The Open Point List – Your Best Friend

Eric West wrote a great blog post on thinking before you ask your boss questions you may have or if you need help.  In my experience as an accountant and auditor, knowing when, what, and who to ask are daily struggles for a staff accountant.  Ideally, you will have coworkers who may have enough knowledge to help you get by.  However, in smaller firms, sometimes the only people available to ask are your bosses.  One extremely helpful tool I have learned, and this is especially true for tax returns is that by creating an open point list, you will use your time more efficiently.

This is the best recommendation I can give you when you first start.  I use this strategy primarily for tax returns.  I used to make my open point lists in excel or word, but found that I often change them or need to re-write things as I go through the return.  Say you don’t get the ideal situation of your boss hands you a clean tax return with practically the same work papers as last year and explains the year summary, tells you how many budget hours to expect and says to come to him/her with any questions you may have.  Unfortunately, this doesn’t happen enough, and definitely not during busy season.

Step 1: Paper and Pencil

So what do I mean exactly by open point list?  I mean that the very first step you should take before preparing a tax return is to get out a blank piece of paper and pencil (I erase a lot) and write on the top, “[Client Name, Client ID, Tax Year] Open Point List.”  Congratulations you have taken your first step towards an efficient way of asking questions.  Now, before you freak out and start asking everyone in the office what to do with this messy pile of papers, let’s move to step 2.

Step 2: What DO you know?

Instead of letting the tax return overwhelm you because you have never handled a Form 982 with cancellation of debt or seen a Form 2555 to exclude Foreign Income, why don’t you take a breath and look at the big picture.  The big picture always starts with last year.  Look at last year’s tax return and try to understand where all the income and deductions are coming from.  If you see how it was done last year, you have a foundation to start with for this year and can gather the right information to do it.  Don’t worry about the things you can’t figure out, just erase that from your memory.  If you know how to finish the clients Schedule C and all their itemized deductions, well start getting to work and do it!  On to Step 3…

Step 3: Boss before Client

It is much more efficient to finish everything that you know on the return first, before going back to your boss with a list of questions.  Furthermore, I have always found it is much better to go to your boss first with your list of questions before discussing with the client.  For example, sometimes you think you’re missing information but your boss actually had the information in their mailbox but forgot to forward it to you – save the client the headache of sending the information twice and go get it from your boss.  Perhaps you don’t know how to fill out a form such as a 982, you should ask your boss first because they may be able to develop better questions or requests to the client than you.

I would never recommend “avoiding” the client, but at the same time, more time should be spent internally seeing what you and your boss/co-workers can figure out yourself before asking the client.  In a perfect world, you would send one list of questions to your client which has everything you need to complete the return and then you are done.  Clients don’t like to have 25 different emails with different dates for each question you come up with.  They want one email (even if it’s a long one) with everything they need to get for you, and then be done with it.

At the end of the day if you, as a staff accountant, feel like you have no idea what you are doing, just remember your boss does.  Ultimately, nothing will be sent out of the firm without someone who has a bit more “gray hair” reviewing it.  So if you have to pretend like you are on top of it and know what you are doing, go ahead and fake it until you make it.  If you follow these three steps and rely on tools such as an open point sheet your questions will be answered in a much more efficient manner than randomly piecing questions together or attempting to file a Form you have no clue how to fill out.

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Why “SALY” Isn’t Always Best: Auditing

SALY (Same as Last Year) is a popular technique accountants use when they don’t have supporting documentation for a balance or transaction in the current year, but they can make a reasonable assumption based on historical trends or averages what the balance should be.  Thus, theoretically, the difference between the actual balance and the accountants assumption should be immaterial.  This terms also applies to auditing techniques.  Many auditors will simply rely on the same information and techniques that were used to test a control or balance in the previous year, and just mimic it again the current year.  While this is a good beginning step, an auditor should never fully rely on what was done in the prior year.  Here’s why:

Processes Have Changed

This is primarily true for internal control testing.  The first thing an auditor should do when testing internal controls is review the memo or narrative describing the overall process of that transaction cycle.  Before even thinking about pulling a population to sample, the auditor needs to discuss with the appropriate employees if there have been any changes in the process.  For example, perhaps there is a new employee in a key position, your risk assessment may change from low to medium and now you may want to pull more samples.  Perhaps the client changed accounting software, you may need to stratify your sample now.  The point being that unless the process is identical to last year, odds are the testing may not always be the same in the current year.

