accounting & auditing seminar december 3, 2012 arnall

Accounting & Auditing Seminar December 3, 2012

Arnall Golden Gregory LLP

Georgia Society of CPAs Atlanta Chapter

Robert F. Dow Arnall Golden Gregory LLP 171 17th Street NW Suite 2100 Atlanta, Georgia 30363-1031 (404) 873-8706 email: [email protected]

Georgia Society of CPAs Atlanta Chapter

Accounting & Auditing Seminar


Georgia Society of CPAs Accounting & Auditing Seminar

AGENDA

Date: December 3, 2012

Time: 7:30 a.m. to 7:50 a.m. Registration, Breakfast and Networking 7:50 a.m. to 11:45 a.m. Program

CPE: 4 hours A&A credit

Cost: $10 for Atlanta Chapter GSCPA members** $45 for non-members Receive a $5.00 discount (i.e. cost reduced to $5.00 or $40.00) for bringing a food item for the Atlanta Food Bank Cost includes continental breakfast ** to receive member discount, you must be an current chapter member and make an advance reservation via email to [email protected] (space is limited, sign up today!)

Location: Arnall Golden Gregory LLP 171 17th Street NW, Suite 2100 Atlanta, Georgia 30363

Topics:

7:50-9:00 Update on Recent PCAOB Audit Standards

Robert F. Dow, JD, CPA, CMA Partner, Arnall Golden Gregory LLP

9:00-10:00 FASB and EITF Update Chris Rouse, CPA

Partner, Windham Brannon

10:00-10:10 Break 10:10-10:50 Update on IFRS and Going

Concern Issues W. Scott Hazy, CPA Partner, Bennett Thrasher

10:50-11:40 Fraud Considerations in Auditing Tyler Wright

Manager, Habif Arogeti & Wynne

mailto:[email protected]

http://www.agg.com/robert-dow/

http://www.btcpa.net/People/AssociateDirectory/tabid/67/agentType/View/PropertyID/24/Default.aspx

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Recent SEC and PCAOBAccounting, Auditing

and Reporting Developments

Presented To:Georgia Society of CPAs

Atlanta ChapterDecember 3, 2012

Presented By:Robert F. Dow, Esq.

Arnall Golden Gregory LLP171 17th Street, NW, Suite 2100

Atlanta, Georgia 30363-1031404.873.8706

[email protected]

© 2011 Arnall Golden Gregory LLPAll rights reserved

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Public Company AccountingOversight Board (PCAOB)

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Members of the PCAOB Board

• Chairman – James R. Doty, former SEC general counsel and partner of law firm Baker Botts

• Lewis H. Ferguson, former general counsel of PCAOB and partner at Gibson Dunn

• Jeannette M. Franzel, CPA, CMA, CIA, former director in the GAO and former small firm auditor

• Jay D. Hanson, CPA, former National Director of Accounting at McGladrey & Pullen, and EITF member

• Steven B. Harris, former Staff Director and Chief Counsel of the United States Senate Banking, Housing and Urban Affairs Committee under Chairman Paul S. Sarbanes

The SEC appoints the Chair and members of the PCAOB. The current members are:

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Members of the PCAOB Board

Steven B. Harris

James R. Doty Lewis H. Ferguson

Jay D. Hanson

Jeannette M. Franzel

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Questions

• How much regulation is “too much”?

• How much regulation is “too little”?

• Where are we now on that spectrum?

• Where are we going?

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Auditor Registration

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PCAOB Audit FirmRegistration System

• A CPA firm must register if it issues reports on public companies or “plays a substantial role”

• Electronic filing of lengthy application; PCAOB has 45 days to review

• Confidential treatment of certain information – everything else is publicly available

• Firms doing SEC audits were required to be registered by 10/22/03

• Beginning in 2009 – must register if auditing any registered broker-dealer.

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Registration (11/28/12)

• 2,380 firms registered

• 32 pending applications

• 34 applications denied (2 in Georgia)

• 33 firms seeking withdrawal (2 in Georgia)

• 915 foreign firms in 84 countries

• 870 firms with no public company audits

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Time for a Quiz

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Trivia Quiz

How many registered firms have their headquarters in Georgia?

•42

•89

•35

•23

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Auditing Standards and Guidance

AS No. 16 – Communicationswith Audit Committees

• Adopted August 15, 2012; effective, pending SEC approval, for audits beginning on or after December 15, 2012.

• Requires communications with the audit committee to be made in a timely manner and prior to the issuance of the audit report.

• Auditing Standard No. 16 -

– Provides a definition of audit committee;

– Retains or enhances existing communication requirements;

– Incorporates certain SEC auditor communication requirements to audit committees; and

– Adds new communication requirements that are generally linked to performance requirements in other PCAOB standards.

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(cont’d)

Enhances existing requirements by requiring the auditor to:

• Establish an understanding of the audit with the audit committee and document terms of engagement in an engagement letter;

• Communicate certain matters regarding the company’s accounting policies, practices, and estimates;

• Communicate the auditor’s evaluation of the quality of the company’s financial reporting;

• Communicate information related to significant unusual transactions; and

• Communicate the auditor’s views regarding significant accounting or auditing matters when the auditor is aware that management consulted with other accountants.

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(cont’d)

Incorporate SEC communication requirements –

• All critical accounting policies and practices to be used;

• All alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the accounting firm; and

• Other material written communications between the accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.

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(cont’d)

Adds new requirements linked to other PCAOB standards or the conduct of the audit, which require the auditor to communicate –

• An overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;

• Information about others involved in the audit, including internal auditors and other independent public accounting firms;

• The basis for the auditor’s determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors;

• Difficult or contentious matters for which the auditor consulted outside the engagement team;

• The auditor’s evaluation of the company’s ability to continue as a going concern;

• Departure from the auditor’s standard report; and

• Other matters arising from the audit that are significant to the oversight of the company’s financial reporting process.

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PCAOB Considers Substantial Changes to Standard Audit Report

Quote from Chairman Doty:

Embedded in investors' call for more information from the auditor, is a call for auditors to better serve investors. I dare say most auditors don't see investors as their direct or even ultimate masters, unless they are dealing with a private investor, such as to conduct due diligence for a potential acquisition.

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Auditor’s Reporting Model

• On June 21, 2011, the Board issued a concept release on possible changes to the auditor’s reporting model.

• Discusses four alternatives for changing the auditor’s reporting model (auditor’s discussion and analysis, required and expanded use of emphasis paragraphs, auditor assurance on other information outside the financial statements, and clarification of language in the standard auditor’s report).

• The Board hosted a roundtable on September 15, 2011 to discuss the alternatives in the concept release.

• The comment period ended on September 30, 2011; over 150 comment letters received.

• PCAOB planned activities

– 2012 – Propose standard

– 2013 – Re-propose or final standard

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Concept Release on Possible Changes to the Auditor’s Report (6/21/11)

Four alternatives for possible changes to the standard auditor’s report:

• Auditor’s Discussion and Analysis (AD&A) – a supplemental report to discuss auditors’ view on significant matters regarding the audit and the financial statements, such as audit risks, management’s judgments, accounting practices or contentious issues; covering many of the items discussed with the audit committee.

