Knowing the value of your business is important for making wise gifting decisions, especially because there could be quite a difference between an organization’s perceived value and its actual value.

“Business owners really should know how much their business is worth so they can determine whether or not to make a gift, and to ensure the amount of the gift is appropriate for their estate plan,” says David Heilich, family wealth planning practice leader at Brown Smith Wallace LLC, St. Louis, Mo.

As a result of the recent recession, lower fair market values have made gifting a much more attractive option, giving business owners the opportunity to leverage closely held stock and partnership/LLC interests, especially when applicable discounts for lack of marketability and lack of control (the so-called minority shareholder discount) further decrease the amount potentially subject to taxes.

At the same time, doing a business valuation sooner rather than later — meaning years before a possible ownership change — can potentially add to the future value of the business when an eventual sale to an outside party is planned.

“Now is a great time to discuss with a professional how to take advantage of estate planning opportunities,” says Cathy Roper, director of financial advisory services, Brown Smith Wallace.

Smart Business spoke with Heilich and Roper about year-end gifting and the benefits of a business valuation.

What year-end gifting opportunities make this an attractive time of year to be generous?

Currently, there is a $5 million gift exemption, which is significantly higher than ever before, and, under the current law, in 2013, the estate, gift and generation-skipping tax (GST) exemptions decrease to $1 million, with the GST exemption indexed for inflation. In 2011 and 2012, single individuals with net worth of at least $5 million, and married couples with net worth of at least $10 million should consider making outright gifts and/or executing various estate planning techniques.

Advisers should take into account the nature of the assets being gifted and projected future values to determine if gifting makes sense and to avoid gifting too much.

How should an individual plan this year, considering the uncertainty of gift laws in 2013 and beyond?

It is unknown when the law in 2013 and future years will be settled, and if there will be any changes to the current law. You don’t want to be paralyzed by the uncertainty of the future. The opportunities in 2011 and 2012 could be lost if you wait until there is better guidance on the current and future estate and gift tax laws.

There are a lot of creative estate and gift tax planning opportunities that provide options and flexibility. Consult with a team of qualified professionals and take into account all relevant factors in order to make an educated decision about whether now is the time to take advantage of gifting opportunities.

How can getting a business valuation years before an ownership change is planned potentially add to the future value of a business?

A business valuation is an opportunity to do a ‘wellness’ check of your business and provides you with the type of dispassionate view a potential buyer will have. The valuation analyst will tell you where your company ranks compared to the industry on a number of different measures such as days outstanding on receivables, capital expenditures as a percentage of sales, gross profit margins, etc., and suggest areas where efficiency and, thus, profitability, can be increased.

Here’s an example: In a recent due diligence engagement in which we were evaluating a software business for a potential investor, we recommended switching from a traditional development model in which a client purchases the software and upgrades as new versions come out to a software-as-a-service model in which the software is leased and the continuous monthly lease payments smooth out the revenue stream and cash flow. This reduces the need for interim financing, reduces income variability and stabilizes the customer base, which reduces risk for a potential buyer. The less risk an investor has, the safer the investment is and the more an investor is willing to pay, or, put another way, predictable cash flow is always more valuable.

What is involved in the process of getting a business valuation?

The process is fairly straightforward, but often takes four to six weeks. First, you will receive a document request list that requires gathering at least five years’ worth of financials on an accrual basis, along with the most current financials. These are reviewed, and your ratios are compared to the industry average.

Once the valuation analyst gets a feel for the industry’s outlook and how the company compares to the industry, he or she will schedule an on-site visit in which owners are interviewed and questions are asked to further assess the company relative to the industry and to its competitors. Documents reviewed may include corporate charters, partnership agreements, minutes and any previous offers to buy the company.

Is it too late to begin the gift planning and valuation processes after the New Year?

Not at all. 2011 is an opportune time to take advantage of gifting opportunities, and a valuation is important to make wise decisions. Under current law, the gift exemption continues through 2012, so the New Year will still provide opportunities to continue estate planning and reap benefits from current estate, gift and GST exemptions.

David Heilich is family wealth planning practice leader at Brown Smith Wallace. Reach him at (314) 983-1273 or dheilich@ bswllc.com.  Cathy Roper is director, financial advisory services at Brown Smith Wallace. Reach her at (314) 983-1283 or croper@bswllc.com.

Published in St. Louis

In any economy, smart tax planning can protect income and provide opportunities for businesses to maintain their financial well being. In a tough economy, partnering with a tax professional who can help you devise a strategic plan can help you avoid surprises and can provide a critical advantage.