Last Year Was Just Wrong

Not to say that us auditors aren’t always 100% right perfectionist beings.  But the truth of the matter is we are human and sometimes we do make mistakes.  That being said, if I am auditing someone elses work from the prior year, I always read the comments and ask myself, “does this make sense?”  Did the prior year auditor pull the right sample, did their population include too much or too little for the transaction cycle?  Perhaps, the control was new last year and the auditor didn’t fully understand the process.  As a result, a key control may have been missed and was not tested.

Auditing can sometimes have a subjective nature to it.  When one auditor reviews another auditors work, there should always an attempt to understand what the prior year auditor was thinking.  An auditor always needs to maintain some level of professional skepticism when viewing what the prior year work paper says.

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When is the Right Time to Hire a CPA?

A Natural Curve

I believe each business goes through a natural curve between in-sourcing and outsourcing your accounting functions to a CPA.  I am writing this article for a business model that starts from nothing and grows into a substantially large company.  If I were to plan my accounting functions this is how I would consider paying for them.

Wear Your CPA Hat

In one of my first articles, “The Small Business Owner and Accounting,” I discussed the importance of understanding some basic accounting/bookkeeping functions.  As a small business, most owners don’t have the resources available to spend on a professional.  My suggestion would be to take some basic accounting classes at a local community college or hire a low level bookkeeper part time to come in and simply “clean up” your books for you.  Either way, I believe the effort at this stage should be to in-source your accounting duties and save your cash flow to grow your core business.

When Do I Hire a CPA?

There is no magic number or volume of transactions that triggers a business to hire a CPA.  However, I would start considering this process if you reach a large enough level where in order to obtain substantial loans or lines of credit from the bank, you will need financial statements.  I wouldn’t recommend trying to issue your own financial statements.  In addition, many banks won’t accept that, they want to see that a CPA has prepared them for you.  At this point, your hands are pretty much tied.  In order to borrow and keep growing your business you will have to outsource this function.  However, as a business owner, I would still keep the mindset of spending as little money as possible and maintaining a positive cash flow to grow your business.

Fortune 500

If your business really takes off and reaches a stage where you are now traded on the stock exchange and are potentially breaking through as a Fortune 500 company, I would start thinking about in-sourcing your accounting functions.  However, I wouldn’t attempt to do them yourself anymore, but rather hire a full time CPA or even tax department to handle your books for you.  Most reporting and compliance requirements increase as companies get larger.  To handle the complexity of everything would be too much for one business owner.  Everything should be specialized and have its own department at this point, your accounting, your legal, your sales department, etc.

As you can see the right type of CPA and whether to in-source vs. outsource will all depend on the size of your company.  I would recommend staying in the mindset using cash flow to grow your business up until a point where the consequences of improper accounting functions or non compliance would be too dire for your business to risk.  At this point, I wouldn’t spare any expense and make sure you retain top talent at your company.

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Accountants: Wizards of Dark Magic

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When I was younger I heard a joke about accountants.  A joke that, for a while, made me picture accountants as these wizards of dark magic (I’m trying my best to keep Harry Potter references out of this).  It went something like this:

A business man was interviewing three different job applicants: a lawyer, an engineer and an accountant.  He simply asked each applicant one simple question, “What is two plus two?”  The lawyer responded, “In the case of Jenkins vs. Department of the Treasury, two plus two was proven to be four.”  The engineer pulled out a slide rule and came up with an answer of, “somewhere in between 3.999 and 4.001.”

Finally, the business man interviewed the accountant.  When he asked him what two plus two was, the accountant got up from his chair, went over to the door, closed it, came back and sat down.  Then, leaning across the desk, he said in a low voice, “How much do you want it to be?”  He got the job.

Gray Area

While the joke is humorous, the lessons and truth behind it are undeniable.  Everyone is familiar with the large accounting frauds involving Enron and WorldCom.  There is a fine line between the term Creative Accounting and “Arthur Anderson Accounting.”  The fact of the matter is that accountants constantly face these so called “gray areas.”  Take the tax accountant for example.  What started out as 400 pages of information to understand back in 1913 has grown to 73, 954 pages as of 2013.  There is no one human capable of absorbing that many pages of various tax code, its just too much.  With so much code, so many rules and regulations you would think that they would have covered every type of possible tax scenario right?  Wrong.  No one can predict what types of unique and random situations a taxpayer will present to the accounting industry.  However, the Department of Treasury tries to keep up and as a result continues to publish an enormous amount of material.  I digress.

