The Public Company Accounting Oversight Board (PCAOB) recently voted to finalize two related standards aimed at improving audits of accounting estimates and the work of specialists. Though the new, more consistent guidance would apply specifically to public companies, the effects would likely filter down to audits of private entities that use accounting estimates or rely on the work of specialists.

Estimates

Financial statements often report assets at fair value or use other types of accounting estimates, such as allowances for doubtful accounts, credit losses and impairments of long-lived assets. These estimates may involve some level of measurement uncertainty. So, they may be susceptible to misstatement and require more auditor focus.

PCAOB Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements , aims to improve audits of estimates. The new risk-based standard would promote greater consistency in application. It would emphasize the importance of professional skepticism when auditors evaluate management’s estimates and the need to devote greater attention to potential management bias. Under the updated standard, auditors would consider both corroborating and contradictory evidence that’s obtained during the audit.

Use of specialists

Some accounting estimates may be easily determinable. But many are inherently subjective or complex, requiring the use of specialists. Examples include:

• Actuaries to determine employee benefit obligations,
• Engineers to determine obligations regarding environmental remediation, and
• Appraisers to determine the value of intangible assets or real estate.

The audit guidance on using the work of specialists hasn’t changed much since it was originally published in the 1970s. It deals with auditors’ oversight of third-party specialists, as well as the auditor’s use of the work of a professional hired by management. Existing guidance requires auditors to evaluate the relationship of a specialist to the client, including situations that might impair the specialist’s objectivity. But it doesn’t provide specific requirements.

PCAOB Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists , would provide more direction for carrying out that evaluation. The updated standard would extend the auditor’s responsibility for evaluating specialists beyond simply obtaining an understanding of their work. It would require auditors to perform additional procedures to evaluate the appropriateness of the company’s data, as well as significant assumptions and methods used. However, auditors wouldn’t be required to reperform the work of the company’s specialist.

Stay tuned

The PCAOB issued these related standards simultaneously at the end of 2018, and wants both to become effective for audits of financial statements for fiscal years ending on or after December 15, 2020. However, the updated guidance is pending approval by the Securities and Exchange Commission. Contact us to discuss how these updated standards are likely to affect your company’s audit procedures in the coming years.

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Can your business become more profitable without venturing out of its comfort zone? Of course! However, adding new products or services may not be the best way for your business — or any company — to boost profits. Bottom-line potential may lie undiscovered in your existing operations. How can you find these “hidden” profits? Dig into every facet of your organization.

Develop a profit plan

You’ve probably written and perhaps even recently revised a business plan. And you’ve no doubt developed sales and marketing plans to present to investors and bankers. But have you taken the extra step of developing a profit plan?

A profit plan outlines your company’s profit potential and sets objectives for realizing those bottom-line improvements. Following traditional profit projections based on a previous quarter’s or previous year’s performance can limit you. Why? Because when your company reaches its budgeted sales goals or exceeds them, you may feel inclined to ease up for the rest of the year. Don’t just coast past your sales goals — roar past them and keep going.

Uncover hidden profit potential by developing a profit plan that includes a continuous incentive to improve. Set your sales goals high. Even if you don’t reach them, you’ll have the incentive to continue pushing for more sales right through year end.

Ask the right questions

Among the most effective techniques for creating such a plan is to consider three critical questions. Answer them with, if necessary, brutal honesty to increase your chances of success. And pose the questions to your employees for their input, too. Their answers may reveal options you never considered. Here are the questions:

1. What does our company do best? Involve top management and brainstorm to answer this question. Identifying your core competencies should result in strategies that boost operations and uncover hidden profits.

2. What products or services should we eliminate? Nearly everyone in management has an answer to this question, but usually no one asks for it. When you lay out the tough answers on the table, you can often eliminate unprofitable activities and improve profits by adding or improving profitable ones.

3. Exactly who are our customers? You may be wasting time and money on marketing that doesn’t reach your most profitable customers. Analyzing your customers and prospects to better focus your marketing activities is a powerful way to cut waste and increase profits.

Get that shovel ready

Every business owner wishes his or her company could be more profitable, but how many undertake a concerted effort to uncover hidden profits? By pulling out that figurative shovel and digging into every aspect of your company, you may very well unearth profit opportunities your competitors are missing. We can help you conduct this self-examination, gather the data and crunch the resulting numbers.

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Among the fastest ways for a business to fail is because of mismanagement or malfeasance by ownership. On the other hand, among the slowest ways is an ineffective or dysfunctional sales department.

Companies suffering from this malady may maintain just enough sales to stay afloat for a while, but eventually they go under because they lose one big customer or a tough new competitor arrives on the scene. To ensure your sales department is contributing to business growth, not just survival, you’ve got to ask some tough questions. Here are four to consider:

1. Does our sales department communicate customers’ needs to the rest of the company? Your sales staff works on the front lines of your industry. They’re typically the first ones to hear of changes in customers’ needs and desires. Make sure your sales people are sharing this information in both meetings and written communications (sales reports, emails and the like).

It’s particularly important for them to share insights with the marketing department. But everyone in your business should be laser-focused on what customers really want.

2. Does the sales department handle customer complaints promptly and satisfactorily? This is related to our first point but critical enough to investigate on its own. Unhappy customers can destroy a business — especially these days, when everyone shares everything on social media.