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Concept Release on Possible Changes to the Auditor’s Report

(cont’d)

• Required and Expanded Use of Emphasis Paragraphs –required to be added to the audit report to discuss matters such as management judgments and estimates and areas with significant measurement uncertainty.

• Auditor Assurance on Other Information Outside the Financial Statements – require auditors to provide assurance on MD&A, non-GAAP information and earnings releases.

• Clarification of the Standard Auditor’s Report – concepts could be clarified in the report, such as reasonable assurance, auditor’s responsibility for fraud and financial statement disclosures, and auditor independence.

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Related Parties• On February 28, 2012, the Board proposed for comment an auditing

standard on Related Parties and amendments to procedures regarding significant unusual transactions and a company’s relationships with its executive officers.

• The proposed standard and proposed amendments would address the following areas:

– Evaluating a company’s identification of, accounting for, and disclosure of relationships and transactions between the company and its related parties.

– Identifying and evaluating a company’s significant unusual transactions.

– Obtaining an understanding of a company’s financial relationships and transactions with its executive officers, as part of the auditor’s risk assessment.

• Comment period ended May 31, 2012; 37 comment letters received.

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Proposed Rule: Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits (10/11/11)

• The proposed amendments would:

– require registered public accounting firms to disclose the name of the engagement partner in the audit report,

– amend the Board's Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and

– require disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.

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PCAOB Concept Release on Mandatory Audit Firm Rotation

Asks the following questions about whether the Board should propose a mandatory firm rotation requirement:

• Does the current “audit client-payor” model create a fundamental conflict of interest and, if so, would mandatory audit firm rotation eliminate or significantly mitigate that conflict?

• What are the advantages, disadvantages and potential unintended consequences of mandatory audit firm rotation?

• What are the costs of audit firm rotation and how can those costs be mitigated?

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(cont’d)

• To what extent have some audit committees already adopted policies that provide for the periodic rotation of the outside auditors and what are the experiences of those audit committees that have implemented such policies?

• Are there alternatives to audit firm rotation that would meaningfully enhance auditor independence, objectivity and professional skepticism?

• Rather than pursue potential proposals to require firm rotation, should the PCAOB seek to address its concerns regarding independence through its current inspection programs or, at a minimum, allow more time to evaluate the impact of recent additions to the Board’s auditing standards?

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(cont’d)

A second set of questions seeks input as how such rules should be structured:

• What is an appropriate rotation period and, in particular, what would be the advantages and disadvantages associated with requiring rotation after periods of 10 years or greater?

• Should PCAOB require rotation for all audits, for only larger clients that are issuers, or for some other subset of audit clients?

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(cont’d)

• What would be the significant transition and implementation issues associated with mandatory firm rotation, including (1) the impact on competition for audit engagements; (2) the impact on the market for providing non-audit services to clients; (3) the ability and capacity of firms to staff new engagements appropriately; (4) whether multinational audits would pose unique challenges; and (5) if the early years of a new engagement pose a higher audit risk, how that risk can be mitigated.

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Trivia Quiz

The PCAOB has received approximately how many comment letters on the Audit Firm Rotation release?

(a) 500

(b) 700

(c) 300

(d) 900

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Upcoming Standard-Setting Priorities

• Audit confirmations

• Going Concern

• Documentation of supervision

• Audits of brokers and dealers

• Auditing supplemental information

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Inspections

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Firm Inspections as of September 2012

• More than 1,950 firm inspections

• Includes over 301 foreign firms in 36 jurisdictions

• Reviewed over 8,200 audit financial statements

• Almost 50% of the reports showed quality control or audit performance problems

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Trivia Quiz

How many audit firms are subject to annual inspection in 2012?

a) seven

b) eleven

c) nine

d) six

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GBH CPAs, PC(9/27/12)

• Firm has 15 CPAs, 53 public co. audits

• Five deficient audits identified

• Quality control issues not published yet

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Things to Consider When Your Firm is Inspected

• Get organized

• Do not alter documents!

• Cooperation and transparency

• Communication with client

• Be mindful of potential enforcement actions

• Proactively respond to PCAOB staff comments

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Information for Audit Committees about the PCAOB Inspection Process

• Guide issued 10/31/12 by PCAOB

• Available at http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf

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Questions Audit Committee should ask the Audit Firm

• Was the company's audit selected for PCAOB inspection?

• Did the PCAOB identify deficiencies in other audits that involved auditing or accounting issues similar to issues presented in the company's audit?

• What were the audit firm’s responses to the PCAOB findings? Be skeptical of:

– "It was just a documentation problem"

– "There was a difference in professional judgment"

– "The firm has addressed the criticisms in accordance with PCAOB standards"

• What topics are included in Part II findings?

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Trivia Quiz

Which body has final authority for the application of GAAP in a public company’s financial statements?

a) SEC

b) PCAOB

c) FASB

d) independent auditor

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PCAOB ENFORCEMENT

Claudius Modesti PCAOB Director of Enforcement and Investigations

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Overview of Enforcement Division

• Staff includes 27 attorneys and 17 forensic accountants

• May investigate violations of

– Sarbanes-Oxley

– PCAOB Rules

– Securities laws related to auditing

– Professional standards

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Sanctions for Violations

• Penalties

Up to $15 million for firm

Up to $750,000 for individual

• Temporary or permanent suspension of registration

• Person’s disassociation from firm

• Limitations on firm’s activities

• Require an independent monitor to observe and report

• Censure

• Additional education

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Enforcement Actions

• PCAOB has taken 55 disciplinary actions against 42 firms

• Revoked the registration of 27 firms

• Barred 43 CPAs from association with a registered firm

• 19 pending formal proceedings

• Numerous ongoing investigations not made public

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Recent Items of Focus

• Firm quality control deficiencies

• Failure to obtain sufficient evidence (especially revenue and valuation)

• Inadequate consideration of fraud

• Inappropriate alterations to workpapers

• Failure to cooperate with inspection or investigation

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Ernst & Young LLP, Jeffrey S. Anderson, CPA,Ronald Butler, Jr., CPA, Thomas A. Christie, CPA,

and Robert H. Thibault, CPA (2/8/12)

• Failed to properly audit Medicis Pharmaceutical’s returns reserve estimate and accepted non- GAAP rationale to support the estimate.

• After E&Y’s quality review process identified the non-GAAP rationale, EY formulated a different non-GAAP rationale to justify the continued use of the reserve methodology.

• Former concurring partner, acting in a National office role, agreed with the conclusion that estimated sales returns could be accounted for like warranty obligations.

• The non-GAAP rationale was flagged in a PCAOB inspection leading to a $94M restatement of financial statements.