With so much information an accountant will either have too specific of rules or conflicting rules/guidelines which leaves no certain answer.  This happens regularly.  The accountant must work inside this gray area to find the best possible solution for the taxpayer without breaking any clear laws.  And this is perfectly fine.  It’s when the accountant clearly violates a law or takes advantage of a gray area of the code by conducting themselves in clearly (to the rational person) unethical behavior.

Education is Key

Out of all the responses and legislation passed (Sarbanes-Oxley) in response to these scandals, the action I think was and will continue to be the most effective, is ethic courses in academia.  Creating a sturdy, ethical foundation for a student is important before exposing them to the culture of a firm that could potentially corrupt him/her.  As long as we follow GAAP, a rules based system, there will continue to be gray areas in accounting.  Only ethics is what allows an individual to make the right choice in an unclear situation.  In addition, ethics cant be legislated or enforced through law.  It’s shoulders lie on the teachers forming the foundation of our future business leaders, including accountants.

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3 Tips To Impress Your CPA

Today I am going to give you 3 tips that will allow you, as a business owner, to impress your CPA during any audit, review or even tax preparation.  These tips are items that you can take care of before giving your information over to your CPA.  Ideally, you’ll have everything tied out with supporting documentation and as a result the process (whether it be tax return preparation or a review/audit) will go much smoother for everyone.

Retained Earnings: Never “Tie” Home Without It

This is the number one tip I can give you when handing over your books to a CPA.  If your beginning retained earnings does not match last year’s ending balance, then were already off to a rough start.  Now, for those of you using QuickBooks, this will be an issue for you every year.  The main reason is that distributions and contributions don’t automatically close out to Retained Earnings like they do in our accounting software.  This is an easy adjustment to make; you simply reverse out your prior year distributions/contributions as of the first day of your new fiscal period and take the other side of the entry to Retained Earnings.  When you run your Trial Balance Report you should be able to see that your Retained Earnings balance agrees to last year’s ending balance.

Also, I would recommend looking at any other equity accounts such as common stock or APIC to make sure those balances haven’t changed.  Unless you are liquidating or have sold stock these balances should just carry forward from year to year.

If after reviewing both of these items and your Trial Balance still doesn’t match what the CPA gave you, check your journal entries that you posted.  Make sure they match exactly what your CPA has and that you have hit the right accounts with the right amounts.

Balance Sheet is King (No, not that King)

Often times, clients aren’t sure how much support or what types of support they should give their CPA in addition to their books.  Ultimately, it depends on what type of engagement it is, if we referring to an audit then you will simply wait for their sample lists that they give you.  However, for a review or tax preparation, I would recommend starting with the balance sheet.  Simply go down each account and one by one look at the balance to see if it makes sense and do you have adequate support which ties to your Trial Balance.

These are some account types and examples of what I mean by adequate supporting documentation:

  • Cash – Provide bank reconciliation and bank statements that agree to the balances reflected on the General Ledger?
  • Inventory – Conduct a physical count and ensure you don’t have any outdated materials that need to be written off?
  • Note payables – Provide the original loan agreement indicating the amount of the loan, the interest rate, the maturity date and how often the payments are (monthly, biweekly, etc.)

This will be the best guide you have to ensuring you have provided all the necessary documents ahead of time before your CPA starts their work.  This will minimize the amount of follow-up phone calls and requests for emails or faxes of additional information needed.

If you don’t know – Ask!

Two of the most common balances I see clients have difficulties with are booking the prepaid and accruals.  If you or your bookkeeper don’t fully understand how to keep track of these accounts, I would recommend discussing with your CPA ahead of time.  The best option may be to leave this as an audit adjustment every year that your accountant will calculate for you.  This can be especially true for adjustments related to insurance accruals for construction contractors.  Certain types of insurance are not based on a pro-rata basis but rather on things like construction volume.  In those cases the accrual needs to be done as a comparison of actual construction volume to the estimated premium established in the contract.  In order to save time and headaches, it may just be best to leave this to your CPA and simply make a note to yourself when you are reviewing your balance sheet that this amount will be adjusted by them.

By the way, if you are looking for a CPA who specializes in construction industry, Pete Umphress, CPA has the type of experience and knowledge that I can only imagine to obtain someday.

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June 30, 2013 · 2:12 pm

What To Expect as a Staff Accountant

Today I am going to be discussing a presentation on What To Expect as a Staff Accountant.  This presentation is really geared towards accounting majors who are close to graduating or have already graduated and are about to start as a staff accountant at a CPA firm.  I thought to myself, what things do I wish I could have gone back in time and told myself as a staff accountant?  So here are my top five pieces of wisdom for all of you about to start your career in public accounting

Acronyms: Learn Them

When a senior comes in and tells you to roll forward the binder, pro-forma the financial statements and post the prior year AJE’s to the TB after you can in the G/L and P&L – if you are capable of responding with anything but a blank stare, I would say you are miles ahead of the game.  My advice, Google these acronyms now, learn them ahead of time and you might actually impress your boss.

