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- Written by: T. Steel Rose, CPA
CCH
ProSystem fx Engagement
Patrick Manosca is a CCH Accounting and Auditing Software Specialist, for ProSystem fx Engagement (PFE). He advises firms on the utility of the software. CCH provides audit advice at the CCH Learning Academy, which is in a classroom environment. The School of Audit is the knowledge-based approach to risk based auditing. A firm can go through a Best Practices course after the firm purchases the software and buys the training. One day is to cover training and another day is to cover consulting to conform it to their practice.
CCH PFE works from a binder perspective. The savings occur the second year moving forward where firms save 25% in realization or budget savings. Users have said savings are easily 30% in the second year, according to Manosca.
From the beginning the firm is looking to get the client trial balance (TB) data into their system. Users can link to an Outlook email with an Excel file and import directly into PFE. A QuickBooks direct import is expected soon. All correspondence is kept in the same binder for each client.
From the TB, users can copy and paste with a wizard to get their TB into the PFE TB. The next step is to use the Grouping tool to summarize the accounts so there is one cash account presented although the client has several bank accounts, for example. Part of the onetime set up for a first-time audit client is to copy and paste to the balance sheet so a live link is presented. The presentation of the financial statements is determined in the beginning if desired. Then TB reports can be set up to create supporting schedules, much like a cash lead sheet. From the top ribbon on the software you can create a journal entry. A report is produced of an update of all the journal entries which can be a huge time saver on audit budgets.
Actual red tick marks are used from the menu ribbon. Users can use a column to reference where the number came from on the workpapers by left clicking on the cell and right clicking from the Insert Workpaper reference and selecting the schedule. The reference cell can then be right-clicked and opened to review where the number came from. Users bring in supporting schedules like bank reconciliations from clients. Users locate it in the binder, left-click and move it to the Cash section of the binder arranged in balance sheet order, for the typical presentation reported on the financial statements. The package is used for compilations, reviews and audits. The opinion letter and notes can link the presented numbers and the dates.
The footnotes are also updated automatically. On the menu ribbon, you can go to the CCH Footnote in the upper left hand corner and browse all the subfolders to find a sample footnote for a category. PFE is unique in that is has integrated audit content. Another library is built inside of PFE with audit programs with Knowledge Coach, which is based on the latest risk-based standards. During audit planning users select the assertions that are applicable, and are reflected in the Substantive Procedures.
During planning you determine the risks as you complete the tables. On the menu ribbon users reflect the risk with a red flag. For example: if users notice that there is little separation of duties in reconciliations and accounts payable during field work on internal controls; they reflect an audit risk that an employee could create himself as a vendor. This is then reflected in the workpapers. Based on the new standards, the peer reviewer is going to associate the risk with the auditing steps performed.
All of this can be rolled forward. If users have Knowledge Coach, they can also roll forward their updates of audit content related to current standards during the roll-forward from the prior year. There is a TB report that will help calculate the analytics. Ratios are calculated in ratio analysis based on links to the trial balance. The roll-forward is where the large savings occur.
Thompson Reuters
Engagement CS
Thomson Reuters Engagement CS is available as part of the Thomson Write-Up package or users can obtain Engagement CS separately. It was originally designed as an audit tool. Up to 75% of clients also use it for tax return workflow, according to Brian Woods with Thomson Reuters. It has a PDF editor to mark up statements which can be scrolled through. There is also a notes field below each screen. There is a trial balance grid, which can provide different views for different staff, like for tax or audit as well as necessary fields for size of column width and a code field. There is a split screen view, so adjusting journal entries can be made and posted in real-time. If the entry is out of balance, the total shows up in red to alert you to the problem. There is also a separate journal entry screen.
There is a rounding utility that will keep the subaccounts balanced when rounding by category. It can pull the trial balance from write-up, QuickBooks and Excel. The first time you import from QuickBooks you have a matching screen to match to the Engagement CS template. The spreadsheet format has columns for budget, adjusting debits and credits, another balance column and reclassifying entry columns before the final balance column.
