Tips for an efficient, successful month-end close

Closing your books at the end of each month might not be the most exciting part of running a business, but efficient and accurate monthly closings are important for any organization. Month-end closings are not only essential to effective fiscal governance, they also provide management with financial information that drives strategic decisions. The sooner management gets good information, the more quickly they can respond — and organizational agility can be an enormous competitive advantage.

Smart Business spoke with Jennifer Henson, a senior business services associate at Sensiba San Filippo LLP, about how businesses are transforming month-end closings from a cumbersome and stressful process into a value driver for their management.

Why is a streamlined month-end process important?

Month-end can be a very stressful time for finance departments. Management is often eager to get their hands on financial information that will inform their decisions. Developing an efficient, ‘streamlined,’ process for month-end will create a more relaxed environment, free up man hours and ensure that management receives accurate and timely information. When month-end is completed quickly, you can adapt sooner, capitalize on more opportunities and make better strategic decisions.

What pitfalls can slow down the month-end process?

Even a well-designed process can become obsolete as needs change or become cumbersome over time. When data is not recorded correctly throughout the month, it creates a tremendous burden on the month-end process. Finance professionals often find themselves looking for missing expenses, searching for expenses that have been entered multiple times or correcting items that were coded or categorized incorrectly.

Process and procedural problems aren’t the only things that can slow down month end. Many companies spin their wheels tracking information in greater detail than is ever needed. A swollen chart of accounts may require detailed tracking that provides no organizational value.

How can an organization simplify and improve the month-end process?

Before you can fix a problem, you first have to recognize it. Look out for signs of stress within your month-end process. These symptoms might include monthly closings dragging longer and longer into the next month, finance professionals putting in significant overtime at the beginning of each month or general tension related to the process.

Once you decide that your month-end closing process isn’t working, you need to diagnose the problem and take corrective action. Do you have a cumbersome process that is creating unnecessary work? Consider simplifying your chart of accounts.

Month-end problems can also be caused by a failure to define and follow effective recording procedures throughout the month. Set strong deadlines for critical tasks and monitor adherence to your procedures. Many of the symptoms that you see during month-end are actually a manifestation of ongoing problems.

Once your ongoing accounting processes and procedures are fine-tuned, there may be opportunity to improve your closing process as well. Analyze your month-end routine. Follow a checklist, but be able to think outside of it. Ask a lot of questions. ‘Why are we doing this?’ ‘Should we be doing this?’ ‘Are there steps in our process that don’t accomplish anything?’

What else should business owners know about month-end?

Financial accounting, which includes the month-end process, is an important function within any business. It can either positively or negatively affect overall business performance. Business owners shouldn’t hesitate to ask for outside help when they need it. Experienced accountants can help setup a system that works for your specific needs. Professional expertise and experience can be very valuable. It can save a lot of time, stress and angst over the long term.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How outside expertise can help owners focus on their core business

Outsourcing some or all bookkeeping and accounting functions can make a lot of sense for small businesses that can’t afford an in-house accountant.

“They may not have the budget for a full-time or even part-time accountant. An outsourced controllership can fill in and provide affordable ongoing reporting so they have accurate numbers on a monthly basis rather than waiting for an annual accounting cleanup,” says Clayton W. Rose III, CPA, a principal at Rea & Associates.

Smart Business spoke with Rose about various options available to meet the accounting needs of small businesses.

Can businesses use software such as QuickBooks instead of using a professional accountant?

QuickBooks is easy to use, but you need sufficient supervision by someone who is proficient with accounting skills. Otherwise, you’re not analyzing what is going on behind the numbers or utilizing some of the capabilities of the software, such as the reconciliation process, accounts receivable tracking and accounts payable, etc. You could end up with duplicated entries and overstated or understated balances as a result. When problems occur, there could be a lot of fees invested in cleaning up the accounting.

What forms can outsourced accounting take?

It can be a wide range, from full service to partial service or oversight.

If your business operates by the calendar year, you need to clean up your accounting between Jan. 1 and April 15. If you stay on top of your accounting throughout the year, though, this will be a much smoother process. Perhaps bring someone in at the end of six months, and then again in September and December so you can track performance and analyze your tax situation.

Tax planning is always an important part of the process, too. An accountant can help ensure commercial activities and sales taxes are filed on time and the numbers are accurate so you’re not overpaying.

