A&A Focus recap: A&A risk, not-for-profit update, SQMS, and ERC

Increased risks and challenges that auditors face, and new, risk-based quality control standards dominated the AICPA’s April installment of the A&A Focus Series broadcast.

Hosted by Carl Mayes, CPA, vice president–Audit and Accounting Quality at the AICPA, and Bob Durak, CPA, CGMA, director–Audit and Accounting Technical Services at the AICPA, the event featured expert speakers covering issues that included emerging risks for audit firms, challenges in the not-for-profit sector, the new quality management standards, and the accounting and auditing implications of the employee retention credit (ERC). The series is free for AICPA members and earns one CPE hour.

AICPA members can watch an on-demand recording of the broadcast on the series’ webpage.

2024 risks for A&A practices

Sarah Ference, CPA, risk control director at CNA Insurance in Chicago, provided a broad look at the risks facing audit and assurance practices. Ference, who previously worked as an auditor, emphasized that while audit-related claims are lower in volume recently, they tend to be much more severe and costly to defend.

Ference highlighted certain industries and engagement types that pose heightened risks, such as public company audits, financial institutions, insurance companies, hedge funds, and any work involving financially distressed entities. Notably, Ference asserted that juries often have different expectations around fraud detection than the auditing standards require, leading to increased liability.

To mitigate these risks, Ference recommended that firms focus on thorough client continuance evaluations, clear and comprehensive engagement letters, meticulous documentation that “tells a story,” and timely communication with clients about issues and concerns.

She stressed the importance of robust risk assessment, saying, “If you never assess it, then you’re never going to know how to manage it.”

Not-for-profit industry update

Pete Ugo, CPA, a partner at Crowe in Indianapolis who leads the firm’s not-for-profit audit practice and chair of the AICPA’s Not-for-Profit Expert Panel, outlined several significant challenges facing not-for-profit organizations.

Ugo noted that inflation has squeezed not-for-profits from both the revenue and expense sides, with rising costs for employee compensation, benefits, and essential goods and services, while also potentially impacting donor contributions. The volatility in investment markets has also created unpredictability in investment returns, which many not-for-profits rely on to fund operations.

Beyond operational concerns, Ugo highlighted issues around revenue recognition, particularly the complexities of distinguishing between exchange transactions and contributions under FASB ASC Topic 606, Revenue From Contracts With Customers. He also mentioned the impacts of pandemic-related government relief programs, such as the expiration of ERCs, and the emergence of new risks, such as cybersecurity threats and debt covenant challenges.

Ugo emphasized the need for not-for-profit auditors to have a deep understanding of the unique complexities facing these organizations and to work closely with their clients to navigate the evolving landscape.

Journey to the quality management standards

Sherry Chesser, CPA, a partner at Landmark PLC in Little Rock, Ark., and a member of the AICPA Auditing Standards Board, provided an overview of the upcoming changes to quality management (QM) standards, which represent a shift from the previous quality control framework.

The new QM standards take a more risk-based approach, requiring firms to establish quality objectives, identify and assess quality risks, and design and implement responses to address those risks. While firms may be able to leverage some of their existing policies and procedures, Chesser said, they will need to thoughtfully evaluate their existing system of quality control to ensure it is tailored to their specific risks and circumstances as they transition to practicing under the QM standards.

Key areas of focus under the new standards include information and communication, as well as the appropriate allocation of resources, including technology and intellectual resources. Chesser encouraged firms to start developing their timeline for QM implementation, which must be in place by the December 2025 effective date.

She stressed the importance of involving staff at all levels in the QM process, as their insights can provide valuable perspectives on potential risks and areas for improvement. Chesser also highlighted the AICPA’s practice aid, free for AICPA members, which provides a comprehensive framework to assist firms in navigating the QM transition.

ERCs: What you need to know now

Mike Westervelt, CPA, principal for national assurance in the construction business of CLA, a firm in Charlotte, N.C., and chair of the AICPA’s Accounting and Review Services Committee, addressed the accounting and auditing considerations surrounding the ERC program.

Westervelt reminded viewers that the ERC was a government-sponsored initiative intended to help businesses retain employees during the COVID-19 pandemic, but its rapid implementation and lack of clear guidance led to complexities and potential abuse. As a result, the IRS halted new applications and is actively reviewing past claims, putting companies and their auditors in a precarious position.

For companies that have claimed the ERC, Westervelt encouraged a three-pronged approach: (1) Take ownership of the situation, (2) be proactive in addressing the issue, and (3) recognize that the solution may be straightforward but the implementation can be difficult. This may involve working with the service provider that helped file the ERC claim, consulting the company’s accountant, and potentially even negotiating a payment plan with the IRS if the company needs to return funds.

Auditors, in turn, must obtain sufficient appropriate audit evidence to evaluate the client’s compliance with ERC requirements, which can be challenging, given the ambiguity around factors like government shutdown orders and revenue reduction thresholds.

In other matters

The A&A Focus Series webcast also provided updates of other timely issues, such as:

• The release of the AICPA Business and Industry Economic Outlook Survey for the first quarter of 2024, which found cautious optimism, with 43% of executives expressing optimism about the U.S. economy, up from 24% the previous quarter. However, concerns remain around inflation, employee costs, and the availability of skilled personnel.
• Deloitte’s latest “CFO Signals 4Q 2023,” echoed these themes, with CFOs citing interest rates, inflation, and their impact on liquidity as top concerns that could constrain financial performance.
• The AICPA and the Center for Audit Quality outlined the key components of the March 2024 SEC rule on climate-related disclosures (Nos. 33-11275 and 34-99678), including a summary of the requirements and other key facts.
• FASB released Accounting Standards Update No. 2024-01, Compensation — Stock Compensation (Topic 718), which guides entities to determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of Topic 718.
• The Financial Accounting Foundation is seeking comments from the public on how well the Private Company Council performed and input on its effectiveness in achieving its mission. Stakeholders can access the request for comment webpage and can email written comments to PCCReview@f-a-f.org by May 31, 2024.

Looking ahead

The monthly A&A Focus Series will continue May 8. Planned topics include diving more deeply into current expected credit losses, leases, and commercial real estate issues. Mike Cheng, national practice partner at Frazier & Deeter; Tom Groskopf, CPA, assurance service line leader at Barnes Denning and technical director of the AICPA Center for Plain English Accounting; and Mike Valenza, CPA, a senior manager at KPMG, will address the latest on these topics. Further, Lindsey Oakley, CPA, national financial reporting partner at Forvis and a member of the AICPA Governmental Audit Quality Center, will join to provide an industry update.

Throughout 2024, the AICPA plans to leverage the A&A Focus Series as a vital channel to keep members apprised of new accounting, auditing, and reporting developments impacting their work across all industries and domains of practice. Members can also access archives of past sessions.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.