When the audit begins you can roll the prior year settings forward to utilize the workpaper names. Users can include, exclude or replace with PPC templates, SMART Practice Aids (SPA), or a selected engagement tool that you have built. The roll-forward takes several minutes but brings in all of the current data from SPA. Users can assign workpapers to different staff on complex audits if needed. Users can assign these staff privileges to prepare entries or even delete the section.
SMART Practice Aids provide risk assessment, field work and internal control and disclosure modules. Risk assessment was the first SMART Practice Aid built. The planning questionnaire will determine the audit approach (basic or extended) after the user designates the risk as low, medium or high. The practice aid will provide the general planning questionnaire and enable users to customize or remove some of these steps. It will then produce the audit programs. The workpapers are produced by SMART Practice Aids, which can be modified. Users can drag and drop from files after giving them a name and a reference, like a bank statement. Files can also be scanned in. Users can use or create online “stamps” for notes like draft, final, and tick marks. Users can also print any file or computer screen into Engagement CS to keep in the file for later review. Rather than scan in something like a 500 page inventory, users can refer to the document and still sign off on the step.
Users can utilize a third party accounts receivable confirm tool called Capital Confirmation. Users can use Checkpoint tools which are in Word or Excel formats so they can be formatted. SMART Practice Aids utilize Checkpoint tools as well; however, users are not required to use either one. Users can use Checkpoint tools without SPA. SPA is necessary to use to determine risk assessment. The worksheets are integrated with MS Office. This allows users to reference files, much like the bank statement on the workpaper leadsheet, which are also available to others for review making the move to paperless easier. As the audit objectives on the workpapers are completed, users sign off on the column with initials and date. Another diagnostic report will show the steps that have not been completed. It will track down the steps and list the steps that will need to be completed.
There is a link in the Notes to Financial Statements that links to the trial balance whether users use Word or Excel. The user puts the cursor on the field they need to link, and clicks the function key to put in the variable in order to link the number into the Notes to Financial
Statements.
Users can sign-off and review with individual or group clicks that a privilege user can set. Users can create review notes with a subject name with unlimited field notes. There is a dialog window where the discussion can be documented. Users can also create sticky notes that can be visually pinned on the audit workpapers and the treeview of lead sheets. They can also be checked off. A total of all of these notes can be shown in a Note Report that can be “drilled down” based on who made the notes.
In the wrap-up function, users can go to Engagement Properties and key in the Report Release Date, which will provide the 45 day countdown after which it cannot be changed. On the wrap-up, users can remove all workpaper review notes so they would not be presented for peer review, for example. After wrap-up has locked down all of the details, no one except assigned partners or those with security privileges can unlock it.
You can provide all needed static documents for a Peer Reviewer by going into the diagnostic report and converting it to a PDF. Engagement CS enables multiple staff working on the audit at the same time on different parts of the audit. If staff are in the field, you can use this virtual office to work in the field, rather than use the send/receive function. It works the same except for the drag and drop function.
Users can also send the engagement by email utilizing GoFileRoom. Thomson Reuters advises firms on how to implement the software but does not provide auditing advice.
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- Written by: T. Steel Rose, CPA
To get to the essence of crowdfunding for CPAs I talked with Sherwood Neiss, the entrepreneur, who pioneered the legislation, Sara Hanks, a due diligence attorney, and Richard Salute, the CPA who may have the most relevant experience about this new practice area for CPAs.
Equity crowdfunding was made possible by the JOBS Act signed into law in April to allow individuals to buy equity stakes in emerging growth companies, who will be able to raise up to $1,000,000. The SEC has concerns about fraud now that raising capital from the general public will become legal in 2013, the first time in 80 years. Therefore, audits by CPAs are required for capital raised over $500,000. Reviews are required for capital raised over $100,000, up to $500,000.
From Sherwood Neiss, I learned that the JOBS Act rules are expected to remain largely intact despite the burden to the SEC. Neiss is one of three entrepreneurs that literally provoked an Act of Congress to obtain SEC exemptions for these public capital formations of under $1,000,000 on websites.
“The review area will be a boon to CPAs who prepare and review financials for integrity and comprehensiveness,” said Neiss. Neiss expressed the same consternation as other people I talked with who are entrepreneurs. “How are CPAs going to do an audit for a startup since it is hypothetical?” he asked.