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Ernst & Young LLP, Jeffrey S. Anderson, CPA,Ronald Butler, Jr., CPA, Thomas A. Christie, CPA,

and Robert H. Thibault, CPA (2/8/12)(cont’d)

• Sanctions:

– Firm: $2 million civil penalty and censure

– Signing partner for 2 audits: 2 year bar and $50,000 civil penalty

– Concurring partner for 2 audits and national office partner: 1 year bar and $25,000

– Second partner for 1 audit and signing partner for 1 audit: $25,000 civil penalty and censure

– Second partner for 1 audit: Censure

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Trivia Quiz

In November, the PCAOB censured a partner from another CPA firm. Which one was it:

• BDO

• McGladrey

• Malone Bailey

• KPMG

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What if Your Firm Receivesa PCAOB Enforcement Inquiry?

• Consult counsel

• Preserve documents

• Do not mislead the investigator

• Answer questions carefully (see first bullet above)

• Realistic self-evaluation – what went wrong

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Recent Issues Raised in the Securitiesand Exchange Commission (SEC)

Mary Schapiro Elisse B. Walter

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Frequent CF Staff Comment Areas

• Reverse Mergers

• Disclosure Controls and Procedures, Internal Control over Financial Reporting and Certifications

• Equity Transactions

• Stock Compensation

• Embedded Conversion Options and Freestanding Warrants

• Deferred tax valuation allowances

• Audit Reports

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Deferred Tax Assets - Areas ofStaff Comment

• Non-objective evidence in supporting how DTA will be realized, particularly if based substantially on income not expected to be achieved for several years in the future

• Lack of disclosure supporting the appropriateness of a partial valuation allowance

• Disclose both the positive and negative evidence considered in determining the extent of any valuation allowance and how such evidence was weighted

• To the extent there is reliance on tax planning strategies or offset of deferred tax liabilities in lieu of projected future taxable income for the realization of the DTAs, disclosure of these facts and a description of such strategies

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Reverse Mergers & “Back Door” Registrations

Accounting acquirer’s audited F/S presented for all historical periods in subsequent reports

• Earnings per share recast to reflect exchange ratio

• Eliminate retained earnings of shell or legal acquirer

• Common stock of shell or legal acquirer continues

Audit Issues

• PCAOB Standards

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Disclosure Controls & Procedures

(DC&P) Conclusions

• Disclosure should state clear conclusion – effective or not effective

• “Adequate” or “Effective except for X” are inappropriate

• “Effective” DC&P conclusion when ICFR conclusion is “ineffective”

• Consider reassessing conclusions upon the filing of any amendments

Incomplete definition of DC&P

• If definition is included, should conform exactly to Exchange Act Rule 13a-15 (note definition is not required)

JOBS Act Enacted

On April 5, 2012, the President signed the Jumpstart Our Business Startups, or “JOBS,” Act into law. The JOBS Act

encompasses several measures designed to enhance companies’ capital raising opportunities.

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Capital Raising Alternatives Under the JOBS Act

The Act gives companies a menu of options:

• Enhanced private offerings under Regulation D

• Enhanced private offering to QIBs under Rule 144A

• New, enlarged private offerings under “Reg. A Plus”

• Crowdfunding – new type of offering to hundreds of your closest friends

• IPO On-Ramp – easier to “go public”

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Title I of the JOBS Act:The IPO On-Ramp

© 2012 Arnall Golden Gregory LLPAll rights reserved

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Emerging Growth Companies

• New category of issuers

• Issuer that had less than $1 billion in total annual gross revenues during its most recently completed fiscal year.

• What is “total annual gross revenues”?

• First registered sale must have been after December 8, 2011.

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Losing Status as an Emerging Growth Company

• The last day of the fiscal year during which the issuer had annual gross revenues of at least $1 billion

• The last day of the fiscal year following the fifth anniversary of the first sale pursuant to a registered offering

• The date on which the issuer, during the previous three-year period, issued more than $1 billion in non-convertible debt

• The date on which the issuer becomes a “large accelerated filer” (i.e. worldwide public float of at least $700 million)

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Reduced Financial Information in SEC filings

• Emerging Growth Companies need only two years of audited financial statements in registration statements

• Selected financial data only dating back to the company’s earliest audited period presented in connection with the IPO registration statement for its subsequent registration statements and Exchange Act filings

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EGC REQUIRED FINANCIAL STATEMENTS

• An EGC will only have to present 2 years of audited financial statements for an equity-IPO

• The Staff has indicated it would not object to the same treatment for acquired businesses (“Rule 3-05”)

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SELECTED FINANCIAL DATA

• An ECG is not required to present selected financial data for any period prior to the earliest audited period presented in its equity-IPO registration statement

• Also applicable to Exchange Act filings, such as a Form 10 registration statement and Form 10-K annual report

• Act does not explicitly provide same exemption for ECG’s equity-IPO registration statement, but Staff has indicated it will allow exemption

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ACCOUNTING STANDARDS

• An EGC may elect to apply new or revised accounting standards on the same date as a non-issuer, if that standard also applies to non-issuers

• If the new or revised accounting standard does NOT apply to non-issuers, then the EGC must apply the transition provisions of a non-EGC issuer

• If EGC uses issuer transition provisions, then it CANNOT go back to non-issuer transition provisions

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ACCOUNTING STANDARDS(cont’d)

• Provision applies to all new or revised accounting standards issued on or after April 5, 2012

• New or revised accounting standards issued before April 5, 2012 are not subject to the exemption

• For example, ASU 2011-05, Presentation of Comprehensive Income, was issued before April 5, 2012

• An EGC may NOT apply the non-issuer transition provision of ASU 2011-05.

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AUDITING STANDARDS

• An EGC is exempt from the requirement to obtain an Audit of internal control over financial reporting

• Relief does not apply to the management reporting provisions related to ICFR

• The audit of an EGC is not required to comply with any potential future PCAOB rules requiring:

– Mandatory audit firm rotation

– Supplement to the auditor’s report, such as an AD&A

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AUDITING STANDARDS(cont’d)

• Any rules adopted by the PCAOB after April 5, 2012 would not apply to an EGC unless…

• The SEC “determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation”

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Executive Compensation Disclosure

• Emerging Growth Companies permitted to comply with reduced executive compensation disclosure requirements available to smaller reporting companies

• Excluded from Dodd-Frank provision that requires disclosure of ratio of the CEO’s compensation to the median compensation of all other employees in the company

• Exempted from Say on Pay vote and Say on Golden Parachute vote

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Risk Factor from WageWorks, Inc.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

• We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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Risk Factor from WageWorks, Inc. (cont’d)

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

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NOTICE

This presentation was prepared for educational purposes only. It may not be relied upon as the legal or tax advice of the author or Arnall Golden Gregory LLP with respect to any specific transaction.

IRS CIRCULAR 230 NOTICE: To comply with requirements imposed by the IRS, we inform you that any information contained in this communication (including any attachment) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

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AGG’s Securities and CorporateGovernance Practice

Arnall Golden Gregory LLP counsels public and private companies, as well as officers, directors, investors, and underwriters, in matters regarding transactions, compliance and corporate governance. Our clients include entrepreneurial private companies, as well as companies listed on NYSE, NASDAQ, AMEX and OTC Bulletin Board. We work together with those clients to provide solutions that make sense given their goals and resources.