“We are in terrible financial times. There are lots of losses in the marketplace and income is down for many people,” says Cathy Goldsticker, member, tax services, Brown Smith Wallace LLC, St. Louis, Mo.

Rather than putting tax planning at the bottom of the agenda, start thinking about ways to cut your losses and gain tax advantages through deductions and other smart investment moves.

“There are important tax planning decisions that can be made now, and over the next year, that can give individuals and businesses more leverage as they weather the financial storm,” says Martin Doerr, member in charge, tax services, Brown Smith Wallace.

Smart Business spoke with Doerr and Goldsticker about smart tax planning strategies to consider implementing before the end of 2011, and what to be aware of for 2012.

When should a traditional IRA be converted to a Roth IRA, and what are the pros and cons?

If your traditional IRA has lost substantial value, consider converting it to a Roth IRA this year because the tax on the conversion is based on fair market value. Because that has dropped in 2011, the tax cost of the conversion will be lower.

The benefit of converting an IRA to a Roth IRA is the ability to grow the investment with tax-free earnings and later withdraw the money without paying tax. The flip side is recharacterizing a Roth IRA back to a traditional IRA if the Roth has lost significant value since making the conversion to a Roth. If the IRA was converted to a Roth IRA in 2011, it can be recharacterized in the same tax year. You have until the extended due date of your 2011 tax return to do this (Oct. 15, 2012).

On the other hand, if you are 59-and-a-half or older and the value of your traditional IRA has plummeted, consider liquidating the investment if the value is less than your tax basis (your nondeductible contributions),  as doing so would earn you a miscellaneous itemized tax deduction.

There are many issues to consider, including the impact on AMT, so talk to your accountant about whether this strategy makes sense for you.

How can an investor make the most of stocks that have lost value?

Many people have stock market losses that will carry forward, and there may be no tax advantage in generating more losses in 2011. You might sell gain stocks to use up those losses, then repurchase them immediately. There is no ‘wash sale’ rule for gains.

The success of this plan depends on the investment portfolio, strategy and market view.  Whether you think there is more appreciation left in gain stocks now, or you want to move out of those stocks and into different ones, if you have losses to use, there is effectively no tax when gain stocks are sold. And you will have higher basis in your stocks, which may be helpful if capital gain rates increase in the future.

How can someone take advantage of the $5 million gift exemption?

The current lifetime gift limit is $5 million per taxpayer, so a husband-wife household can take advantage of a combined $10 million tax-free gift. These limits apply to tax years 2011 and 2012, and, given the fluctuation of rules, this is a great opportunity for high-net-worth taxpayers to pass on their wealth to their children.

What tax benefits are available for 2011 capital purchases?

Now is the time to invest in qualifying business equipment and still realize the 100 percent bonus depreciation. New equipment such as technology, furniture and, in certain cases, leasehold improvements, can be written off. That makes 2011 a great year to put new equipment in service or make construction improvements. Bonus depreciation is scheduled to reduce to 50 percent for 2012, and, after that, it is not yet known if it will be renewed.

How do income tax rates for 2011 compare to potential rates in 2012?

Income tax rates are scheduled to remain the same, with slight adjustments based on the Consumer Price Index. However, if you have qualifying deductions, it’s best to use those in 2011 to realize tax savings sooner.

On the other hand, if you have income that can be deferred, it would be wise to defer that until next year and pay that tax later.

What planning can be done to minimize the Alternative Minimum Tax?

This burdensome tax can be an unpleasant surprise for many people.  The AMT exemption, approximately $74,000 for couples in 2011, is up slightly from 2010 but is scheduled to drop considerably next year. Even with the larger exemption, care should be taken to capture and protect all of your tax deductions. For example, if you have substantial deductions and you are in AMT, consider deferring, if you can without penalty, state taxes,   real estate taxes and investment expenses until 2012, since none of these is deductible against AMT.

However, if your 2011 regular tax is larger than your AMT, accelerate, if possible, payment in 2011 for state income tax, real estate tax and investment expenses.

Is charitable giving still a beneficial tax planning activity?

Whether or not you are subject to AMT, continue charitable giving if your heart is there for the organization. Assuming you still want to support the nonprofit, there are options. For example, if you are 70-and-a-half or older, you can make a donation directly from your IRA, which allows you to offset taxable income.