In my discussion with CPAs, an audit remains an audit, as does a review. There is no way to modify how you perform attestation. Neiss believes, “the onus will be on the funder that the financials have been stated accurately. They will need the income statement, a balance sheet
and cash flow statement.” It is Neiss’ opinion that, “The CPAs who want to get involved in these will have to find a way to keep the fees lower, to make more, later. This is a brilliant add-on component. It is essentially a private offering of public shares.”
Companies can be getting ready right now. “Building a business plan and a social network with an executive summary of financials can occur, but we all must wait on the SEC to finalize rules,” Neiss advised. As the crowdfunding framework now exists, Neiss stated, “The investment opportunity is presented by the entrepreneur. They must hit 100% of their [capital raising] target or they don’t get the money.” As to how much equity they can give up, “There is no set standard,” Neiss said. Determining valuations is another area for CPAs with valuation credentials to play a role.
Neiss was motivated to do this with two other entrepreneurs because, “we all tried to raise capital after the 2008 meltdown and found out that it wasn’t there,” Neiss lamented. “Five years ago you could not do this because the Internet was not providing the sunlight on this,” Neiss said referring to Kickstarter.com, which is a platform used to raise money for products and intangibles but not equity. He recommended reviewing crowdcube.com, a site where equity is offered successfully, operating in the UK.
The players in the crowdfunding arena are similar to the roles played at investment banks: The issuers offer equity in their companies. The investors provide the capital. The CPAs provide some assurance. The new wrinkle is the website portals and other intermediaries who provide due diligence and other services. Each player will have to comply with important rules to protect investors and satisfy the SEC.
Companies that help issuers and portals with the required due diligence are already forming. An early pioneer is Sara Hanks, CEO of CrowdCheck. A securities lawyer for 30 years, Hanks was drawn to crowdfunding based on her interest in the need for “micro-due diligence for micro IPOs.”
“CPAs are going to play such an important role, and we are happy to help them,” said Hanks. “In the statute, there is a requirement for a background check and a securities regulatory check for the portals which is not a defined term of the SEC. The statute has to define ‘background check’ as well.”
Hanks described the CrowdCheck service as one that will help entrepreneurs put together, “the disclosure package of some kind to be posted on the portal and sent to the SEC.” Hanks helped me to get my head around all of the fees involved. “There is the disclosure process, the CPA, the escrow and some legal fees, possibly; as well as the merchant processing fees to be passed along to the issuers. There will also be portal fees, and PayPal fees,” said Hanks. “Some of these will be super startups, only a few weeks old,” said Hanks.
Realizing that the crowdfunding enthusiasts are not well versed concerning what it takes to provide the level of assurance that the SEC requires, I talked to CPA Richard Salute of JH Cohn. Salute has experience auditing SPACs, which are similar because SPACs are special purpose offerings raising blind pools of capital for issuers to then find businesses to acquire.
“The SPAC may only have founder stock, or founder stock and warrants,” explained Salute. “The financial statements, even though they are zeros, are audited in accordance with GAAS.”
“Standards already exist,” said Salute. “The challenge that you have is an audit is an audit is an audit. These are risk-based activities that require work even when there are narrow financial statements and internal controls. We should celebrate the standards, not reduce them.”
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- Written by: CPA Magazine
Overview
Business Tax Review: 1040 Integration?
Tax software vendors created the integration-function to combat the redundancy and inaccuracy of reentering the same information across several forms for each client. One such example is in business tax/1040 integration when the K-1 for the shareholders is imported into the 1040 tax prep package. Many different versions of this function have been featured by many vendors.
“The preparer enters the client ID of the receiving/target return in the 1065/1120S return for the K-1,” said Jo Ann Cummings, Product Manager at CCH, a Wolters Kluwer business about ProSystem fx Tax. ‘Once that is done, we create an export file, either automatically when the return is calculated, or upon request, depending on the option chosen.”
“When the preparer opens the receiving/target return, a dialog box displays the import files available for that return. The preparer chooses some or all of the available files and the data from these files is imported into the appropriate input areas of the return.”
This opportunity to save time and improve accuracy has many tax professionals on board.