We regularly counsel companies and underwriters in a variety of complex securities transactions, including initial and follow-on public offerings, “going private” and “roll-up” transactions, mergers, PIPES offerings, and private offerings.

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Contact

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For more information, please contact:


171 17th Street, Suite 2100 ∙ Atlanta, GA 30363

www.agg.com

Robert F. Dow, Esq.404.873.8706 (phone)404.873.8707 (fax)

[email protected]

12/11/2012

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Accounting Update 2012Presented by

Chris RousePrincipal

Windham Brannon, PC

Buckhead Chapter GSCPAsAccounting Update 2012

December 3, 2012

Accounting Update 2012

Agenda

• Recent Accounting Standards Updates

• Some Key FASB Exposure Drafts• Convergence, IFRS Roadmap and SMEs

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Recent Accounting Standards Updates•2012 – 7 ASUs issued thru November 27th

o Compare to 12 in 2011 and 29 in 2010o FASB busy working on far‐reaching exposure drafts

and projectso Most are coming from EITF


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Recent Accounting Standards Updates•Industry focus

oFinancial entitiesTroubled debt restructurings (2011‐01; 2011‐02)

•Redefines “concession” to include some subjective matters

oBelow market interest rateoDelay in payment (examples are in the negative)

•Two step process – 1st concession, 2nd creditor financial difficulty

o“Financial difficulty” has not changed•Effective beginning after June 2011 for publics, ending Dec 2012 for non‐publics

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oFinancial entitiesRepurchase agreements (2011‐03)

•Reaction to economic crisis•Removes requirement that transferor have ability to repo

•Removes collateral maintenance requirement from above

•Intent is to keep liability on transferor’s books even when transferor no longer has ability to repo

•Effective beginning after December 2011


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oFinancial entitiesOffsetting assets and liabilities (ASU 2011‐11)

•Applies primarily to financial instruments and derivatives in financial institutions

•Since IASB and FASB could not converge offsetting on balance sheets, this ASU improves disclosure

•Requires significant disclosures of offsetting arrangements, including reconciling to balance sheet

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oHealthcare entitiesHealth insurer fees under Healthcare Acts (2011‐06)

•Fees are set by Government, are due in September and are allocated to insurers based on their pro‐rata share of total insurance written in the preceding year

•Fee for year is recognized when the insurer writes insurance in current year

•Liability should be recognized in full at its estimated amount when the first insurance is written each year, and a corresponding deferred cost


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oHealthcare entities Health insurer fees under Healthcare Acts (2011‐06)

•Deferred cost is amortized using straight‐line method, unless another method is more appropriate

•Similar provision already in place for pharmaceutical manufacturers Healthcare Act fee (ASU 2010‐27)

•Effective in 2014

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oHealthcare entitiesPatient service revenue (ASU 2011‐07)

•Relates to classification of fee discounts as contra revenue vs bad debts

•Requirement is to include in revenue the amount expected to be collected when service is provided

•Includes additional disclosures•Effective after December 2011


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oHealthcare entitiesContinuing care–Refundable advance fees (ASU 2012‐01)

•Provides that advance fees refundable upon re‐occupancy that are limited to proceeds of re‐occupancy are deferred revenue

•Advance fees refundable upon re‐occupancy that are not limited to proceeds of re‐occupancy are liability (current GAAP)

•Effective for public entities beginning after December 2012, for non‐publics effective beginning after December 2013

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oReal estateDe‐recognition of in‐substance real estate (ASU 2011‐10)

•Applies to entities that own real estate through a consolidated special purpose entity and the entity lost control because of debt default

•Continue to consolidate entity until legal transfer of title ie, not a sale until title transfer

•Effective for publics beginning June 2012, for non‐publics ending December 2013


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oNot for profitCash flows from the nearly immediate sale of donated financial assets (ASU 2012‐05)Classified in operations unless donor restricted the use for a long‐term purposeClassified in financing if restricted for long‐term purposesDonated financial assets not meeting operating or financing criteria should be classified as investingApplies to sales after “nearly immediately”In effect, recognizes the decision to invest

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oNot for profitCash flows from the nearly immediate sale of donated financial assets (ASU 2012‐05)Practical consideration – NFPs will have to identify donated vs purchased securitiesEffective for periods beginning after 6‐15‐13, early adoption permitted


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Recent Accounting Standards Updates•Broad application

oComprehensive income (2011‐05; 2011‐12)Can no longer display changes in other comprehensive income in statement of owners equityMust display in income statement, or separate statement of comprehensive incomeRequirement to present reclassifications of OCI on face of statement(s) has been deferredEffective ending December 2012

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oGoodwill impairment (ASU 2011‐08)Provides option to first make a qualitative assessment of goodwill impairment before determining fair value of reporting unitAnnually consider whether it is more likely than not that fair value of goodwill is less than carrying amount

•Negative change in economic conditions•Negative change in financial performance•Negative change in management, personnel, customers, etc

•Others listed


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oGoodwill impairment (ASU 2011‐08)

If qualitative assessment “passes”, no need to perform 2‐step test and determine fair value of reporting unitNo longer allowed to carry‐forward a previous reporting unit fair value determinationEffective ending December 2012

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oIndefinite life intangibles impairment (ASU 2012‐02)Similar to goodwill impairment change covered earlierEffective fiscal years beginning after Sep 15 2012


18


oMulti‐employer defined benefit plans (ASU 2011‐09)Requires disclosure of –Plan name and ID #Number of employees in planContributions, and if over 5% of plan contributions“Financial health” of plan, including funded status, improvement plans, etcCommitments to plan, including collective bargaining agreement infoFor non‐ERISA plans, financial details

Effective 2011 for publics, 2012 for non‐publics

12/11/2012

10


19

Some Key FASB Exposure Drafts•Revenue recognition exposure draft

oUses “contract” basis“Contract” is an understanding, and does not have to be in writingIdentify rights and obligations of contracts with customersDetermine transaction price(s)Allocate transaction price to performance obligationsRecognize revenue when performance obligation is satisfied


20


oPerformance obligationsSingle performance obligation if entity integrates goods or services into a single itemAccounted for as multiple performance obligations if pattern of transfer is different for different goods or services, and …

•Each good or service has a distinct functionoMeasurementMultiple obligations would be measured on basis of relative standalone selling prices of the goods or services

12/11/2012

11


21


oNext stepsRe‐expose a revised draft imminentlyComment period 60‐90 daysFinal standard in spring 2013

oEffective date? Periods after 12‐15‐??


