What Is An Audit?
When you own your own business it is important to enlist the help of an accountant in order to provide audit services. This is because it provides documentation that you are dealing with the financial aspect of your business in the correct way and can be used as evidence if any issues arise.
Some people don’t even know what audit services so they don’t bother using them. However, once you understand it is very easy and can be very beneficial to your company.
An audit is an independent check of a company’s financial statements which is carried out by an outside company who has nothing to do with the business. It ensures that the company being audited is presenting a true, fair and accurate view of its financial position.
Audit services can also review a company’s systems and analyse risks. This means that you will be made aware of any risks you may face so you can be prepared for them if they ever happen. It can also monitor how your systems are performing in order to ensure that you are getting the most out of what you are using.
When using audit services they can also perform tests to check financial information and systems. Again, this is in order to ensure that you are getting the most out of what you are using and that it is being beneficial to your company.
One of the most important parts of audit services is that once they have been completed, the accountant you are using can then advise you on areas you can improve in. For example, they may offer tips to make certain jobs easier and quicker which will save you time and money in the long run.
Audit services can also include an examination of whether you are or not complying with the relevant terms, laws and regulations. Although this sounds daunting it is very important and beneficial in the long run because it is better than doing something wrong and then getting penalised for it later.
With so many advantages of audit services it is not surprising that so many companies large or small hire an accountant to conduct them for their business. You can be reassured that the financial aspect of your business is in safe hands and you will be given quality advice. This will make the running of any business a lot smoother and easier.
At Wilkins Kennedy http://www.wilkinskennedy.com we provide a vast range of professional advisory services to the main, owner managed businesses. These include but are not limited to audit, accountancy and taxation advice.
Through A Microscope - Look Who’s Watching Now! (Part 2 of 3)
This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.
New Appraiser Penalty
The new regulations have started to have a unsettling effect on the appraisers, primarily because it raises many questions, including what kind of tax (gift and estate tax, income tax, or both) is affected, and who may be hit by penalties.
Further, PPA added the new Section 6695A to the Internal Revenue Code. Section 6695A includes new penalties, which are pertinent to appraisers of property for income and transfer tax purposes.
New penalties are applicable to appraisals provided in connection with returns or claims for refunds filed after August 17, 2006. Penalties are applied when the appraised value of property deviates from the correct value by certain set percentages as follows:
“Substantial Misvaluation” (income tax environment): 150 percent or more off of actual value.
“Gross Misvaluation” (income or transfer tax environment): 200 percent or more off of actual value in an income tax case or 40 percent or less in a transfer tax case.
Appraiser penalty applies for appraisals prepared for returns or submissions filed after the date of enactment.
Amount of Penalty
Rather than the aiding and abetting penalty under section 6701 (generally limited to $1,000), appraisers are now subject to a penalty equal to over $1,000 or 10 percent of the underpayment attributable to the valuation misstatement, up to a maximum of 125 percent of the appraisal preparation fee (gross income) received by the appraiser.
Levying new penalties requires certain criteria to be fulfilled, including:
1. Appraiser must prepare an appraisal only in connection with a return or a claim for a refund.
2. Appraiser needs to know that the appraisal will be used for the above mentioned purpose.
3. Appraisal must result in a substantial valuation misstatement or gross valuation misstatement.
Misvaluation thresholds have been lowered, and also apply to estate and gift tax appraisals.
A substantial valuation misstatement arises if the value is 150 percent of the correct value. For example, if an income tax charitable deduction of $90,000 is claimed by a tax payee, based on an appraisal of a painting that the payee donates to a museum, and the correct value of the painting is later determined to be only $30,000, penalties would be enacted upon the appraiser section 6695A. In the case of estate or gift tax, a substantial misstatement occurs if the value exceeds the correct value by 65 percent or more. For example, if an appraiser applies a 45 percent discount for a going business with an underlying value of $100,000 for a value of $55,000. If the IRS and court determine that the discount should have only been 15 percent, the correct value would be $85,000. The appraised value is only 64.7 percent (i.e., less than 65 percent) of the “correct” value. As a result, a 20 percent substantial-understatement penalty would be levied on the appraiser’s fee.
A gross valuation misstatement occurs if the value exceeds the correct value by 200 percent or more. In the case of gift or estate tax, a gross valuation misstatement occurs if the value used is 40 percent or more of the correct value.
