When companies report financial results, they often rely on estimates made by management. Examples include the allowance for doubtful accounts, warranty obligations, costs of pending litigation, goodwill impairment and the fair values of acquired intangible assets. How do auditors evaluate whether amounts reported on the financial statements for these items seem reasonable?

Inquiry and testing

Accounting estimates may be based on subjective or objective information (or both) and involve a level of measurement uncertainty. External auditors evaluate accounting estimates as part of their standard audit procedures.

For instance, they may inquire about the underlying assumptions (or inputs) that were used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates in the past.

Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an independent specialist, such an appraiser or engineer, may be called in to estimate complex items.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to what happened later, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Gray area in accounting

Accounting estimates and fair value measurements involve a high degree of subjectivity and judgment and may be susceptible to misstatement. In today’s uncertain market conditions, predicting metrics that underlie accounting estimates can be particularly challenging. Therefore, they require more auditor focus today than in more-stable prior accounting periods. Be prepared to provide comprehensive documentation to support your estimates during the upcoming audit season.

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CPA firms do more than audits and tax returns. They can also help you with everyday accounting-related tasks, such as bookkeeping, budgeting, payroll and sales tax filings. Should your organization outsource its accounting needs? Here are five potential advantages to consider when evaluating this decision.

1. Professional advice. Outsourcing to an experienced CPA firm provides access to professional guidance related to tax, legal and financial matters. This makes it easier to remain compliant with rules and regulations and avoid costly mistakes due to a lack of knowledge or errors in interpreting complex regulations.

By engaging a third-party firm, there’s a second set of eyes on your company’s books. This can provide peace of mind that your books accurately reflect the performance of your business. Additionally, a CPA can help streamline your accounting processes and help record complex transactions correctly.

2. Scalability. As your financial situation evolves, you can dial up (or down) the services provided by your CPA. For example, a start-up that outsources its accounting needs wouldn’t need to worry about outgrowing its bookkeeper over time — or training that individual to take on more advanced accounting and tax needs. Likewise, if you embark on a major financial project — such as a launching a new product, building a new factory or merging with a strategic buyer — your CPA has the expertise on-hand to help you achieve the best possible outcome from a financial and tax perspective.

Outsourcing can also be a viable temporary solution if you unexpectedly lose your CFO. This can provide breathing room while you search for a qualified replacement in today’s tight labor market.

3. Cost savings. Outsourcing can save you money on payroll taxes and insurance costs associated with hiring an in-house accountant. Further, CPAs enjoy economies of scale regarding software usage and purchases, so they likely can provide accounting services cheaper than your firm can by working alone or relying on independent service providers for each task.

4. Efficiency. When you transfer accounting functions to your CPA, your management team has more time for core marketing, product development and other activities. It also frees up resources for higher-value tasks that can increase cash flow and optimize efficiency within the organization, such as negotiating with prospects or building deeper relationships with existing clients.

5. Enhanced confidence with stakeholders. A CPA firm’s involvement can instill confidence in lenders and investors if you intend to borrow money or solicit investment capital. It shows that your firm is committed to maintaining accurate business records and has access to the expertise needed to address complex issues.

Contact us if you’re considering outsourcing your daily accounting tasks, either permanently or temporarily. We can tailor a cost-effective service plan that works for your current and future business needs.

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Almost 40 years after its launch, QuickBooks® remains the leading accounting software program for small and medium-sized businesses. If you decide to use QuickBooks for your bookkeeping needs, you may have questions about implementation and using it to run your operations. Here are answers to some basic frequently asked questions (FAQs) to help you get started.

What is QuickBooks?

It’s a robust accounting software that businesses can use to manage their accounting. Businesses use QuickBooks for many critical accounting tasks, such as recording expenses, creating invoices, tracking sales, producing reports, administering payroll and maximizing tax deductions.

Is QuickBooks easy to use?

Even for those unfamiliar with accounting software, QuickBooks is easy to use. It includes step-by-step instructions to help users begin using the software and guidance to help get the most out of it.

Setup time varies depending on your organization’s size, complexity and maturity. However, once setup is completed, QuickBooks may offer a scalable solution that can streamline your accounting processes and support your business at every stage of its development.

Are there different versions of QuickBooks?

There are versions for new businesses, established small and medium-sized businesses, and freelancers. QuickBooks also provides dedicated solutions for certain industry niches, including churches, construction, legal, nonprofits, restaurants and retail.

How do I access QuickBooks?

It’s available online or by purchasing off-the-shelf desktop software. The online version requires a minimal monthly fee, whereas the desktop version involves a larger annual fee. There’s also a mobile app that’s available for both iOS and Android devices.

Does QuickBooks provide user support?