If you’re required to provide periodic financial statements to banks, you need to ensure that your numbers are accurate. If you have a loan based on accounts receivable, banks often want a quarterly report so they know how much they can lend and what balance you need to pay if you’re over the limit.

Some clients just want another set of eyes for their bookkeeper, perhaps to prepare the monthly bank reconciliation. They don’t have enough people on staff to have adequate internal controls, so outside help is needed to provide proper checks and balances. Internal controls are often underemphasized because owners never think they hired someone who would steal. But proper controls will provide a much better chance of catching something if it occurs.

How does a business owner decide what level of outsourced accounting is right?

The primary concern is budget. Do you have the budget to have someone on staff? You also haves to consider if you haves the patience to handle the work. It depends on your tolerance level combined with your desire (or lack thereof) to do accounting. Most small business owners are entrepreneurial and sales-oriented. Someone with a selling attitude typically does not have an accounting attitude at the same time. They want the information but aren’t interested in the details because they’re more focused on the next deal.

The level of service can be adjusted to the needs of the business. One client has been doing some data entry, and having us reconcile balances and actually write checks on their behalf. But they have grown and we’ve had discussions about revising the arrangement. They may be ready to go with an on-site accountant.

One concern companies have is that outside accountants can be a disruption, but that can be minimized through Web-hosted versions of accounting software. Accountants don’t have to visit the office; they can access the software and help with modifications as you go along so that you don’t have to wait to get journal entries back in order to post them.

Outsourcing can be a nonintrusive, cost-effective way for small businesses to address accounting needs until they reach the point where they can afford someone on staff.

Insights Accounting is brought to you by Rea & Associates

How an experienced investigator performs background due diligence

When trying to learn about an individual, many companies turn to online background checks. This could be a mistake, however, as much of the available information may not be fully verified, which is why many businesses turn to a licensed investigator to help provide a more complete and accurate picture.

Smart Business spoke with Theresa Mack, CPA, CFF, CAMS, CFCI, PI, a senior manager at Cendrowski Corporate Advisors LLC, about working with a licensed investigator to help your business uncover the information you need.

 

Why hire a licensed investigator? 

Most online or database-driven background checks are actually ‘record checks.’ In other words, data from records are compiled and the quality of the source information is not thoroughly verified.

This cursory check may be sufficient in some cases. However, depending on the information found, the nature of the background check, the check’s intended use and the access to confidential/proprietary information that a potential employee may have, a complete background due diligence investigation by a licensed investigator may be warranted.

An investigator uses multiple resources to verify data accuracy and corroborate information. Thus, background due diligence investigations help reduce the risk of client reliance on false information.

 

How do investigators perform background due diligence activities? 

An investigator generally works on a six-step methodology: prepare, inquire, analyze, query, document and report. This methodology is highly applicable to background investigations. An accurate and comprehensive investigation is based upon existing, determined and verified information, leaving no stone unturned.

Investigators will tailor their activities to suit the needs of their clients, which typically include attorneys, businesses and individuals. Client needs will define both the records checked by the investigator and the type of documents that can be released to the investigator and the client.

 

Where does an investigator begin? 

An investigator often begins by examining open-source information, which refers to sources that are overt and publicly available. These are available through online data warehouse applications, which house data from disparate sources.

Open-source information includes public documents that are created throughout a person’s lifetime, allowing the investigator to follow a paper trail leading to a complete history of the individual being searched. These may include court filings, property tax documents, vehicle registrations and social media sources. Open-source intelligence is a form of intelligence collection management that involves finding, selecting and acquiring publicly available information and analyzing it to produce actionable intelligence.

 

How does an investigator evaluate sources? 

Any record is only as good as the chain of events involved in its creation. Online record checks simply provide information on an individual. Investigators go further by evaluating the veracity of the source data.

Record maintenance, storage and dissemination procedures can often impact the accuracy of the information. Typos, misprints and mistakes introduced by human error can also affect the accuracy of records. These latter items are often seen on personal credit reports, criminal convictions and even civil litigation histories. While these are official records, they can contain errors nonetheless.

Processes for updating records can also compromise the accuracy of information, as records are only as accurate as their frequency of updates. Some records are never updated and may provide stale data if the user is unaware of this underlying issue.

Finally, the method that data warehouses employ for acquiring information critically impacts information integrity. For instance, the provider may have purchased information from a secondary source. In such an instance, it is essential that the provider have accurate retrieval processes and is knowledgeable about handling special data items.