22

Some Key FASB Exposure Drafts•Lease Accounting – no more off balance sheet leases

oOverarching principle – A right to useLeasing is a financing transactionRecognize lease payment obligation and leased asset on balance sheetIncludes all leases of tangible assets, not just property leases

•Board is considering software and inventory leasesExisting leases would be recognized

12/11/2012

12


23


oLessee accountingLease obligation recognized at present valueContingent payments that are likely to occur would be includedIndexed changes would be recognized as they occurLease term includes non‐cancellable period plus renewal periods when “significant economic incentive” to renew is present


24


oLessee accountingLease obligation recognized at present valueDiscount rate is rate charged by lessor or lessee’s incremental borrowing rate

•Considering risk‐free discount rate option for non‐publics

Related party leases do not have specific guidance

12/11/2012

13


25


oLessee accountingLease asset recognized at obligation plus direct costsSubsequent changes reflected as they occurIn earnings if change arises from current or prior periodsIn obligation if related to future periods


26


oLessee accountingFinancial statementsBalance sheet, income statement and cash flow geography changesDisclosures

• Reconcile opening and closing asset and obligation, by class

oConsidering non‐public exemption•Undiscounted maturities for 5 years and thereafter, less interest portion

oConsidering additional disclosures for service elements of leases

12/11/2012

14


27


oLessee accountingFinancial statementsDisclosures

•Lease expense in tabular format, including –oAmortizationoInterestoVariable payments not in amortizationoExpense for any non‐capitalized leases

•Future commitment for services or non‐asset component of leases


28


oLessor accountingA dual modelPerformance obligation approach for financing transactionsDe‐recognition approach for sale transactions

12/11/2012

15


29


oLessor accountingPerformance obligation approachLessor retains risks and rewards of assetRecognize asset for contractual terms, plus contingent rentals, renewals, termination payments, etcRecognize liability to provide asset

•Amortize based on pattern of use (revenue)•Straight line if no pattern

Recognize interest income using effective interest method


30


oLessor accountingPerformance obligation approachReassess estimates each reporting period

•Changes in lease terms on balance sheet•Changes in contingent/index payments added to asset and liability

o Included in revenue if effecting \prior or current period

Leased asset remains on books•Depreciation/amortization in accordance with GAAP

12/11/2012

16


31


oLessor accountingDe‐recognition approachWhen ownership transfers at end of lease, or bargain purchase optionRecognize receivable and revenueDe‐recognize asset and recognize cost of sales

•Amount is based on relationship of fair values of receivable and asset

•Residual is not accreted•While similar to current sales‐type lease, amounts are determined differently


32


oLessor accountingDe‐recognition approachReassess upon change in lease termsContingent/index cash flows are recognized in revenueOn balance sheet, present lease receivable separately from other financial assetsAny residual asset is presented separately within that asset’s classIncome statement depends on lessor’s business

•Financing business – net lease income and expense on one line

•Seller – separate lines for lease income and expense

12/11/2012

17


33


oSale – LeasebacksRecognized as two transactions“Control” criteria in revenue recognition ED would determine if sale occurredAccounted for as (1) sale of “whole” asset, and (2) lease of a right‐to‐use underlying asset


34


oThe Devil is in the detailsSecond exposure draft due in 1st quarter 2013Preparing financial statement preparersPreparing auditorsPreparing financial statement users

12/11/2012

18


35

Some Key FASB Exposure Drafts•Going concern

oFASB is re‐cocking on original exposure draftoApproaching from a “risk disclosure” perspective


36

Convergence, IFRS Roadmap and SMEs•SEC Work Plan to IFRS

o2008 – SEC Roadmap to accepting IFRS for US companieso2009 – Senate confirmation hearings for SEC Chair

12/11/2012

19


37


o2010 – SEC Work Plan addresses areas of concernSufficient development and application of IFRS for US reportingIndependence of standard settingInvestor understanding and educationEffect on US regulatory environmentImpact on issuers (system changes, contracts, governance, litigation)Human capital readiness


38


o2011 – SEC delayed vote on transition to IFRSo2012 – SEC Staff report recommended further studySEC Chief Accountant says “US will need to have a strong voice” in IASB standard setting

12/11/2012

20


39

Convergence, IFRS Roadmap and SMEs•Convergence of US and International GAAP

o2005 – Norwalk Agreement establishes several major projects

o2005 – 2011; Numerous convergence Standards issuedo2012 – IASB says “no more projects”


40

Convergence, IFRS Roadmap and SMEs•IFRS for SMEs

o2009 – IFRS for SME’s issued200+ page documentNot entirely consistent with IFRSRevised every 3 years

o2012 – Tri‐annual revision had limited changes

12/11/2012

21


41

Convergence, IFRS Roadmap and SMEs•GAAP for Non‐public entities

o2005 – FASB establishes Private Company Financial Reporting Committee

o2010 – FAF and AICPA formed Blue Ribbon Panel to prepare recommendations on financial reporting standard setting for private companies

oMay 2012 – FAF established Private Company CounciloMay 2012 – AICPA commits to establishing OCBOA for SMEsIssued exposure document on time in Nov 2012Comment period expires Jan 2013Expects to issue final document in Spring 2013


42

Convergence, IFRS Roadmap and SMEs•Financial Reporting Framework for Small‐ and Medium‐SizedEntities (aka FRF for SMEs)

•232 pages, 31 Chapters•3 covering financial statement concepts, general principles and transition•3 covering the basic financial statements•7 covering cash through operations•18 covering specific transactions

•Blend of current (and former) GAAP and accrual tax basis•Implementation guidance will be issued concurrently withfinal document

12/11/2012

22


In conclusion….

Bon Auditpetite!!Contact Chris Rouse

Windham Brannon, PC Atlanta [email protected]

43

Chris Rouse Biographical Information

2012

Chris Rouse is the Firm Audit and Accounting Quality Control Principal at Windham Brannon, P.C., an Atlanta Georgia CPA firm. He is a graduate of Florida State University, and has spent his career with Big-8 and large local firms. He has served primarily audit clients in his career, including clients in the real estate sector and the financial services industry, manufacturing, distribution and service entities, not-for-profit entities and employee benefit plans. His service as Firm-wide A&A Principal includes helping his partners deal with new and difficult audit and accounting issues. He has served as team captain on many peer reviews of CPA firms, from top-100 firms to sole practitioners. He also provides litigation support, primarily in accountants’ malpractice cases. Chris has served on several AICPA committees and task forces, including the Technical Issues Committee (Auditing), the Peer Review Committee and the Technical Standards Committee (Ethics). Chris served on the US Department of Labor ERISA Advisory Council, and chaired Working Groups of the Council. He currently serves as a Technical Reviewer for the GSCPA Peer Review Committee, and has chaired the Georgia Society of CPAs Assurance Services Section, the Audit Committee, the Peer Review Committee, and the Financial Institutions Committee, and served on several others. He has received several GSCPA recognitions, including the Distinguished Member Award, Distinguished Section Chair, Outstanding Volunteer and Exceptional Leadership awards. Chris is a National Instructor of AICPA audit and accounting training courses, and is a GSCPA Outstanding Discussion Leader. He is a frequent speaker on audit and accounting matters at state and national seminars,

International Financial Reporting Standards (IFRS)

AND GOING CONCERN

Scott HazyAudit Shareholder

Bennett Thrasher PC

OUTLINE

STATUS OF IFRS IN USA

GOING CONCERN UNDER US GAAP

NEVER!!!!!