Your sales staff should have a specific protocol for immediately responding to a customer complaint, gathering as much information as possible and offering a fair resolution. Track complaints carefully and in detail, looking for trends that may indicate deeper problems with your products or services.

3. Do our salespeople create difficulties for employees in other departments? If a sales department is getting the job done, many business owners look the other way when sales staff play by their own rules or don’t treat their co-workers with the utmost professionalism. Confronting a problem like this isn’t easy; you may unearth some tricky issues involving personalities and philosophies.

Nonetheless, your salespeople should interact positively and productively with other departments. For example, do they correctly and timely complete all necessary sales documents? If not, they could be causing major headaches for other departments.

4. Are we taking our sales staff for granted? Salespeople tend to spend much of their time “outside” a company — either literally out on the road making sales calls or on the phone communicating with customers. As such, they may work “out of sight and out of mind.”

Keep a close eye on your sales staff, both so you can congratulate them on jobs well done and fix any problems that may arise. Our firm can help you analyze your sales numbers to help identify ways this department can provide greater value to the company.

© 2019

 

There are three types of financial statements under U.S. Generally Accepted Accounting Principles (GAAP). Each one reveals different, but equally important, information about your company’s financial performance. And, together, they can be analyzed to help owners, management, lenders and investors make informed business decisions.

Profit or loss

The income statement shows revenue and expenses over the accounting period. A commonly used term when discussing income statements is “net income,“ which is the income remaining after all expenses (including taxes) have been paid.

It’s also important to check out the company’s “gross profit.“ This is the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of direct labor and materials, as well as any manufacturing overhead costs required to make a product.

The income statement also lists sales, general and administrative (SG&A) expenses. They reflect functions, such as marketing and payroll, that support a company’s production of products or services. Often, SG&A costs are relatively fixed, no matter how well your business is doing. Compute the ratio of SG&A costs to revenue. If the percentage increases over time, business may be slowing down.

Financial position

The balance sheet tallies your company’s assets, liabilities and net worth to create a snapshot of its financial health on the financial statement date. Assets are customarily listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year, while long-term assets (such as plant and equipment) will be used to generate revenue beyond the next 12 months.

Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year.

Because the balance sheet must balance, assets must equal liabilities plus net worth. So, net worth is the extent to which assets exceed liabilities. It may signal financial distress if your net worth is negative. Other red flags include:

• Current assets that grow faster than sales, and
• A deteriorating ratio of current assets to current liabilities.

These trends could indicate that management is managing working capital less efficiently than in prior periods.

Cash inflows and outflows

The statement of cash flows shows all the cash flowing in and out of your company during the accounting period. For example, your company may have cash inflows from selling products, borrowing, and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

The statement of cash flows is organized into three sections: cash flows from operating, financing and investing activities. Ideally, a company will generate enough cash from operations to cover its expenses. If not, it may need to borrow money or sell stock to survive.

Ratios and trends

The most successful businesses continually monitor ratios and trends revealed in their financial statements. Contact us if you need help interpreting your financial results.

© 2019

Employers grapple with many competing goals when it comes to compensation and pay raises. You probably want to reward specific employees who’ve made contributions to the organization and try to ensure your salaries are in line with what competitors are paying. But you also need to maintain a level of equity with other workers’ compensation. And, of course, you’ve got to keep payroll costs in line. It’s not easy to find a sensible balance.

Develop criteria

Money can be a sensitive subject for many people. Employees often view their salaries and raises not just as a means of providing for themselves and their families, but as an indication of how the organization values their contributions. So, the ways in which you decide on, and communicate, raises and other salary adjustments can affect employee morale and performance.

If you haven’t already, consider developing a standard set of criteria to determine pay raises and apply it to employees within each department or group. Among the benefits of having set criteria is that it reduces the perception of, and opportunity for, bias. Even a perception of partiality can dampen employee morale. Over time, it even may harm retention and performance.

And by standardizing the criteria you use to determine raises, you’re less likely to wind up with significant variations in compensation between different groups of employees. You’re no doubt familiar with the controversies regarding pay inequities between genders and other distinctions. Standardized criteria can help ensure that, as much as possible, compensation fairly reflects performance.

Focus on goals

Of course, these criteria shouldn’t prevent or inhibit you from recognizing employees who’ve met or exceeded their performance objectives. Tying raises to such goals is fine if the objectives themselves are clearly communicated, measurable and challenging — but within reach.

Goals should be both specific to an employee’s actions and tied to broader organizational goals. For instance, a goal set for a warehouse manager could be to increase the percentage of on-time deliveries.

Some organizations use raises to recognize seniority. They say experience often has some impact on the contribution an employee makes. In addition, using raises as one tool to reduce turnover often makes sense, given the expense of attracting new employees.

Other organizations maintain that longevity doesn’t automatically correlate with the value an individual brings. In addition, regularly rewarding employees’ tenure can lead to bloated salaries. Many organizations look at both longevity and performance when determining raises.

Keep searching

Naturally, all policies on raises and compensation should comply with applicable laws and regulations. This is yet one more issue to grapple with when searching for that often-elusive balance. Please contact us for assistance.

© 2019