An investigator evaluates each of these issues over the course of conducting background due diligence activities.

Why conducting regular royalty audits with your licensee is good business

Royalty auditing is a best practice that can strengthen the relationship between licensors and licensees. The key is building a customized audit program that ensures that licensors are getting what they signed up for in a contract agreement.

“The tendency is to audit the poor performing or problem licensees, but even well performing licensees with good systems for managing financial records should be audited if those licensees are very large or geographically dispersed, or have complex language in their contracts between the two parties,” says Dean Bower, CPA, Manager of Royalty & Contract Compliance Services for RBZ.

“There can be errors in the system that can go undetected and will not be found any other way except through a royalty audit. Sometimes it gets down to differing interpretations of the license agreement, which result in significant underpayments.”

Smart Business spoke with Bower about what licensors stand to gain through an effective royalty audit program and how it can lead to a stronger partnership with licensees.

 

What is the best time to conduct an audit?

Ideally, licensors should adopt a rotating cycle of audits as part of an overall program. However, circumstances might accelerate the need to audit a licensee, such as a change in ownership or major changes in personnel. Suddenly records or the knowledge of how your royalty statements were prepared become unavailable to audit. If a licensee implements new accounting software, it can take up to a year to get all the bugs out of the system, which can also affect your royalties.

Licensees with contracts approaching expiration should be audited so you know what issues to address in a contract renewal. Finally, many license agreements have a time limit on contesting royalty statements. After that, statements become final and can no longer be audited. Licensors should mark their calendars for these important dates.

 

What is the best way to approach a licensee when you are considering an audit?

Keep in mind that a licensing agreement is a partnership built upon mutual needs. The licensee needs a brand or an idea, and the licensor needs commercialization. Licensors rely on receiving regular streams of royalties. It is a standard practice for licensors to audit royalties in the course of managing their businesses. Large consumer product licensors have royalty compliance programs and actors, directors and creative talent, and recording artists all conduct royalty audits.

You are just making sure you receive the money owed under the provisions of your contract with the licensee.

 

What are some non-monetary reasons to do a royalty audit?

Advertising and marketing should be approved by the licensor to ensure that it is consistent with the brand’s identity and is reaching an appropriate audience. Distribution channels are another area. Territories and retail stores should be defined in a license agreement or you might find your high-end brand selling at a discount retailer, resulting in a lower sales price and royalties. But the larger issue is the image of the brand can be compromised.

 

What is an audit cost recovery provision?

This is contract language that specifically provides for a reimbursement to the licensor for audit fees if an inspection of the licensee’s records reveals underpayments over a certain defined amount or percentage of reported royalties. The licensee would pay the licensor for the cost of the audit. Audit cost recovery should be in all license agreements. Royalty audits usually pay for themselves and over time become self-funding.

 

How is the licensor/licensee relationship strengthened through the audit process?

A royalty audit can bring to light a wide variety of issues from differing contract interpretations, to faulty systems and basic misunderstandings. The inspection process allows for a thoughtful discussion of these issues, allowing both parties to have a better sense of their relationship so they can proceed with confidence.

The COSO effect: How the new control framework adds value, not just work for work’s sake

Every business, private and public, has a control structure. Internal controls — often called COSO after the Committee of Sponsoring Organizations that has set the standard for internal controls since 1992 — are the functional steps that process accounting transactions generated by a business.

Every company wants to profit by providing a product or service, and therefore, transactions must be initiated and recorded. The internal controls are the baseline framework to execute that.

“The current business environment is highly automated and global with more of a remote workforce and increased transparency. So, those kinds of activities needed to be reflected in the COSO framework,” says Alyssa G. Martin, a partner in Risk Advisory Services at Weaver. “This framework that we are all ‘supposed to follow’ was essentially stale. It wasn’t a reflection of the real business environment today.”

COSO recognized that migration by releasing an updated framework last year.

Smart Business spoke with Martin about these COSO changes and what they mean for those who run companies.

When do these changes go into effect?

The updated framework was approved in May 2013. Organizations in regulated industries, such as banking, insurance or health care, and those accountable to the U.S. Securities and Exchange Commission need to evaluate and update their control structure against the new framework by December 2014.

Others like large private organizations in unregulated industries aren’t required to use the new framework. However, these controls are best practices that are worth emulating.