Martin Doerr is member in charge, tax services at Brown Smith Wallace LLC, St. Louis, Mo. Reach him at mdoerr@bswllc.com or (314) 983-1350. Cathy Goldsticker is member, tax services at Brown Smith Wallace. Reach her at cgoldsticker@bswllc.com or (314) 983-1274.

Published in St. Louis

Now is the time to seriously consider how you classify real estate expenditures, including building purchases, major renovations, tenant improvements and smaller projects such as acquiring fixtures.

In the current tax environment, there may be an opportunity for your business to turn slowly depreciating cash expenditures (tax write-offs) into tax-deductible items that can be fully depreciated in one year. The result is a lower tax payment in the current year.

The key to claiming this benefit is to reclassify costs by unraveling items from your overall real estate investment. Then, you can identify which of those costs qualify for accelerated depreciation. The process is called a cost segregation study, and any business with real estate expenditures should consider having one done.

“Now more than ever, it’s important to save on real estate and construction project costs. One of the ways to do that is to realize available tax benefits,” says Cathy Goldsticker, member, tax services, Brown Smith Wallace LLC, St. Louis, Mo.

Many businesses are not aware of the tax benefits that a cost segregation study can uncover. And as tax planning season closes in, now is a good time for your business to discuss this opportunity with a CPA who has experience performing cost segregation studies.

“With this bonus depreciation tax law scheduled to expire at the end of fiscal 2011, we can’t be certain there will be an extension of this tax benefit, so businesses should consider how they can take advantage of this remarkable write-off,” says Nick Lombardi, manager of risk services and energy services practice leader, Brown Smith Wallace.

Smart Business spoke with Goldsticker and Lombardi about how cost segregation studies work, how they benefit companies and what your business can do to act on this opportunity now.

What is a cost segregation study?

A cost segregation study involves moving portions of property development from long-tax-life assets to shorter-life schedules. Essentially, cost segregation is a tax planning strategy that allows businesses to accelerate deductions and defer tax payments for real estate expenditures, which include land improvements, furniture and equipment.

Items are unraveled from the total asset cost and assigned an individual cost amount. Qualifying items can be depreciated separately and many times more quickly. For example, you could depreciate decorative lighting or furniture 100 percent in the current year, when, historically, a typical real estate depreciation tax write-off schedule for commercial property is 39 years. Many times, costs can be reclassified from ‘land,’ a nondepreciatable asset, to classifications that will provide an immediate tax benefit. Accelerated tax write-off schedules are a tremendous benefit for businesses. Engaging in a cost segregation study can tease out those qualifying expenses.

What does a cost segregation study involve?

It requires formal documentation of the cost basis — the real estate expenditures that are being depreciated — and a reliable method for depreciating those assets on the accelerated schedule that allows 100 percent depreciation over one year. The process includes observation, pictures, measurements and an engineering analysis to determine which items can be unraveled from your real estate expense. The study involves a present value analysis that details how much qualifying items are worth, a mathematical analysis and the application of tax law. A team of professionals, including an experienced accountant and an engineer who specializes in cost segregation studies, is important to ensure that proper documentation is compiled to support the shorter-term depreciation schedule. While the process seems complicated — and it does involve many moving parts — cost segregation studies are quite efficient when professionals have the resources to perform them effectively. A study can take as little as four to six weeks to complete, and, considering the potential tax benefit, the time is well spent.

When does it make sense to hire a professional to perform a cost segregation study?

Any business that has made a land improvement or purchased furniture or equipment in the last several years might be a candidate for a cost segregation study. And don’t discount smaller projects. The cost of performing a study is less when the project scope is smaller, so there is a benefit to engaging in a study for less complex real estate endeavors.

How can a cost segregation study directly benefit a business?

For one, faster depreciation on tax-deductible items frees up cash flow for a business. This is critical, especially now when so many companies are struggling to maintain a healthy cash flow. Cost segregation allows a business to maximize bonus depreciation or the depreciation of qualified leasehold improvements. These studies can be done at any time, with benefits realized very quickly. The study can be retroactive, meaning projects completed, or qualifying purchases made in the past several years, can be re-examined and costs segregated to take advantage of this tax benefit. Talk to your tax professional about lookbacks and projects that you’ve completed in the past one to four years that could warrant a cost segregation study.

How can a business prepare for a cost segregation study?

 

Proper, specific documentation is critical, which is why hiring a professional who specializes in cost segregation studies is crucial. This person will create the documentation to support the rationale for depreciating items in a much more efficient manner for tax purposes. So when preparing for a study, ask the professional about the process, find out if there is a specialized engineer on staff to help and be prepared to assist with the documentation process, including taking pictures and measurements to create the necessary documentation. The process is seamless, and it doesn’t take long to realize potential savings of thousands of dollars.