As penalties under section 6695A are far more severe than prior to PPA, appraisers may be more conservative and might be forced to choose to restructure or raise their fees; although as described above, the more gross income an appraiser derives from an appraisal, the larger the potential penalty. For example, an appraiser prepares an appraisal which he knows will be used to support an income tax deduction for a charitable contribution of the subject property. He charges $6,000 as the appraisal preparation fee. He values the property at $1 million, resulting in an income tax benefit from the deduction of $300,000. The correct value is $600,000, resulting in an income tax benefit from the deduction of $180,000. The appraiser is subject to penalty in this case as the claimed value of $1 million is more than 150 percent of the correct value of $600,000 (i.e., $900,000). According to PPA guidelines, appraiser’s penalty in this case is $7,500 (125 percent of the $6,000 fee), because this is less than 10 percent of the tax underpayment (10 percent of 120,000, or $12,000).
The new penalties imposed under section 6695A create a non-uniform field for appraisers engaged by taxpayers and appraisers engaged by the IRS. Taxpayer appraisers are likely to be under the scanner of PPA and face penalties if their appraisals are later rejected. On the other hand, IRS appraisers face no similar penalties no matter how far their appraisals are from the values finally determined for tax purposes.
The penalty will not apply if the appraiser establishes to the satisfaction of the IRS that the value established in the appraisal was more likely than not the proper value. However, given the magnitude of the trigger point percentages, it would be unlikely to prove a “more likely than not” standard when the magnitude of difference is 40 percent or 200 percent.
Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.
Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.
Through A Microscope - Look Who’s Watching Now! (Part 3 of 3)
This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.
The Implications for Appraisers
Appraisers are now required to operate under quite a few important professional accountabilities. In varying federal tax matters, highly inaccurate appraisals would be subject to substantial monetary penalties, in some cases, forfeiting of 125 percent of the appraiser’s fee. Appraisers need to be aware of the declarations and announcements of the IRS disciplinary office, which has significantly enhanced standards of appraiser conduct, and to bar from appearing before the IRS those appraisers who fail to adhere to the set standards.
The investigative process can result in an appraiser being placed on the disqualification list. As such they can not reapply to the Office of Professional Responsibility for recertification to practice for five years. However, even if they are granted the authority to practice in five years, they are still unable to submit large appraisals to the IRS for another three years due to the qualified appraiser requirement of not being on the disqualified list for the three years prior to the appraisal being performed.
I believe that the appraisal industry, tax advisors and taxpayers should expect the regulatory regime over valuation work to continue to expand in the near future.
The Implication for Taxpayers
The new regulations have outcomes not only for the appraisers but for the taxpayers and their advisers as well those who hire appraisers in connection with planning transactions and filing returns.
The taxpayers and their advisors now need to put in extra effort to select an appraiser who is knowledgeable and experienced enough to steer clear of any violation of Section 6695A or Section 6701 or any other ethical norm. This is necessary because once an appraiser is disqualified all appraisals previously prepared by the appraiser (whether they gave rise to the disqualification or not) become disqualified in the eyes of the IRS. In other words, the appraiser’s work will not be accepted by the IRS as a result of the disqualification. Consequently, it becomes important for taxpayer to select an appraiser based on the quality of work performed, the background and experience of the appraiser so they do not run into problems at a later date. The cliche “you get what you pay for” seems to come to mind when I read through this provision.
Considerations for Survival
It is clear that appraisers need to be extra cautious and avoid all temptation to fall into the net of penalties cast by the PPA. In the light of this new law it is necessary to collect and organize all case information strictly based on facts. Appraisers must focus on arriving at their conclusions via a reasonable, objective path in accordance with the valuation standards. Other factors to consider and integrate into the valuation process include the following:
1. Don’t be an advocate for the client’s position.
2. Don’t value an entity or asset that is outside your area of expertise or authority.
3. Disclose all known, relevant facts in your report
4. Obtain a representation letter from your client on key issues/assumptions.
5. If you feel pressure or are being influenced to arrive at a preconceived value or result, do not take the engagement, or remove yourself from it.
6. Use an appropriate, extensive information gathering process.
One way to move a long way down the road of avoiding be captured in the net of penalties cast by PPA is to have an organized manner in which to collect information, data and facts surrounding the case. By using a detailed process you will gain the ability to create a fact specific and fact supported conclusion based specifically on the information related to the client and case at hand.