“This allows us to spend more time being an advisor to the client and not just a scribe,” said Kurt Sturn, Principal at Reznick. “We spend more time learning the tax rules and are more involved with helping the client business plan for the year.”
However, the number of eccentricities and details involved can make it difficult for tax professionals to utilize the function in every situation.
“We don’t use tax integration primarily because the extra work required to adjust the state tax is more trouble than it’s worth. Massachusetts, our primary state, is especially cumbersome,” said Steven P. Rodman CPA, MST of Rodman & Rodman, P.C.
Reviews
Stock Assistant Investment Data transferred Directly into form 1099-B
TaxACT from 2nd Story Software lets users create personalized Data Organizers to help clients gather the necessary tax information and documents. The worksheet lists last year’s numbers with spaces for clients to provide this year’s data. Users can pull in basic information by importing PDFs of their clients’ 2011 returns prepared by other tax return preparers. The Stock Assistant lets users enter clients’ investment data in one window. As the user types, data is transferred directly into Form 1099-B. It includes a printable summary and an option to return to the Q & A Interview at any time.
Benefits and Features
- Users can instantly print a complete list of their clients’ current year, next year and accumulated depreciable and disposal assets.
- What-if scenario tax calculators can give users’ clients an idea of what their tax situation would be if they choose to invest in an IRA.
- Users can choose the order and the specific fields they want to appear in the Client Reports users produce with TaxACT.
- Features the 10-key calculator, which is a portable tool for calculating, saving important calculations and printing on standard paper.
- Features a billing invoice template to customize invoices.
What Users Say
“I can’t imagine spending thousands of dollars for prep software when TaxACT has it all...after using the product for six years and recommending it to many others, I am very satisfied with the flexibility and the completeness of the product - keep up the good work, said Doreen R. of Fremont, California.”
Summary
2nd Story Software’s TaxACT is augmented by Stock Assistant and tax scenario calculators to solve IRA what-if questions.
2nd Story Software | TaxACT
prep.taxact.com
319-373-3600
Over 50 Forms and Schedules in Spanish
CH Small Firm Services’ TaxWise allows users to print a letter containing data from their client’s return. Users can create custom organizers to mail to clients prior to the tax season. The organizer can also be converted to a PDF file and emailed to the client.
If the user’s office is bilingual or they are looking to better serve the Latino market, TaxWise can provide comprehensive bilingual services for the office and its clients. Bilingual client orientations, customer support and training webinars are available. There are over 50 forms and schedules in Spanish on-screen for users that can print for clients.
Benefits and Features
- Users can prepare returns without a mouse by using keyboard shortcuts or use the mouse to take advantage of toolbar buttons and right-click pop-up menus.
- Users can “Link” to supporting forms using the QuickLink feature or open forms directly from the “Find a Form” screen.
- Users can open multiple instances of TaxWise, allowing you to view more than one return at a time
- Data flows automatically from supporting forms to the primary form and from federal forms to state forms.
- TaxWise’s open database compliant (ODBC) format allows users to track returns and analyze data using spreadsheets and reports created with software such as Crystal Reports and Microsoft Access and Microsoft Excel.
What Users Say
“I should have purchased the TaxWise Power Accounting Package years ago,” said Lenny Blair in Deatsville, Alabama. “I originally only used TaxWise to prepare my customers’ tax returns; but when I needed to update my accounting technology, I saw their accounting software as a way to grow my business.”
Summary
CCH Small Firm Services’ TaxWise offers options for offices that are bilingual or are servicing bilingual clients.
CCH Small Firm Services | TaxWise
taxwise.com
866-345-4171
Detailed Reports for Planning and Audit Trail Purposes
The ProSystem fx Tax - Corporation module allows users to convert a Corporation return to an S Corporation return, and vice versa, from one year to the next. It also features an array of commonly used Federal elections.
The ProSystem fx Tax - Partnership module provides extensive allocation capabilities. Powerful state features and Schedule K-1 (Schedule 1065) options save time.
Benefits and Features
- Depreciation and amortization features that handle all types of calculations, bookto- tax adjustments and detailed reports for planning and audit trail purposes.