Cathy Goldsticker, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at cgoldsticker@bswllc.com or (314) 983-1274. Nick Lombardi, PE, is manager of risk services and energy services practice leader at Brown Smith Wallace. Reach him at nlombardi@bswllc.com or (314) 983-1323.

Published in St. Louis

For U.S. companies considering export sales, the potential incremental transportation costs, selling expenses, duties and other costs can create a financial barrier to entry.  This complicates a tough environment in which manufacturers are working to cut costs and go lean to compete in a difficult global economy.

The potential silver bullet is an export incentive that could save you as much as 10 cents of tax on every dollar of export profit. The Interest Charge Domestic International Sales Corporation (IC-DISC) tax incentive has been in place since the 1970s but has been underutilized. However, taking advantage of this tax incentive can change your financial picture and help you compete in today’s world market.

“Businesses that implement an IC-DISC can reduce the U.S. tax cost for export sales profits by more than 50 percent,” says Doug Eckert, member and international tax practice leader, Brown Smith Wallace LLC, St. Louis, Mo. “It is an opportunity to save tax dollars on export sales so companies can reinvest that money back into their operations. This incentive is designed to encourage U.S. businesses to manufacture in the U.S. and export, with the hope that export sales on an after-tax basis will be at least as profitable as domestic sales.”

Smart Business spoke with Eckert about how IC-DISC can benefit your company and how you can qualify for the export incentive.

What is the IC-DISC tax incentive, and how does a company qualify?

The IC-DISC incentive permits qualifying U.S. taxpayers to exclude at least 50 percent, and often more, of their export income. Any company that manufactures, produces or grows products in the U.S. can qualify for IC-DISC benefits, as long as those products are exported.

Basically, you qualify if your products or goods are produced in the United States and contain at least 50 percent U.S. content — meaning that goods can contain some foreign components — and if you are selling to a customer outside the United States. The customs duty value of imported components must be less than half of the sales price of the finished exported goods.

Also, you don’t have to be the actual exporter to qualify for IC-DISC. You can still qualify if you sell goods to a customer for use outside the United States.

In addition, distributors that don’t actually manufacture goods can qualify for an IC-DISC as long as the product is manufactured in the U.S. and they export the products.

How does the tax incentive work?

To take advantage of IC-DISC benefits, you set up a separate corporation that elects to be an IC-DISC. Generally, this company would not have employees or operations.

A portion of the export profits are allocated to the IC-DISC company. There are several different allocation rules, of which, 50 percent of the export profits is the most common method.  However, it is allowable to use 4 percent of gross receipts, or a method called the marginal costing method, which allows averaging of domestic sales profits and export sales profits to determine the profit that may be allocated to the IC-DISC. Taxpayers may choose the method that allocates the maximum profit to the IC-DISC.

The profit allocated to the IC-DISC is not subject to U.S. federal tax. The remaining profit stays with the exporting company.

For example, say your company makes $2 million in export profits. The IC-DISC will report receiving $1 million in export commission income, and your company will reduce its $2 million of export profits by a deduction payable to the IC-DISC, leaving only $1 million of income subject to tax.

Your company then pays tax of $350,000 (a 35 percent rate) and the DISC does not pay tax. At the time the DISC distributes its profits to individual shareholders, the distribution is taxed at the qualified dividend rate of 15 percent.

Therefore, the profits in the IC-DISC are ultimately subject to tax of $150,000 in this example, compared to a tax of $350,000 had the IC-DISC not been in place, a savings of $200,000. That amounts to a savings of 10 cents for every dollar of export profits by starting an IC-DISC and taking advantage of this tax incentive.

Can service companies qualify for the incentive?

There are carve-outs for specific industries such as software that some people may not define as a product. Also, service companies providing architectural or engineering services for construction projects outside the U.S. may qualify for an IC-DISC.

These provisions are very specific, so service firms should talk to an international tax adviser about whether they qualify.

What steps should a company pursue to take advantage of the incentive?

Talk to a tax professional who is well versed in international affairs so you can be assured that you are setting up the IC-DISC properly and realizing its full tax advantage. Essentially, to receive IC-DISC benefits, you must set up an IC-DISC corporation that is separate from the manufacturing company. The IC-DISC must be a newly formed C corporation. You then elect to be treated as an IC-DISC within 90 days, which makes the entity nontaxable for federal tax purposes.