IFRS DEFINED

GLOBAL ACCOUNTING STANDARDS

DEVELOPED BY THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

PUBLIC COMPANIES ONLY

PRIVATE COMPANIES IN USA NOW ALLOWED TO USE (RULE 203)

WHAT IS THE IASB?

ORIGINALLY IASC FOUNDED IN 1973

IASB FOUNDED IN APRIL 1, 2001 AS SUCCESSOR TO IASC

Hans Hoogervorst, Chairman of the IASB

COMPRISED OF 15 MEMBERS FROM 9 COUNTRIES (INCLUDING USA) USA 4 JAPAN 1 UK 2 CHINA 1 FRANCE 2 S. AFRICA 1 AUSTRAILIA 1 SWEDEN 1 OTHER REGIONS 2

MANDATE IS TO DEVELOP IFRS

IFRIC—INTERPRETATIONS COMMITTEE

TIMELINE AND CURRENT STATUS OF IFRS IN USA

2001 IASB FORMED

2002 NORWALK AGREEMENT BETWEEN FASB AND IASB. ALSO EU ANNOUNCES THAT ITS MEMBER STATES REQUIRED TO USE IFRS FOR PUBLIC COMPANIES IN 2005

2007 SEC ALLOWS FOREIGN FILERS TO FILE USING IFRS WITHOUT US GAAP RECONCILIATION

2008

SEC ISSUES “ROADMAP” THAT INCLUDE HURDLES TO CLEAR BEFORE CONSIDERATION OF ACCEPTANCE

AICPA VOTES TO RECOGNIZE IASB AS AN OFFICIAL STANDARD SETTER (RULES 202 AND 203) WHICH ALLOWS PRIVATE COMPANIES TO ISSUE IFRS FINANCIAL STATEMENTS

FASB AND IASB ISSUE MEMORANDUM OF UNDERSTANDING (MoU) TO WORK TOWARDS CONVERGENCE OF STANDARDS

2011

CPA EXAM QUESTIONS APPEAR

SCHEDULED COMPLETION OF FASB AND IASB CONVERGENCE PROJECT(Still Not Completed-Mid 2013)

JOINT PROJECTS

FINANCIAL INSTRUMENTS REVENUE RECOGNITION LEASES STATEMENT OF COMPREHENSIVE INCOME FAIR VALUE MEASUREMENT DERECOGNITION CONSOLIDATIONS POST-EMPLOYMENT BENEFITS-INACTIVE BALANCE SHEET-NETTING FINANCIAL STATEMENT PRESENTATION-INACTIVE DISCONTINUED OPERATIONS-INACTIVE FINANCIAL INSTRUMENTS WITH EQUITY CHARACTERISTICS-INACTIVE INSURANCE CONTRACTS EMISSIONS TRADING SCHEMES-INACTIVE INCOME TAXES-INACTIVE

July 13, 2012 SEC Final Report on Work Plan

137 Pages

Support for a Single Set of High Quality Standards

Summary of Findings Development of IFRS Interpretive Process IASB’s Use of National Standard Setters Global Application and Enforcement Governance of the IASB Status of Funding Investor Understanding

July 13, 2012 SEC Final Report on Work Plan

Options to Proceeding No Action (Not Deemed Likely) Full IFRS Adoption as Authoritative for U.S. GAAP (Never!)(Rejected) Condorsement????

Reference to “U.S. GAAP” in Legal Documents

Large Differences Still Remain (LIFO)

What the report did NOT say: No policy recommending adoption No recommendation of WHEN a decision by the SEC would be

made

CONDORSEMENT????

SEC Staff Paper, May 26, 2011, “Exploring a Possible Method of Incorporation”

Con-verge the Two Standards (Finish Joint Projects)

En-dorse Remaining and New IFRS Standards into U.S. GAAP

Expect to Take 5 to 7 Years (Starting When???)

FASB Role Work With IASB to Develop Standards Develop Specific USA Supplemental Guidance Develop Industry Guidance Endorse the Existing IFRS Standards into U.S. GAAP Endorse New IFRS Standards into U.S. GAAP

INTERNATIONAL REACTION TO FINAL WORK PLAN

Mr. Hoogervorst NOT a Happy Camper

“IFRSs have already reached critical mass as international standards, and the momentum behind them becoming global accounting standards is irreversible……(blah, blah, blah)…..the United States needs to come on board now to participate in shaping the future of global accounting. The IASB has started working on a new agenda. The era of convergence is coming to an end…”

NOW WHAT?

MOST AGREE THAT IFRS IS INEVITABLE (In Some Form)

CONDORSEMENT

TIMELINE IS VERY SUSPECT

MANDATORY OR OPTIONAL

SCHEDULED COMPLETION OF FASB AND IASB JOINT PROJECTS

MOST COMPANIES TAKING A WAIT AND SEE APPROACH

STAY TUNED

RESOURCES

AICPA WWW.AICPA.ORG

FASB WWW.FASB.ORG

IASB WWW.IASB.ORG

IFRS RESOURCES WWW.IFRS.COM

SEC WWW.SEC.GOV

GOING CONCERN IN US GAAP

PROJECT OBJECTIVE

HOW SHOULD AN ENTITY ASSESS ITS ABILITY TO CONTINUE AS A GOING CONCERN

TIMING, NATURE AND EXTENT OF ANY RELATED DISCLOSURES

GAAS vs. GAAP

PROJECT LAST UPDATED ON NOVEMBER 12, 2012

GOING CONCERN SUMMARY

EACH REPORTING PERIOD MANAGEMENT ASSESS ENTITY’S ABILITY TO CONTINUE AS A GOING CONCERN AND RELATED DISCLOSURES

INABILITY TO MEET OBLIGATIONS FOR A REASONABLE TIME 12 MONTHS 24 MONTHS

EARLY WARNING DISCLOSURES NEAR MORE LIKELY THAN NOT—ORDINARY COURSE OF BUSINESS

12 MONTHS REASONABLE TIME PROBABLE=SUBSTANTIAL DOUBT—CONSIDER ALL OF

MANAGEMENTS PLANS 24 MONTHS REASONABLE TIME

NEXT STEPS-BOARD TO CONSIDER

APPLICABILITY TO NONPUBLIC ENTITIES

NATURE OF DISCLOSURES AND MD&A FOR PUBLIC COMPANIES

HOW MANAGEMENT’S PLANS SHOULD BE DISTINGUISHED AND CONSIDERED

EFFECTIVE DATE AND TRANSITION

EXPOSURE DRAFT 2013

QUESTIONS???

1

Habif, Arogeti & Wynne, LLP | Five Concourse Parkway, Suite 1000 | Atlanta, GA 30328Habif, Arogeti & Wynne, LLP | Five Concourse Parkway, Suite 1000 | Atlanta, GA 30328

Fraud Considerations in Auditing

Tyler Wright

December 3, 2012

Agenda

• Fraud

• Professional Standards and Other Guidance

• What is Forensic Accounting?