- Wizard for importing or exporting foreign entity information – one at a time or in batch mode.
- Detailed statements, offered historically by year, which include net operating loss, general business credits, contributions, carry forwards and carry backs.
- Produce Alternative Minimum Tax versions of Schedule D‚ Form 4797‚ Form 4952 and Form 6252.
- Allocate all income‚ deduction and other Schedule K-1 (Schedule 1065) items according to specified amounts‚ percentages or units.
- Efficient output of Partner Schedule K-1 packages to a combined PDF or to individual PDF files.
What Users Say
“ProSystem fx Tax is the best tax software bar none,” said Linda L. Speicher, CPA in Los Gatos, California. “I have used CCH’s services for tax since 1980. Their service team is on top of all issues at all times, with frequent updates to the program. I wouldn’t use any other software.”
Summary
CCH, a Wolters Kluwer business’ ProSystem fx Tax – corporation and partnership modules offer numerous forms specific to users’ needs.
CCH, a Wolters Kluwer business | ProSystem fx Tax
cchgroup.com
800-739-9998
Fully Integrated Document Manager
Drake Software’s business tax solution features proformas and organizers which can help save time during the rush of tax season. Organizers, which can be emailed securely as PDF files, can help user’s clients collect their records and prepare for their appointments. Both proformas and organizers include the previous year’s tax information.
The Drake Document Manager (DDM) is fully integrated with Drake Software and can help users organize and store documents. Users can also send documents to their printer and to the DDM simultaneously, so users can have an electronic copy of what was handed to their client. The DDM is fully compatible with TWAIN compliant scanners.
Benefits and Features
- The Evaluation Guide introduces users to navigation, setup, and e-Filing while walking them through preparing 1040, 1120, and 1065 returns within the software.
- The Calculation Results window displays return information-including notes, fees, refund amount, and e-file eligibility at a glance.
- Broadcast emails, sent to user’s Drake-provided email account, notify users of important information about the latest industry news and Drake-related updates.
- Users can assign pre-defined or customized security settings to preparers in their office.
- Flagged fields help prevent mistakes, as they force users to verify important data entry fields before finalizing the return.
What Users Say
“Drake Software? Love it! I’ve been a loyal customer since 1996,” said David C. Dietrich, Office Manager at Kittrell Enterprises, Inc. “Customer support is the best of any I have ever used! The phone is always answered by knowledgeable & friendly personnel with no annoying prompts. I can’t imagine a tax season without Drake Software.”
Summary
Drake Software’s business tax solution features several tools to keep users’ files and client interaction organized as well as flagged fields to make sure user missteps are minimal.
Drake Software | Drake Software
drakesoftware.com
800-890-9500
Client Checklist Helps Keep Yearly Momentum
ProSeries Tax by Intuit features added integration for Refund Advantage into ProSeries. Refund Advantage is increasing its enrollment capacity for ProSeries users to accommodate increased demand for ERC/RT and RAL products.
The Client Checklist can help users collect client information easier from year to year by generating an easy-to-understand list of the information users need from their client to complete their return.
Benefits and Features
- Free e-Filing for supported individual and business forms.
- Automated calculations, diagnostics and built-in tax research to help prepare returns accurately.
- Tight integration between Federal and State forms, plus QuickBooks and K-1 import can help save time by reducing data entry.
- Automatically generated with each return, the Client Presentation can provide a summary breakdown of the return for clients, including income and deductions, compared to prior years.
- The Missing Client Information Utility can help users track down data they still need from clients via email and links users directly to the field to add it.
- The Client Analyzer helps users keep up-to-date on the ever-changing tax law and allows users to see which clients it impacts.
- The Client Advisor generates a list of recommendations to help clients lower taxes based on their existing tax data.
What Users Say
“With ProSeries, I have had the least stressful tax season ever,” said Michelle Ziegenbein, CPA of Michelle Ziegenbein, CPA, LLC. “Last year’s data carried over to this year smoothly. My data entry was cut in half.”
Summary
ProSeries Tax by Intuit features several alert systems such as Client Advisor and Client Analyzer which push tips about tax information. Automation is heavily emphasized with diagnostics and built-in tax research for accuracy during the filling out of returns; and Client Presentation which provides statistics about the client.