How has the framework been updated?

The COSO framework still has 17 components, but those components are revised, renamed and renumbered. A couple of the biggest differences relate to data security and fraud prevention. The old framework did not explicitly recognize the reliance on technology in the ordinary course of business, as well as the need to specifically prevent and deter fraud. Further, the revised framework is more focused on overall coordinated governance, such as no longer viewing HR policies and procedures as separate from company-wide policies and procedures, and managing risk to meet business objectives.

How can an organization get started on following the new framework?

Corporate internal control structures sit along a spectrum that ranges from unintentional actions that focus on just trying to record transactions to highly intentional, effectively controlled and mature.

Every business should evaluate its structure against the new framework. As an outcome of the evaluation, if you fall toward the mature, effectively controlled end of the spectrum, the business is likely already following these changes. Ad-hoc organizations that are not strongly controlled, stale and/or highly manual are looking at more material changes.

Your chief financial officer, chief accounting officer or controller — whoever is responsible for the accurate reporting of financial transactions — needs to compare your internal controls to the new framework in a high-level gap assessment. Even if your processes aren’t well documented, this person knows best what practice is in place, and if it’s working or needs improvement.

Then, consider getting consultative help to implement the new framework. External assistance provides a competency and skillset to apply this framework efficiently. It is also a labor source to complete a project of this scale while people who work in the company are doing their normal jobs.

What’s the takeaway for business leaders?

This new framework is a good excuse to take a fresh look and determine if the way business is transacted could be more effective, efficient or automated in order to benefit the company. Every business can benefit from having internal controls that are intentional and preventative focused.

It may seem like work for work’s sake, but if you have to go through this exercise, then use this opportunity to look at efficiency and effectiveness. Are your processes scalable if the company experiences growth? Are you using automation that can be preventative and have low labor costs? Is it standardized, so it can be transferred to a new location?

The paradigm in which you approach this has a direct relation to the value and output at the end, which is why consultative assistance is so beneficial. Those experts can help you get more value versus simply going through an exercise to check the right boxes.

Insights Accounting is brought to you by Weaver

Whistleblower protections are hitting private companies

Whistleblower protections have been extended to employees of many private companies.

Recently, the U.S. Supreme Court ruled in Lawson v. FMR LLC that Sarbanes-Oxley Act (SOX) Section 806, which protects employees from retaliation, also applies to private companies, contractors and subcontractors that provide services to public companies. “Retaliation” is broadly defined to include the discharge, demotion, suspension, threatening, harassment or any discrimination against a whistleblower.

The Lawson decision has made SOX Section 806 an important consideration for private companies, which should consider:

  • Are we aware of anti-retaliation risks?
  • Do we have effective anti-retaliation policies and procedures?
  • Do these policies and procedures address how we deal with whistleblower complaints, which are likely to increase?
  • If so, do we have a compliance program to ensure these policies and procedures are being followed and are effective?

Smart Business spoke with Bill Brown, partner-in-charge, and Carolyn Bremer, senior manager, in Forensics and Litigation Services at Weaver, about how to react in light of this decision.

What is the impact of whistleblowers?

The government has long recognized the importance of leveraging witness information in enforcement. Traditional investigative tactics are reactionary and slow paced. In contrast, firsthand knowledge of illegal activity is direct and relevant, reducing the need for fishing expeditions.

It is well established that anonymous tips — the firsthand knowledge brought forward by whistleblowers — is by far the most effective source of information about suspected fraud.

How does the government promote assistance from whistleblowers?

Although financial incentives can be substantial (often a percentage of funds recovered), many whistleblowers are motivated by a desire to correct a perceived wrong. Would-be whistleblowers, however, may hesitate for fear of retaliation. The government recognizes the chilling effect retaliation has on whistleblowers, and SOX Section 806 is its response.

What kind of anti-retaliation policies and procedures should companies employ?

Whistleblower protections must be deeply rooted in your compliance and ethics policy. Anti-retaliation is an ethical issue that must be addressed from the top. To be effective, these policies and procedures must address:

  • Encouraging whistleblowers to come forward with relevant information.
  • Providing a reporting mechanism for handling increased whistleblower reports.
  • Establishing investigative procedures to resolve complaints.
  • Promoting acceptance of anti-retaliation policies throughout the organization.