We use a secure, automated web-based interview questionnaire. This tool has an initial base of 105 questions in multiple categories. All questions are editable and additional questions may be added as needed. We can modify the questionnaire so it is specific to a client, to allow for unique questionnaires for each client.
We have found that the use of a questionnaire process such as this provides all of the initial information prior to the site tour and management interview to allow for a highly focused and more productive site tour and management interview process.
No matter what interview or questionnaire tools you decide to use by considering the following factors (which are included in the automated web-based interview questionnaire) you will be in a much better position to support your conclusions and in developing an appropriate value based on the specific facts in a case.
1. Basic information such as valuation date, purpose, intended use, valuation date and standard of value as well as a list of data requested for the valuation.
2. Entity information as to capital and legal structure such as, C-Corporation, S-Corporation, Partnership, Proprietorship, LLC, LLP, FLP.
3. Company history including,(a) product lines/services, (b) customers, (c) locations, (d) marketing activities, (e) distribution methods, (f) employees, (g) acquisitions, and (h) ownership.
Other categories include questions related to:
1. Prior transactions,
2. Products or services,
3. Customers,
4. Competition,
5. Suppliers,
6. Operations,
7. Intangibles,
8. Sales,
9. Marketing,
10. Management,
11. Industry,
12. Economy,
13. Financial information
14. Related party information
15. Company expectations and
16. Litigation & claims.
By focusing your data collection efforts in a detailed organized fashion and constructing your conclusions in a reasonable, objective fashion while satisfying the requirements of the established valuation standards, you will find that you will substantially reduce your exposure to the penalty provisions and the teeth of the Pension Protection Act.
Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.
Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.
Choosing An Internal Auditor
Recently hailed as the number one career for the year 2007, Internal Auditors are very well sought after and compensated accordingly. Because of stricter laws and enforcements due to corporate accounting scandals, like that of Enron, companies are offering top dollar compensation to accounting and finance professionals to provide internal audits. As an internal audit can be expensive, it is wise to allocate and ensure the availability of funds prior to hiring an internal auditor.
As most companies typically conduct annual or bi-annual reviews of processes and procedures, in order to remain compliant, and hire internal auditors to do so, there are times when a government agency will come to audit things themselves. These are stressful times and choosing the right Internal Auditor can save thousands in fine and penalties.
There are several factors that should be determined before choosing an Internal Auditor. First, you must know the role of an Internal Auditor to be able to match your compliance strategy with the proper education, experience and know-how to effectively get the job done. Acting as a go-between for government compliance offices and providing a service to your company, the internal auditor must be aware of the latest in compliance governance. Therefore, when you choose an internal auditor, it is your job, that is, you’re responsible for the auditor you choose, to make sure the credentials are relentlessly checked. Including the human resource department, the chief financial officer(s) as well as others who make high-level decisions for the company are good ideas, too.
In order to enhance internal controls and to remain compliant with government standards, experience has to be the number one criteria when choosing someone who will have access to all intellectual and physical property records as well as delicate financial information. When choosing an Internal Auditor, you should check references, licensing information, and review previous audit information available. The Institute of Internal Auditors is a professional organization aimed at providing guidance, certification and educational research to it’s over 130,000 members. This organization serves as a clearinghouse for checking licensing and references.
Secondly, keeping in mind your companies business needs, the internal auditor should specialize in the type of auditing you require. For example, if it is quality management auditing, then the internal auditor should have the capability to grasp and understand fully your company’s business, quality controls and standard operating procedures. This should be proven by a consistent track record of QMS audits. If it is risk management or financial analysis that is required, then, along with being bonded individually as well as within his/her own auditing company, the internal auditor must be completely impartial and objective. This ensures that, while no personal interest is involved, the end result will be to make recommendations, share downfalls and places where compliance must be tightened to ensure your organization will pass any type of auditing test.
As reported by NASDAQ, only half of all companies listed on the exchange actually have in place internal auditor functions. This is a dangerous lack of practice and could cost so much in fines and penalties, that an internal audit can look like the cost for a weekend drive to your mother’s house. Sarbanes-Oxley requires the Internal Audit function exists in companies that have $250,000 in assets or more. It would be a horrible thing if a Cynthia Cooper wanna-be blew your company apart simply because you didn’t hire an Internal Auditor.
Kevin Dark is the owner of http://inaudit.com, which is the ultimate source of information on internal auditing.
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