How can implementing an IC-DISC fit into a company’s bigger tax picture?

For companies with export income, this is an opportunity to defer taxation or take advantage of lower dividend tax rates that are set to expire Dec. 31, 2012.

To ensure that the IC-DISC company is properly structured, you should work with a CPA firm with IC-DISC specialists who can guide you through the process, including all the structuring and compliance issues.

Doug Eckert is a member and the international tax practice leader at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1268 or deckert@bswllc.com.

Published in St. Louis

Change happens. Are you making the most of it? Are you considering relocating your business or hiring employees? What about diving into research and development, or purchasing new, more efficient equipment to improve manufacturing processes?

If you are thinking about these or any other business-related initiatives, tax credits and incentive opportunities could have a significant impact. You may also be eligible for grants, low-interest financing or reduced utility costs, says Shawndel Rose, manager of State and Local Tax, Brown Smith Wallace LLC, St. Louis, Mo.

“Credits and incentives have been around for years, but as the economy changes, so does the nature of these opportunities. The financial position of the state you live in is impacted right along with your business, so why not make use of these tax opportunities while continuing to grow and develop your business,” says Rose.

Smart Business spoke with Rose about how tax credits and incentives work and what businesses can expect this year in light of the economy.

How do tax credits and incentives work for businesses?

Credits and incentives work in a number of ways for businesses. One way is to encourage economic development in the state. For example, many states encourage businesses to invest in new property or machinery and equipment. Relocating operations, expanding current operations and job creation are other focus areas.

Some of the most beneficial credits and incentives are based on maintaining or increasing a business’s work force.

A second way they work is to induce businesses to engage in certain activities, such as research and development and ‘going green.’ Oftentimes, they encourage businesses to relocate operations to a distressed or revitalization area.

Job training to increase employee skills and help develop the state’s work force is another encouraged activity. There are also rewards for hiring employees who may belong to a protected class, such as veterans or those considered difficult to employ.

As you can see, there are a host of opportunities to encourage business growth and to expand and enrich business operations while reducing your tax burden and, ultimately, saving money.

What is the difference between a credit and an incentive?

Credits are statutory and are designed to encourage specific activities. They can be based upon payment of other taxes. For example, if a business pays sales tax or property tax, it could generate a credit to be used to offset an income tax liability.

It’s important to know that some credits require preapproval from the government agency awarding the credit. Credits are typically claimed on a taxpayer’s state or local income, franchise, or net worth tax return and may be carried forward if unused in the current year. Some are even refundable.

Incentives are benefits that are negotiated with state or local economic development, taxation or other government officials as an inducement to locate or expand operations in a specific jurisdiction. Unlike credits, incentives must be negotiated well in advance of a firm commitment.

The financial benefit of the incentive may be reflected in a variety of ways, not necessarily on your state income tax return. Because they are contractual in nature and require each party to perform certain activities, the contract typically contains a recapture provision that requires repayment of the incentive and/or imposes a penalty if the contract requirements are not satisfied.

Incentives offer businesses negotiating power. For example, if a company is planning to build a new facility, it could approach the states of Illinois and Missouri and ask what benefits each can provide. The company can then compare the proposed benefits to determine which state’s package would result in a better financial outcome.

How can credits and incentives benefit businesses?

Cash flow is always a priority for businesses. Tax credits and incentives can help a business reduce or even eliminate certain costs to increase cash flow. Such costs may include human resource activity (i.e., training/screening costs), acquisition, site-preparation and public infrastructure (i.e., rail, sewer, etc.), just to name a few.

Companies may also have an opportunity to reduce telecommunication and utility costs.  These decreased costs, as well as cash grants and refundable tax credits, all result in increased cash flow.

In addition, successful negotiation can produce a reduced effective tax rate or preferential tax treatment, such as special apportionment.

What is the credit and incentive environment like today, and what does this mean for businesses?

That depends on the state. Generally, states are struggling financially and many are taking a step back to review credits and incentives to ensure that these tools are producing the intended results. In Missouri, for example, the governor created the Missouri Tax Credit Review Commission to assess the 61 current credit programs operating in Missouri and to make recommendations.

A report distributed in February noted that the commission recommended eliminating or not reauthorizing 28 credits and improving efficiency in another 30 credits. Connecticut and New Jersey are taking similar action.