Intuit | ProSeries Tax
proseries.intuit.com
800-934-1040
Check-Off Completed Items in the Review Process
TaxWorks by RedGear Technologies features a Fixed Asset Manager that can track the depreciation of fixed assets and non-conforming state depreciation. Users can dispose of fixed assets through sales, installment sales, like-kind exchanges, casualties/ thefts, or charitable contributions.
Data can be imported from QuickBooks, EasyAcct and Accounting CS. The data can be in both Excel or CSV files. Trial Balances can be started from scratch with the default Chart of Accounts,
Benefits and Features
- Users can view prior year values on proforma returns by hovering over the input field.
- Users can archive returns in ArkWorks or save PDF copies to the firm’s file system for other archival programs.
- Users can use a barcode reader to import K-1 information from printed Schedule K-1s with 2-D Barcodes.
- A multi-state apportionment grid to report information from the Federal returns and calculate the various state’s apportionment factors.
- Features support for electronic signature pads; if the taxpayer is in the office, they can sign the return electronically.
- Users can lock completed returns so that they stay the way they were prepared, with no unintentional changes.
What Users Say
“The main reason I changed back to TaxWorks was because of the business systems,” said Ron Kleker, CPA in Woodland Hills, California. “I had merged with another practice that was using another provider. I felt like I had to do more work for the software than what the software was doing for me. It’s much more cumbersome especially for California. I also missed TaxWorks ability to check-off completed items in the review process which is vital for larger offices.”
Summary
TaxWorks’ Fixed Asset Manager helps tax professionals keep track of assets from several perspectives. Users can also lock returns to preserve finished work.
RedGear Technologies | TaxWorks
taxworks.com
800-230-2322
Scan Bar Codes on K-1s and W-2 Forms to Transfer Data
UltraTax CS by Thomson Reuters can eliminate repetitive data entry and other time and resource consuming tasks. UltraTax CS also offers one-click access to RIA research on Checkpoint and PPC Deskbooks. UltraTax CS can be combined with other CS Professional Suite products and popular applications as well.
Users can utilize e-file tools to monitor each step of the e-file process, like automatic error-checking to ensure that returns are complete and accurate prior to being transmitted to the IRS and state taxing authorities. There is detailed information to alert users to the status of a given tax return, including e-file acknowledgements from the IRS or a state. There is also the option to send clients an automatic email when an e-file return is accepted by the IRS.
Benefits and Features
- Account balances in Accounting CS transfer directly into UltraTax/1120 and automatically calculates M-1 and M-2 adjustments.
- UltraTax CS allows users to scan bar codes on 1065, 1120S, and 1041 Schedule K-1s, and on W-2 forms to transfer data from those forms directly into UltraTax CS.
- Users can add customized text items once to the library, then insert them repeatedly in tax forms without re-keying.
- Clients are enabled to complete their tax information online via users’ websites using a customizable questionnaire. Users can then import the completed data into UltraTax CS without re-keying.
What Users Say
“The accurate and reliable tax processing software grants me the ability to quickly process basic and intermediate tax returns at high volumes and high profit rates in January and February,” said Lloyd Leuthner of Leuthner Tax & Financial. “That same easy-to-use UltraTax CS processes high-end returns for doctors, entertainers, and multi-state athletes.”
Summary
Thomson Reuters’ UltraTax CS can help users save time by eliminating several data entry procedures.
Thomson Reuters | UltraTax CS
cs.thomsonreuters.com
800-968-8900
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- Written by: T. Steel Rose, CPA
To get to the essence of crowdfunding for CPAs I talked with Sherwood Neiss, the entrepreneur, who pioneered the legislation, Sara Hanks, a due diligence attorney, and Richard Salute, the CPA who may have the most relevant experience about this new practice area for CPAs.
Equity crowdfunding was made possible by the JOBS Act signed into law in April to allow individuals to buy equity stakes in emerging growth companies, who will be able to raise up to $1,000,000. The SEC has concerns about fraud now that raising capital from the general public will become legal in 2013, the first time in 80 years. Therefore, audits by CPAs are required for capital raised over $500,000. Reviews are required for capital raised over $100,000, up to $500,000.
