DATELINE: May 12, 2009, Chicago
The AICPA’s Accounting and Review Services Committee (ARSC) has issued an exposure draft that would liberalize the independence standards applicable to CPAs performing review and compilation services for clients, including nonprofits. AICPA president and CEO Barry Melancon calls the revision the biggest change in reviews and compilations standards since the standards were first issued in 1978. Some state charitable solicitation statutes permit charities required to register with the state and file annual reports to file...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives Jack Siegel knows his way around this backwater...Best of all, he doesn't write like an accountant (in deference to my brothers and sisters a the bar, I avoid adding lawyers to the assessment). His guide is to the point, practical, and readable....Even though the subtitle of this worthy book is Avoiding Trouble While Doing Good, doing good well is the book's operative theme. Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour.
Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, has quickly become the go-to guide for nonprofit executives and advisors. So what are people saying about the Guide? In the October 2007 edition of the The Federal Lawyer, New York lawyer George W. Gowen and nonprofit authority, wrote:
Buy your copy today at Amazon.com, Barnes & Noble, or John Wiley (the publisher).
CPA reviews rather than full audit reports. Georgia, for example, requires a review for organizations with revenue of $500,000 or more, but not more than $1 million during either of the two preceding years. The following states also require reviews: (i) Maryland (gross income between $100,000 and $200,000); (ii) Massachusetts (revenue over $100,000 but not more than $500,000); (iii) Michigan (public support between $100,000 and $250,000); (iv) New York (revenues between $75,000 and $150,000); and (v) Pennsylvania (gross contributions between $50,000 and $125,000). There may be other states that require reviews and the thresholds for the states listed may have changed since we last reviewed state law. Therefore check state law rather than relying on our summary.
The AICPA views the change as a response to reality. Some of the services that CPA firms provide clients involve management services and internal control activities that are incompatible with the notion of independence because they place the CPA in the position of evaluating his own work. In the real world, small nonprofits do call on their CPAs to deliver these services because the organizations don’t have the resources to undertake the work themselves. According to the AICPA and its research, users of financial statements, particularly banks, like the fact that the CPA is involved in providing these services, apparently because the services strengthen the accounting system and internal controls.
The proposal in the exposure draft would permit a CPA to issue a review report on financial statements despite the fact that the CPA’s independence would otherwise be impaired through the performance of nonattest services. This is considered justifiable because ”these nonattest services help management prepare higher quality or more reliable financial statements.”
Under the old regime, an accountant could perform a compilation if he was not independent, but he had to disclose that fact. He could not, however, explain why he lacked independence. In the case of a review, an accountant could not issue a review report if he lacked independence.
Under the new regime, a CPA still would be precluded from performing review or compilation services if the CPA lacked independence because of a financial or relational interest. However, a CPA would be permitted to perform such services if the impairment to independence resulting from the performance of internal control services. The reporting requirements would be modified to require disclosure of the services provided.
On the positive side, the change would permit CPA’s to provide important services to smaller charities and still issue a review report. Many nonprofits already are reluctant to incur expenses that improve their accounting systems and internal controls. One-stop shopping might be a way to encourage smaller charities to use the CPA who "already is on site" when performing the review. Given the fact that the services must be disclosed, the regulator and other users can assess whether the services impair independence in a negative way. It is in everyone’s interest to have improved internal controls.
On the negative side, if the CPA begins to make more money from nonattest services than from the review services, the CPA has an economic incentive to protect the fees from the nonattest services. We have seen this problem with some compensation consultants who are asked by the board to develop compensation comparables for use in setting the executive director’s salary while at the same time being selected by the executive director to perform other work for the organization (like structuring and developing fringe benefit plans). The consultant can quickly develop divided loyalties, particularly when the work for the organization produces far higher fees than developing compensation comparables for the board.
We strongly oppose the liberalization of the independence requirement. Independence is the hallmark of the CPA's core work. We believe this change, although couched in terms of improving controls, is economically motivated. Smaller practitioners want a bigger share of the available work and this is one way to get it. The AICPA, by adopting a rule of convenience, is moving down a slippery slope. We see time and time again how exceptions in regulatory rules aimed at helping the small participant in a marketplace backfire. Bernard Madoff took advantage of one such exception to hide his scheme. There is one simple fact: If a regulation is warranted, it should apply to all. Users of CPA reviews are entitled to same protections against professional conflicts of interest as users of audits.
State regulators may want to take a position and submit comments before the expiration of the comment period on July 31, 2009.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good." Copyright 2009, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