First, retaliatory risks must be assessed in order to design procedures that fit your organization. During this assessment, top leaders must make it clear that they fully support the policies, and the procedures must reflect management’s ethical tone.

Once policies and procedures have been adopted, continuously monitor compliance and update procedures. An effective internal audit group usually can accomplish this.

Finally, you must investigate whistleblower reports. Some will require an extensive third-party investigation culminating in appropriate remedial actions, which may include litigation or voluntary disclosure.

What’s the key to engaging the right resources to deal with fraud?

Few organizations have internal resources with the investigative skills required. Consult a qualified firm with investigative and risk advisory professionals who can help you prepare for these new requirements.

If your organization doesn’t yet have a well-established internal audit department, you also may consider hiring an outside firm to facilitate the implementation and monitoring of your new plan.

Whistleblower protection against retaliation is already part of many private companies. With the Lawson decision, though, employers must be proactive in developing, implementing and monitoring anti-retaliation policies. Not only do such actions provide appropriate and lawful protections, they demonstrate your commitment to ethical behavior.

Insights Accounting is brought to you by Weaver

How to successfully implement new software systems in your company

Companies update their systems to replace outdated software and to modernize or streamline supporting IT resources. They also implement new systems in hopes of benefitting from internal efficiencies through added features, better workflow, etc. The problem is most companies that implement a new system do not achieve all of their objectives, and many fail miserably.

“Ultimately, the new system may be better, but if executives listed the top things they wanted to accomplish by implementing the new system, many times they don’t achieve those things,” says Brian Thomas, partner in IT Advisory Services at Weaver.

Smart Business spoke with Thomas about how to buck the trend of frustrating and failed system implementations.

What pitfalls occur with new system implementations?

Most companies don’t do a detailed analysis of day-to-day operations and assess how that translates into new system requirements. Management must ask, ‘What are the requirements we, as a unique organization, have of a system that will make it successful?’

Midsize companies often don’t have the time and/or don’t feel the need to formulate detailed system requirements. Executives may operate off of a high-level understanding about improvements they want to see, while calling on people they know to get perspective on what comparable companies are doing.

Also, almost everyone takes for granted how software users have shaped internal business processes based on the reports they generate. New systems mean new reports. If the new system doesn’t consider reporting, as well as how much old data to bring over, it can create back-end challenges. Then, companies are forced to either reconfigure processes or scramble to build new reports.

What’s the potential cost of these issues?

A lack of attention can drag out a project and lead to cost overruns. Management may run blind for a period of time if reporting requirements are not properly addressed before go-live, which hampers business decisions and company performance. Top management may perceive the software vendor as not delivering as promised. Delays and problems cause system users to have a tarnished view of a system, and could lead to employees building system workarounds, such as spreadsheets or databases on the side.

What steps do you recommend instead?

A new software system can substantially impact your company. So, it’s crucial to do the initial due diligence to determine whether the new system is capable of doing what management needs it to do the day it goes live.

Appoint someone internally or externally to build out detailed system requirements by working with users in each department to understand how their processes work. You can then provide these requirements to prospective vendors in an RFP-type format.

Vendors should demonstrate to decision-makers how their software achieves the requirements as part of the proposal process. If any are not fulfilled, which usually is the case, they should be able to articulate their plan for resolving the gaps. Management needs to analyze, ‘If this software does 75 percent of what we need, are we comfortable with the vendor’s responses or plans for what it doesn’t do? And if we have concerns, do we want to change how we do things or look at a different software product?’

It’s logical to expect this process to take a few months unless the system being replaced is a standalone product used by one department for a specific need. There are multiple vendors for a reason; companies must figure out what works best for them.

What about monitoring risks during implementation?

Once a vendor is selected, don’t turn over the keys. If the vendor made promises about covering gaps, the internal stakeholders need to remain involved throughout the project’s life cycle to ensure those things are actually happening.
An objective third party can work between the company and vendor to ensure everyone is accountable. They can even assess the risks of going live on the new software and let the company know when those risks have been brought down to an acceptable level. This helps the company avoid a failed implementation and protects the vendor from having a dissatisfied client.

Insights Accounting is brought to you by Weaver

How to stay in front of tax issues before and after a M&A deal closes

For most company buyers, taxes are a priority when negotiating a purchase price. However, if tax issues are neglected during the integration phase, the negative consequences can be serious. To improve the likelihood of a successful merger, it’s important to devote resources to intensive tax planning before — and after — your deal closes.