For businesses, there are still great opportunities to use these tax-advantaged resources, but they should spend time with a tax professional who can provide direction so the company can realize the full benefit of potential credits and incentives that match its strategy.

Shawndel Rose is manager, State and Local Tax for Brown Smith Wallace, St. Louis, Mo. Reach her at srose@bswllc.com or  (314) 983-1356.

Published in St. Louis

Service organizations and companies that rely upon these third-party service providers are in for a change. For years, service organizations had an independent CPA firm perform an audit in accordance with Statement of Auditing Standards No. 70 (SAS 70). These SAS 70 reports were provided to customers and their auditors to provide assurance they had effective internal controls related to the services being provided. On June 15, 2011, SAS 70 was effectively replaced by Statement on Standards for Attestation Engagements No. 16 (SSAE 16), which will bring added complexity while increasing the quality and utility of these engagements.

“More companies today are outsourcing different parts of their business to third-party service organizations,” says Tony Munns, who leads the IT risk advisory team at Brown Smith Wallace LLC, St. Louis, Mo.  “These outsourcing relationships expose companies to additional risks related to the service organization’s systems. While activities can be outsourced, these companies still remain responsible for risk management. These standards allow service organizations to provide assurance to customers that their responsibilities are understood and being handled properly.”

Smart Business spoke with Munns about the change from SAS 70 to SSAE 16 reporting and what service organizations and their customers need to know to meet the new standards.

What are the different types of engagements that can be performed?

The AICPA has introduced three types of service organization control (SOC) reports to address controls at a service organization.

SOC 1 — This is very similar to the old SAS 70. It focuses on controls relevant to customers’ financial reporting processes. A SOC 1 engagement is generally used to provide assurances to customers and their auditors concerning their financial reporting processes.

SOC 2 and SOC 3 — These engagements are designed to focus on security, availability, processing integrity, confidentiality, or privacy principles at the service organization. These engagements allow service organizations to address certain compliance and operational risks that are often very important to customers.

In addition to SOC 1, 2 and 3, there are other AICPA attestation standards that allow auditors to perform engagements to report on a number of different subject matters.

Why do service organizations have these examinations performed?

Customers want to have confidence in the quality and reliability of activities being performed by their service providers. These engagements help service organizations build trust with customers related to their service delivery processes and controls. Some service organizations view these engagements as an opportunity to differentiate themselves from their competition, while others just see them as the cost of doing business.

How will the new standards impact service organizations?

Most importantly, service organizations now have the option to focus these engagements on areas of risk that may be important to their customers. Service organizations need to make sure they understand the needs of their customers and discuss the various options to arrive at the appropriate type of engagement.

The new standards also will place additional responsibilities on the service organization to ensure the comprehensiveness and accuracy of the information contained in the reports. Service organizations will now be responsible for providing a written assertion about the fairness of the presentation of the description of their system as well as the suitability of the design and operating effectiveness of their controls. SAS 70 allowed service organizations and auditors some flexibility regarding the scope of the engagement, which resulted in some engagements not fully addressing the customers’ needs. The new standards should help to improve the quality of these reports.

One other important aspect of the change is that SSAE 16 is based on international standards. This increases service organizations’ ability to utilize these reports on an international basis.

Does this address a service organization’s security and privacy practices?

Some organizations have incorrectly used a SAS 70 to give assurances to customers regarding their security and privacy practices. While a SAS 70 often included testing of security controls specified by the service organization, it generally did not evaluate security and privacy practices against a comprehensive and objective standard. SSAE 16 allows a service organization to do so. SOC 2 and SOC 3 engagements focus on controls addressing security, availability, processing integrity, confidentiality and the privacy of its systems and information.

How do these changes impact customers of service organizations?

These companies need to be aware of the changes and which reports best serve their needs.  Companies need to understand what is being outsourced and what important risks and responsibilities are being addressed by the service provider. This will help guide what types of assurances your company requires and the reports that address those needs.

What should a service organization be doing now to prepare for the transition to SSAE 16?

Evaluate whether you have the appropriate system of internal controls, policies and procedures. People are sensitive about the impact of data breaches and the security of information, and it’s important to be able to assure clients that you are managing data with the highest integrity. The new standards impose some additional responsibilities upon the auditor and organization. While the impact will vary for each organization, service organizations should establish a defined transition approach to reduce the potential for surprises.

Tony Munns is the leader of the IT advisory team at Brown Smith Wallace LLC, St. Louis, Mo. Reach him at (314) 983-1297 or amunns@bswllc.com.

Published in St. Louis
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