• Auditing vs. Forensic Accounting

• Forensic Accounting Techniques for Auditors –“Forensic Audit”

2

Fraud

Fraud (AU 316):“Fraud is a broad legal concept and auditors do not make legal determinations of whether fraud has occurred. Rather, the auditor's interest specifically relates to acts that result in a material misstatement of the financial statements. The primary factor that distinguishes fraud from error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. For purposes of the section, fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.”

Source: AU Section 316.05

Fraud

Fraud (ACFE):

“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

Source: 2012 Report to the Nation on Occupational Fraud and Abuse. Copyright 2012 by the Association of Certified Fraud Examiners, Inc.

3


Fraud

How is fraud detected?• Tips (43.3%)• Management review (14.6%)• Internal audit (14.4%)• By accident (7.0%)• Account reconciliation (4.8%)• Document examination (4.1%)• External audit (3.3%)• Notified by police (3.3%)• Surveillance/Monitoring (1.9%)• Confession (1.5%)• IT controls (1.1%)• Other (1.1%)


4

Fraud

ACFE Fraud Survey Results

• Corruption“Any scheme in which a person uses his or her influence in a business transaction to obtain an unauthorized benefit contrary to their duty to their employer (e.g., schemes involving bribery or conflicts of interest).” (ACFE)

• Asset Misappropriation“Any scheme that involves the theft or misuse of an organization’s assets (e.g., theft of company cash, false billing schemes, or inflated expense reports.).” (ACFE)

• Fraudulent Statements“Falsification of an organization’s financial statements to make it appear more or less profitable (e.g., recording fictitious revenues, understating reported expenses, or artificially inflating reported assets).” (ACFE)


Occupational Frauds by Category ‐Frequency

8

10.30%

26.90%

88.70%

4.80%

32.80%

86.30%

7.60%

33.40%

86.70%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%

FinancialStatement Fraud

Corruption

AssetMisappropriation

Percent of Cases

Type of Frau

d

2012

2010

2008


5

Occupational Frauds by Category –Median Loss


9

$2,000,000

$375,000

$150,000

$4,100,000

$250,000

$135,000

$1,000,000

$250,000

$120,000

$‐ $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000

FinancialStatement Fraud

Corruption

AssetMisappropriation

Median Loss

Type of Frau

d

2012

2010

2008

Professional Standards and other Guidance

• AICPA ‐ Statements on Standards for Consulting Services No. 1 (SSCS 1), 1992

• AICPA ‐ Consideration of Fraud in the Financial Statement Audit (AU Section 316), 2002

• AICPA ‐ Forensic Services, Audits, and Corporate Governance: Bridging the GAP, 2004

• AICPA ‐ Forensic Procedures and Specialists: Useful Tools and Techniques, 2006

6


SSCS 1

• Consulting Services that CPAs provided to their Clients.– Consultations

– Advisory Services

– Implementation Services

– Transaction Services

– Staff and Other Support Services

– Product Services


AU 316• Description and Characteristics of Fraud• The Importance of Exercising Professional Skepticism• Discussion Among Engagement Personnel Regarding the Risks of Material

Misstatement Due to Fraud• Obtaining the Information Needed to Identify Risks of Material

Misstatement Due to Fraud• Identify Risks that may Result in Material Misstatement due to Fraud• Assess the Identified Risks after Taking into Account an Evaluations of the

Entity’s Programs and Controls• Responding to the Results of the Risk Assessment• Evaluating Audit Evidence• Communicating about Fraud to Management, those Charged with

Governance and Others• Documentation of Auditors’ Consideration of Fraud

7


Forensic Services, Audits, and Corporate Governance: Bridging the GAP

• Increase Financial Statement Audit Effectiveness in Applying AICPA Statement of Auditing Standards (SAS) No. 99, consideration of Fraud in the Financial Statement Audit (AICPA Professional Standards, vol. 1, AU sec. 316)– External Auditors– Internal Auditors– Corporate Management– Others Interested in the Goal of Improving Financial Reporting


Forensic Procedures and Specialists: Useful Tools and Techniques

• Intended to Provide Educational and Reference Material Primarily for Audit Committee Members and Others Who May Want to Us the Work of a Forensic Specialist– What are forensic procedures?

– How do forensic procedures differ from audit procedures?

– Who can use forensic procedures and specialists?

– What are the potential uses of forensic procedures to reduce litigation, business, and audit risk?

8

Forensic Accounting Overview

• Forensic Accounting

– Investigative Services

– Litigation/Dispute Advisory Services

– Fraud Risk Management Services


Forensic Accounting

“Forensic accounting services generally involve the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings, and may involve either an attest or consulting engagement.”

Source: Forensic Procedures and Specialists: Useful tools and Techniques

(AICPA 2006)

9


Investigative Services ‐ Defined

“A structured gathering of documentary evidence and testimony to resolve allegations of improper activity, including a reported fraud.”


(AICPA 2006)


Investigative Services ‐ Examples

• Corporate Internal Investigations

• White Collar Crime Investigations

• Financial Statement Investigations

10


Financial Investigation Techniques

1. Public Document Reviews and background investigations

2. Interviews of knowledgeable persons

3. Confidential sources and informants

4. Laboratory analysis of physical evidence

5. Analysis of electronic evidence

6. Physical and electronic surveillance

7. Analysis of financial transactions


(AICPA 2006)


Litigation/Dispute Advisory Services

“Litigation services entail the role of the forensic specialist as an expert or consultant and consist of providing assistance for actual, pending, or potential legal or regulatory proceedings before a Trier of fact in connection with the resolution of disputes between parties.”


(AICPA 2006)

11


Litigation /Dispute Advisory Services ‐ Service Types

• Expert Witness Services

• Consulting Services

• Other Services – Special Master

– Court‐Appointed Receiver

– Referee

– Arbitrator

– Mediator


(AICPA 2006)


Fraud Risk Management Services

“Programs designed specifically to prevent, detect, and deter fraudulent and criminal acts.”

Source: Managing the Business Risk of Fraud: A Practical Guide (IIA, AICPA ,

ACFE)

12


Fraud Risk Management Services ‐ Service Types

• Fraud Risk Assessments

• Proactive and Reactive Fraud Detection

• Audit Procedures ‐ Fraud


Fraud Risk Assessments

• Workshops and interviews

• Brainstorming

• Questionnaires

• Process mapping (Heat Map)

• Comparisons with other organizations (Benchmarking)

• Discussions with peers (Round Tables)

13


Six Steps to Proactive and Reactive Fraud Detection1. Gain an understanding of the client’s business2. Classify each process based on risk and identify the

client’s high risk processes3. Identify the abnormalities that might occur in each of

the high rick processes4. Determine how each identified abnormality would

likely appear in a set of data5. Gather the necessary data and query for the

identified indicators6. Review identified abnormalities and refine the query


Audit Procedures – Fraud

– Brainstorming session

– Interviews of management

– Forensic data analytics

• Benford Analysis

• User Activity Analysis

• Day of the week Analysis

• Comparing databases

14

Auditing vs. Forensic Accounting

Audit Procedure Forensic Procedure

Examination of Documentation Public Document Searches

Inquiry of knowledgeable persons Interviews of knowledgeable persons

Third Party Confirmation Alternative Sources

Physical Examination Lab Analysis of Physical Evidence

Reperformance Analysis of Electronic Evidence

Observation Surveillance

GAAS Analytical Procedures Nontraditional Analysis


Documentation vs. Public Document Searches

• Documentation

– Obtained from the clients or outside sources in ordinary course of business. These include: invoices, shipping documents, receipts, and bank statements.