During deal negotiations, you and the seller will likely discuss issues such as deductibility of transaction costs and the amount of local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures such as asset sales can benefit one party and have negative tax consequences for the other, so it’s common to wrangle over taxes at this stage, says Sean Muller, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.

“With adequate planning, companies can be spared from costly tax-related surprises after the transaction closes and integration of the acquired business begins,” Muller says. “Tax management during integration can also help your company capture synergies more quickly and efficiently.” You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via post-merger synergies. However, if your tax projections are flawed or you fail to follow through on earlier tax assumptions, such synergies may not be realized.

Smart Business spoke with Muller about tax planning after the deal closes.

What is one of the most important tax-related tasks in a deal?

Integrating accounting departments is critical, and there’s no time to waste. The seller may have to file federal and state income tax returns or extensions either as a combined entity with the buyer or as a separate entity within a few months following the transaction’s close. Companies must also account for any short-term tax obligations arising from the acquisition.

To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel to retain. If different tax processing software or different accounting methods are used, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise previous tax filings to align them with your own accounting system.

What are the major areas of concern for companies related to tax planning and operational synergies?

Before starting to integrate products, personnel and facilities, examine the tax implications of those actions. Major areas of concern include:

  • Supply chain integration. Combining the logistical operations of both companies may make fiscal sense on paper, but there could be tax consequences. Say, for example, that you’re planning to close your seller’s main warehouse and fold operations into your company’s existing warehouse facilities. What if the acquisition’s warehouse is domiciled in a more favorable tax locale than your warehouse?
  • Divestitures and sell-offs. Buyers often spin off unwanted divisions or products when they acquire a business, but from a tax standpoint such moves can be costly. For example, selling a segment could eliminate certain tax write-offs or protections. You also need to plan for the tax consequences of selling newly acquired assets.
  • Global implications. International acquisitions can be a tax minefield. Companies should keep in mind the kinds of new exposures the deal carries, such as value-added taxes. Also, consider how a foreign purchase may affect your company’s effective tax rate. Be sure your M&A advisory team includes people who are knowledgeable about the relevant tax laws.
  • Enterprise resource planning (ERP). If the two companies’ ERP systems aren’t merged and synchronized, data collection could slow or you could lose tax data. This could affect the accuracy and speed of the combined organization’s financial reporting.

When acquiring a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, the tax consequences of M&A decisions may be costly and could impact your company for years. So, if you don’t have the necessary tax expertise in-house, work with outside advisers that do.

Insights Accounting is brought to you by Weaver

How to realize tangible value by integrating true ERM

Enterprise risk management (ERM) has become a big buzzword in business the past few years. However, corporate governance and compliance, which is how business executives utilize ERM, is really a traditional management function.

“What’s new about it is that there’s market interest and significant value associated with an enterprise that has implemented true ERM,” says Alyssa Martin, a partner in Risk Advisory Services at Weaver.

When an investment company is looking at an enterprise’s value, a consortium of banks are considering giving a syndicated loan, or companies are weighing a merger or acquisition, an ERM program increases the company’s intrinsic value, illustrating the sophistication of its corporate governance. An organization can also use ERM to improve internal decision making, promoting and instilling risk awareness within its culture.

Smart Business spoke with Martin about integrating ERM into strategic, business and financial management processes.

How does ERM differ from other methods of assessing and managing risk?

Risk assessment was more widely implemented during the regulatory increase and Sarbanes-Oxley wave, but companies often assess risks at the process level in silos.

ERM looks at risk across the entity, casting a wide net, incorporating the results of the risk assessment with integration practices throughout the organization. The first step is to perform an entity level risk assessment identifying the most critical risk categories and related events that influence the organization’s success. Then, you drill these risk considerations down into processes and functions.

An ERM program considers the business goals, objectives and strategies at all times, following these steps to monitor and manage risk on an ongoing basis:

  • Identify, assess and prioritize business risk.
  • Analyze key risks and current capabilities.
  • Determine strategies and new capabilities.
  • Develop and execute action plans and establish metrics.
  • Measure, monitor and report risk management performance.
  • Aggregate results and integrate them with the decision-making process.

An organization identifies the risk categories and specific risk events that have the most material influence, which are not necessarily the most common, for current operations and strategic initiatives. So, a domestic company that wants to grow internationally is changing its business condition and risk influences, and in turn, the management of related risks.