Microsoft Excel: Your best friend or worst nightmare

This is one thing I thought I was actually pretty good with in college.  What I didn’t realize is that I should have spent less time making 3-D charts and more time becoming a, “super-raw-data-formula-into-useful-population-hero.”  If you now formulas such as v-lookup and are capable of turning 7,000 rows of raw data into a useful population in a reasonable amount of time, you will enjoy your time spent at audit clients much more.

Ten Key – Look Ma, no hands!

I used to think that all my calculations would be done faster in Excel or even just a regular calculator.  But I can tell you right now, that if you are capable of multi-tasking by reading your screen while rapidly taping out at a hundred words per minute with the accuracy of not even a penny variance – you’ve made it to the big leagues.

IT: Solving problems we didn’t even know we had

This is one you will probably thank me for later.  When you set up your field work at a client site on your first day and for whatever reason, your computer just doesn’t want to share that engagement binder.  You’ll actually know how to fix it!  You won’t be sitting there twiddling your thumbs for an hour or two and next thing you know, half the day goes by and you haven’t actually done any work.  Now (fair warning) there are pros and cons to learning Information Technology.  Pro – you will be much more productive, you’ll actually be doing work and getting faster results for your client(s).  Con – you will probably become the resident IT guy and everyone is going to be asking you for help.  Before you know it, it will become, “hey you! My computer isn’t working can you fix this for me?”  So, on second thought – you can choose to play dumb if you like.

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June 27, 2013 · 10:33 pm

The Mortgage Debt Relief Act: Important Tax Considerations

Today I am going to be discussing a presentation on The Mortgage Debt Relief Act of 2007.  I chose this topic because many homeowners unfortunately are still facing issues such as foreclosure and short sales.  There are some important tax considerations that you, as a homeowner should be aware of.

Background of the Act

The act allows taxpayers to exclude Cancellation of Debt (COD) Income from the discharge of debt on their principal residence.  This usually means a short sale for foreclosure of the taxpayer’s home.  It is limited to $2 million per taxpayer.   It was created to help lessen the blow for homeowners facing harsh tax consequences in addition from the declining housing market.  Congress felt that you, as a homeowner should not have to face a burdensome tax consequence in addition to losing your house.  The Act has been recently extended until December 31, 2013 so it will thankfully be available for many homeowners filing their taxes next year.

Important Exception

This provision does not allow for COD income to be excluded if any portion of the discharge was not related to a decline in the home’s value or the taxpayer’s financial condition (in relation to the house).  What this means is that if you refinanced your house or took out a second mortgage and used those funds for personal expenses (you didn’t put the money back into the home) then that portion of your outstanding debt can’t be excluded under this Act.  However, this is just one of six Federal COD Provisions and it is possible to exclude non-qualified principal residence indebtedness debt under the insolvency provision.

Insolvency Exclusion

What does the IRS mean by “insolvency?”  It’s important to understand that insolvency DOES NOT mean bankruptcy.  You can still have plenty of money available, you just have to show that your debt exceeds your assets by enough to exclude your COD income.  In part 1 of the worksheet provided by the IRS you list all of your liabilities immediately before the cancellation of debt.  This includes such things as your credit card debt, your mortgages and any auto loans you may have.  In part 2, you need to list the Fair Market Value (FMV) of your assets.  It’s important to list the FMV and not the historical cost.  Also, some taxpayers forget to include their foreclosed home in this calculation.  Remember, the date is immediately before cancellation of debt in which case you still own the home at that point in time.

Coordination of Insolvency with Qualified Principal Residence Indebtedness

The extent to which you are insolvent can be applied against any non-qualified principal residence indebtedness.  This helps out taxpayers tremendously in the current year because they won’t have any taxable income.  However, there will usually be a reduction of tax attributes that takes place which may result in some additional tax in subsequent years.

Ultimately, this act helps out taxpayers tremendously.  Unfortunately, the application of these exclusions is extremely technical and complicated.  This is an instance where I would not recommend trying to become your own CPA.  At The Bullard Macy Group we understand and have dealt with these COD provisions.  In this case, I would recommend having an expert handle your taxes because the last thing you want to do is miss an important exclusion which burdens you with a large tax bill that could have been avoided.

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June 26, 2013 · 8:09 am