• Public Document Searches

– Public record searches relating to the company and its management including: corporation filings, SEC filings, real estate ownership, and social media.

15


Inquiry vs. Interviewing• Inquiry

– Inquiry of personnel during the course of the audit. Discussion of unexpected fluctuations, control procedures, and changes in organizational structure, operations, policies, or philosophies.

• Interviewing– Structured based on the type of information the subject has. Information extraction without interrogation. Looking for verbal and non‐verbal clues to identify credibility and veracity of the subject’s statements.


Confirmation vs. Alternative Sources

• Confirmation

– Written or verbal confirmation from third parties regarding transactions or account balances.

• Alternative Sources

– Information through anonymous sources via hotlines and confidential informants. It is necessary for the forensic accountant to asses the relevance and veracity of the information.

16


• Physical Examination vs. Lab Analysis of Physical Evidence

• Physical Examination– Observations and counts to determine existence, physical condition, and quantity of assets listed on a balance sheet.

• Lab Analysis of Physical Evidence– Lab analysis of documents to verify authenticity, check for alterations, and document dating. Analysis of electronic evidence to recover and retrieve deleted or altered data and incriminating documents and e‐mails located on hard‐drives and servers.


Reperformance vs. Analyzing Electronic Evidence• Reperformance

– Re‐perform calculations of entries to determine mathematical accuracy. Review of key financial statistics and ratios to ensure data meets expectations and covenants.

• Analyzing Electronic Evidence– Using software and program scripts to perform data‐mining to identify inconsistencies using non‐financial data. Analysis of journal entries for patterns or unusual transactions based on transaction account names, type, occurrence, or dollar amount.

17


Observation vs. Surveillance• Observation

– Observing accounting and control procedures to determine if they are properly performed. This includes segregation of duties and inventory counts.

• Surveillance– Physical and electronic surveillance, as necessary. Physical includes observing inventory procedures or driving to a vendor location to verify existence and address. Electronic includes e‐mail monitoring and computer usage, such as tracking internet browsing history.


• GAAS Analytical Procedures vs. Nontraditional Analyses

• GAAS Analytical Procedures– Vertical, horizontal, and ratio analyses. Validate and compare financial data with non‐financial data to identify trends and highlight risks.

• Nontraditional Analyses– Examine stock trading history of key personnel, more in‐depth analyses of high fraud risk areas such as journal entries for management override, revenue recognition for fraud schemes, inventory valuation, asset classification, and related party transactions.

18


• What does this all mean?

– The use of a forensic accountant’s expertise, knowledge, and prior experiences allow them to develop creative approaches to detecting fraud that is being concealed. The use of experience can also help detect management override of controls and the tone at the top of an organization that can lead to an environment primed for fraudulent activities.

Forensic Accounting Techniques for Auditors – “Forensic Audit”

Heightened Level of Professional Skepticism• Professional Skepticism:

– “An attitude that includes a questioning mind and critical assessment of audit evidence.”

• Investigative Mentality:– Forensic accountants are skeptical by their very nature and often utilize personal experiences when analyzing a situation. Financial acumen with a truly investigative approach.

• Internal auditors can utilize their personal experiences to anticipate or identify potential issues.– Perils of “Auditing with Blinders”

Source: AU Section 316.13 36

19


• Utilizing Technology

– Journal Entry Testwork

• Benford Analysis

• User Activity Analysis

• Day of the week Analysis

– Comparing databases

– Sample Selection

• Perils of “not utilizing technology.”


• Interview Techniques

– Open Ended Questions

– Probing Questions

– Follow‐up on Responses

• Perils of “Check the Box” mentality

20

Q & A

39

Fraud Considerations in Auditing

Tyler WrightHabif, Arogeti & Wynne LLP

[email protected]‐353‐8384

Habif, Arogeti & Wynne, LLP ▪ Five Concourse Parkway, Suite 1000 ▪ Atlanta, GA 30328 ▪ 404-892-9651 ▪ www.hawcpa.com

Tyler is a manager in Habif, Arogeti & Wynne, LLP’s Forensic Accounting and Litigation Support Group, a Certified Public Accountant licensed in the state of Georgia, and a Certified Fraud Examiner as designated by the Association of Certified Fraud Examiners. Mr. Wright earned a Bachelor of Business Administration in accounting degree and a Master of Accountancy degree from the University of Georgia.

Mr. Wright has a strong accounting background and experience in the fields of auditing and forensic accounting. His career has included multinational experience with an international service organization and a global leader in the beverage industry.

Tyler has managed or participated in numerous investigations in various industries including public school systems, universities, financial services, consumer electronics, manufacturing, healthcare, government, and consumer products. He has specific expertise in analyzing financial statements and communications, investigating embezzlement and conflicts of interest, analyzing operations and internal controls, and developing implementable strategies to mitigate fraud, waste and abuse. Tyler has also acted as a financial consultant in a selection of litigation matters including post acquisition disputes, escheatable property audits, and contractual disputes in various industries including manufacturing, education, healthcare, government, and financial services. He has performed audits and Statements on Auditing Standards No. 99: Consideration of Fraud in a Financial Statement Audit (SAS 99) procedures for clients in the financial services, manufacturing, automotive, real estate, and healthcare industries.

In his role as a member of the corporate audit department with a global leader in the beverage industry he assisted with the development of the company’s fraud risk management strategy including the design and implementation of process improvements utilizing technology to mitigate and detect potential fraud, waste, or abuse.

TYLER WRIGHT, CPA, CFE Manager Habif, Arogeti & Wynne, LLP

Direct Dial: 770-353-8384 Email: [email protected] Cell: 678-316-0297

Habif, Arogeti & Wynne, LLP ▪ Five Concourse Parkway, Suite 1000 ▪ Atlanta, GA 30328 ▪ 404-892-9651 ▪ www.hawcpa.com

Mr. Wright’s professional memberships include:

American Institute of Certified Public Accountants Georgia Society of Certified Public Accountants Association of Certified Fraud Examiners Certified Public Accountant, State of Georgia Certified Fraud Examiner

Education

Bachelor of Business Administration, University of Georgia Master of Accountancy, University of Georgia

Licenses and Designations

Certified Public Accountant, State of Georgia Certified Fraud Examiner