One of the advantages of ERM is that business leaders can move from managing negative events that have occurred to managing key risk indicators, which allows you to get in front of identified critical activities. For example, if a retailer that does 60 percent of its sales on credit monitors key risk indicators, such as U.S. consumer credit ratings and credit interest rates, it can modify business practices or promotional tactics before a credit freeze trickles down. Instead of offering customers no interest for one year, the retailer can offer no interest for six months.

Are many companies already following ERM?

Absolutely. ERM practices such as building internal controls, joint venturing with business partners or identifying regulatory requirements are already occurring within management functions. But an ERM program helps bolt decision-making and business tactics together to create cohesiveness within an organization, where everything is based on the same risk profile and agreed-upon risk tolerances.

With that said, companies must align the ERM program with their existing goals and strategies. This alignment is crucial. It ensures that program activities are not just new tasks but rather different ways of executing the tasks that may or may not include additional elements.

Where do companies fall short with ERM?

The most common mistake is thinking that entity level, enterprise-wide risk assessment equals ERM. That’s only the first step. Companies must use what they’ve learned through the assessment to put management tactics and monitoring into place.

An entity level risk assessment also does not instill a risk-awareness culture. Risk must become part of a company’s operations and decision-making processes through business planning, product development and regulatory compliance.

As an example, when considering performance evaluations, managers need to ask: Did you consider risk when you made that decision? Did you incorporate more anticipatory business planning versus reactionary planning? Risk management must become a component of the executive management’s responsibilities while ERM is integrated across the organization.

Insights Accounting is brought to you by Weaver

Weaver: What audit committees need to know about Auditing Standard No. 16

The communication between independent auditors and audit committee members of public companies will change in 2014 with Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16.
The PCAOB’s standard is effective for audits of fiscal years beginning after Dec. 15, 2012.

“There’s an emphasis on two-way communication and the timeliness of communication,” says Dale Jensen, partner-in-charge of the Public Company Audit Practice at Weaver. “These requirements should only help the audit committee better understand the audit process and the results.”

Smart Business spoke with Jensen about PCAOB Auditing Standard No. 16’s implementation and how it changes auditor responsibilities.

How will communication between auditors and audit committees change?

Generally, the standard seeks to create more effective and timely two-way communication between the auditor and audit committee, including sharing what discussions have occurred between the auditor and management during the audit. It standardizes what is communicated and when.

Part of the standard addresses the appointment and retention of auditors — general information relevant to the planning of the audit. Committee members need to understand what auditors will discuss with management prior to the auditor retention. Many public companies won’t see a change here if they are following best practices. But some concepts have been expanded, such as requiring auditors to ask the committee if they are aware of any matters relevant to the audit, including knowledge of possible law violations.

The standard also discusses the audit’s results. Auditors already were disclosing many of the required items, such as significant and critical accounting estimates, and significant and unusual transactions. Now, the auditor must also communicate:

  • Difficult or contentious matters about which they consulted with management.
  • Matters that resulted in a going concern consideration, how the matter was alleviated, and the effects on the financial statements and audit opinion.
  • Any departures from the standard report.

The auditor also must share the results with the audit committee before issuing an opinion on the financial statements. This provides committee members with the opportunity to gain an understanding and address questions with the auditors prior to the issuance of the opinion and Form 10-K filings with the Securities and Exchange Commission.

Does the standard specify what type of communication is required?

Some things must be in writing, such as engaging an auditor, but, overall, communication can be written or verbal.

Auditors can communicate the required items solely in writing. However, verbal communication can help committee members truly understand the nuances of what’s being reported. For example, auditors may share audit results over a conference call or at an in-person meeting. This opens up the dialog and creates an opportunity for the audit committee to ask questions to gain a better understanding of the audit process, specific findings, etc. The key here is to allow adequate time for the auditors and audit committee members to have these discussions and to work through any issues or questions that arise.

How much impact will the standard have?

Overall, the impact of this standard will be positive because it’s enhancing two-way communication between auditors and audit committees about matters of importance to the audit and the financial statements. How much impact it has will really depend on the company, what its issues are and how information has typically been communicated to the audit committee in the past.

Dale Jensen, CPA, CFE, is partner-in-charge of the Public Company Audit Practice at Weaver. Reach him at (800) 332-7952 or [email protected].

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