply it to the receivable. No new revenue will result in January because the revenue already was recorded.

Of course, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional. Several factors might indicate an unconditional pledge. For example:

  • The promise includes a fixed payment schedule.
  • The promise includes words such as “pledge,” “binding” and “agree.”
  • The amount of the promise can be determined.

Conditional promises, on the other hand, could include a requirement that your organization complete a particular project before receiving the contribution or that you send a representative to an event to receive the check in person. Matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.

You generally shouldn’t recognize revenue on conditional promises until the conditions have been met. Your accounting department will require written documentation to support a pledge before recording it, such as a signed agreement that clearly details all of the terms of the pledge, including the amount and timing.

Applying Discounts
Pledges must be recognized at their present value, as opposed to the amount you expect to receive in the future. For a pledge that you’ll receive within a year, you can recognize the pledged amount as the present value. If the pledge will be received further in the future, though, your accounting department will need to calculate present value by applying a discount rate to the amount you expect to receive.

The discount rate is usually the market interest rate, or the interest rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.

Word of Caution
Proper accounting for pledge receivables can be tricky, and if you don’t record them in the right financial period, you could run into audit issues and even put your not-for-profit’s funding in jeopardy.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s host, and I’m here today with Ryan Istre, an Audit Director and a member of the PKF Texas SEC team. Welcome to the Playbook Ryan.

Ryan: Thanks Jen, glad to be here.

Jen: So Ryan what are the hot topics that the SEC staff are looking into these days?

Ryan: That’s a good question Jen. So there are a lot of new accounting pronouncements that are coming up in the very near future but one of the hot topics that the SEC staff are looking into right now are non GAAP financial measures. Some of the items that have come out in recent comment letters relate to the prominence of which non GAAP measures are being displayed over GAAP measures, which we all know is a no-no per Regulation G.
Continue Reading Hot Topics from the SEC

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m back with Chip Schweiger, one of our Audit Directors here at the firm.  Chip, welcome back to the Playbook.

Chip: Thanks, good to be here, Jen.

Jen: Now, if someone’s looking for an audit, take us through what that discussion would look like.  What types of things would you ask? How would you get that discussion started?

Chip: Sure, yeah. Normally somebody will reach out if they’re thinking about an audit. We’d encourage them to call PKF Texas, and we would come out and talk with them about their business; directionally, where is it going? But one of the most important questions that I ask prospective clients is, what do you want this business to be? Do you want to sell it to your children? Do you want to sell it to somebody else? Would you like to take it public? Or, would you like to get a private equity investor involved? That way, we can help calibrate our compliance services to also meet the needs directionally of where the company is going.

Jen: So, we’re really kind of co-developing a solution with them once we find out what their needs are.

Chip: Yeah. I like how you said that. It’s a great approach, and it really helps our clients, in the long run, get to where they want to be.

Jen: Now is there anything beyond that initial discussion they can expect once they decide, yes, I do need an audit?

Chip: We’re going to talk with them, certainly, about what the effort is involved, and which gets the fees. We’re going to talk with them about the service team, and the types of experts that we’re going to put on that engagement.

Jen: Perfect.  Well, thank you so much. I appreciate you being here.

Chip: Great.  Good to be here again.

Jen: This has been another Thought Leader production brought to you by the PKF Texas Entrepreneur’s Playbook.  Tune in next week for another chapter.