From Sherwood Neiss, I learned that the JOBS Act rules are expected to remain largely intact despite the burden to the SEC. Neiss is one of three entrepreneurs that literally provoked an Act of Congress to obtain SEC exemptions for these public capital formations of under $1,000,000 on websites.
“The review area will be a boon to CPAs who prepare and review financials for integrity and comprehensiveness,” said Neiss.
Neiss expressed the same consternation as other people I talked with who are entrepreneurs. “How are CPAs going to do an audit for a startup since it is hypothetical?” he asked. “The CPA industry will provide guidelines,” he said.
In my discussion with CPAs, an audit remains an audit, as does a review. “There is no way to modify how you perform attestation,” Neiss believes. “The onus will be on the funder that the financials have been stated accurately. They will need the income statement, a balance sheet and cash flow statement.” It is Neiss’ opinion that, “The CPAs who want to get involved in these will have to find a way to keep the fees lower, to make more, later. This is a brilliant add-on component. It is essentially a private offering of public shares.”
Companies can be getting ready right now. “Building a business plan and a social network with an executive summary of financials can occur, but we all must wait on the SEC to finalize rules,” Neiss advised. As the crowdfunding framework now exists, Neiss stated, “The investment opportunity is presented by the entrepreneur. They must hit 100% of their [capital raising] target or they don’t get the money.” As to how much equity they can give up, “There is no set standard,” Neiss said. Determining valuations is another area for CPAs with valuation credentials to play a role.
Neiss was motivated to do this with two other entrepreneurs because, “we all tried to raise capital after the 2008 meltdown and found out that it wasn’t there,” Neiss lamented. “Five years ago you could not do this because Internet was not providing the sunlight to this,” Neiss said referring to Kickstarter.com, which is a platform used to raise money for products and intangibles but not equity. He recommended reviewing crowdcube.com, a site where equity is offered successfully, operating in the UK.
The players in the crowdfunding arena are similar to the roles played at investment banks: The issuers offer equity in their companies. The investors provide the capital. The CPAs provide some assurance. The new wrinkle is the website portals and other intermediaries who provide due diligence and other services. Each player will have to comply with important rules to protect investors and satisfy the SEC.
Companies that help issuers and portals with the required due diligence are already forming. An early pioneer is Sara Hanks, CEO of CrowdCheck. A securities lawyer for 30 years, Hanks was drawn to crowdfunding based on her interest in the need for “micro-due diligence for micro IPOs.”
“CPAs are going to play such an important role, and we are happy to help them,” said Hanks. “In the statute, there is a requirement for a background check and a securities regulatory check for the portals which is not a defined term of the SEC. The statute has to define ‘background check’ as well. The one thing people have to bear in mind is that the SEC has to issue rules and register the portals.”
Hanks described the CrowdCheck service as one that will help entrepreneurs put together, “the disclosure package of some kind to be posted on the portal and sent to the SEC.” Hanks helped me to get my head around all of the fees involved. “There is the disclosure process, the CPA, the escrow and some legal fees, possibly; as well as the merchant processing fees to be passed along to the issuers. There will also be portal fees, and PayPal fees,” said Hanks. “As it grows, these amounts will go down.” CrowdCheck will be looking for CPAs to provide audit services. “Some of these will be super startups, only a few weeks old,” said Hanks. “The SEC needs to provide some guidance to provide what they will audit.”
Realizing that the crowdfunding enthusiasts are not well versed concerning what it takes to provide the level of assurance that the SEC requires, I talked to CPA Richard Salute of JH Cohn. Salute has experience auditing SPACs, which are similar because SPACs are special purpose offerings raising blind pools of capital for issuers to then find businesses to acquire.
“The SPAC may only have founder stock, or founder stock and warrants,” explained Salute. “The financial statements, even though they are zeros, the offering is audited in accordance with GAAS.”
“Standards already exist,” said Salute. “The challenge that you have is an audit is an audit is an audit. These are risk based activities that require work even when there are narrow financial statements and internal controls. We should celebrate the standards, not reduce them.”
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