QuickBooks’ website offers customer support. Users can find answers to common questions and troubleshoot problems with an advisor on the site. There are also online tutorials and user guides. If you’re unable to find answers on the website, however, we can provide answers — or arrange an in-depth training session for your staff.

Can my accountant help me use QuickBooks?

This software isn’t a substitute for your CPA, rather it can facilitate the working relationship between in-house and external accountants. With QuickBooks, we’ll have direct online access to your organization’s books. Plus, we can send requests for information and documents through the platform. Contact us with any additional questions you have about QuickBooks and other accounting software solutions.

For years, there was talk of converging U.S. Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting Standards (IFRS). While the formal convergence project lost steam about a decade ago, Financial Accounting Standards Board (FASB) Chair Richard Jones assured stakeholders at a recent Financial Accounting Foundation meeting that convergence discussions are still regularly taking place behind the scenes.

Working together

Multinational companies have routinely asked for converged solutions for U.S. and international accounting rules. They often complain that it’s expensive to implement two sets of rules. Plus, it’s difficult to compare companies that follow different accounting standards, and convergence would improve comparability globally. The FASB’s website says, “More comparable standards have the potential to reduce costs for both users and preparers of financial statements and make worldwide capital markets more efficient.”

Most countries around the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting regulators to use global accounting standards.

In 2007, the Securities and Exchange Commission (SEC) allowed foreign companies to report under IFRS without reconciliation to U.S. GAAP. A year later, the SEC floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies. Then the financial crisis hit, and U.S. interest in IFRS waned.

In 2012, the SEC released a much-awaited report on IFRS in the United States. However, the report described the challenges of adopting IFRS, rather than making recommendations on whether international accounting standards should be used for domestic companies.

Current projects

A decade later, informal meetings continue between U.S. and international accounting rulemaking bodies. FASB Chair Jones and his counterpart on the International Accounting Standards Board (IASB) meet quarterly to discuss ways to improve the quality of accounting standards used around the world and reduce differences among those standards.

Jones provided two specific examples of convergence projects currently in the works: rate regulation and government grants. The IASB proposed Exposure Draft No. 2021-1, Regulatory Assets and Regulatory Liabilities, last year to replace International Financial Reporting Standard (IFRS) 14, Regulatory Deferral Accounts. Meanwhile, the FASB published Invitation-to-Comment (ITC) No. 2022-002, Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles, in June 2022. The FASB is currently considering comment letters it received on the ITC.

Minimizing differences, maximizing value

While there might never be a one-size-fits-all global financial reporting solution, many businesses operate in more than one country. So, it’s beneficial for the standard-setting bodies to align the rules as much as possible. Doing so improves comparability and lowers compliance costs. Contact us for help implementing the appropriate standards based on where you do business.

Timely, accurate financial information is essential to running a successful business. There are a number of accounting methods you can use to record and track your business’s financial performance. Here’s an overview of cash, tax and accrual basis accounting to help you choose a method that’s appropriate for your situation.

Cash basis

Often startups and sole proprietorships default to the cash method of accounting because it’s simple and provides an immediate picture of available funds. This may suffice for small businesses with uncomplicated financial affairs.

Under cash-basis accounting, you record transactions only when money changes hands. While this record keeping is easy, it can be challenging to get an accurate picture of your business’s financial situation. This method also isn’t suitable for tax purposes.

Telltale signs that a company is using cash-basis accounting can be found on the balance sheet: The company won’t report any accrual-basis items, such as accounts receivable, prepaid assets, accounts payable or deferred expenses.

Tax basis

Another financial reporting option is to use the same accounting method for book and tax purposes. Under tax-basis accounting, you only record transactions when they relate to tax.

This method can be helpful for companies that want to minimize their tax liability. It can also be beneficial if your business doesn’t have complex financial affairs and you don’t need up-to-date information about your financial situation.

Accrual basis

As your business grows and has more sophisticated financial reporting needs, you may decide to transition to the accrual method of accounting. Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) must use accrual-basis accounting. GAAP is considered by many to be the “gold standard” in financial reporting. Most lenders and investors prefer statements prepared using this method because it’s the most reliable for long-term financial planning and decision-making purposes.

Under accrual-basis accounting, revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (not necessarily when they’re paid). This methodology matches revenue to the corresponding expenses in the proper period. Compared to the cash and tax methods, the accrual method helps you more accurately evaluate growth and profit margins over time and against competitors.

Using the accrual method also can help you manage cash flow. For example, with more timely financial data, you can negotiate payment terms with suppliers, plan for significant expenses and forecast future cash needs.

What’s right for your business?

Choosing the right accounting method for your business depends on your financial needs and accounting skills. Some businesses use a hybrid approach incorporating elements from two or more methods. The method you’ve used in the past may not be appropriate for your current situation. Contact us to help you find the optimal approach.

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