Why single-audit demand is rising; an update on tax preparer legislation

The number of organizations needing single audits has risen dramatically in the past year. Why? Deetra Watson, CPA, CGMA, an accounting firm principal, explains some of the intricacies of single audits and why demand is increasing for such specialized services. Also, Ed Karl, CPA, CGMA, the AICPA’s vice president–Tax Policy & Advocacy, shares an update on the Taxpayer Protection and Preparer Proficiency Act.

What you’ll learn from this episode:

• An explanation of single audits.
• The amount of government economic relief that triggers a single audit and why more organizations are now subject to single audits.
• The competencies necessary to perform specialized audits and advice and resources for practitioners.
• Insight on a bill recently introduced in the House of Representatives related to tax preparer regulation.
• A summary of recent JofA coverage of the Restaurant Revitalization Fund and a survey seeking feedback on preliminary content proposed for the redesigned CPA Exam.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Pandemic-related economic relief dramatically increased the number of organizations receiving $750,000 or more in government funding. Because of that, more clients of CPA firms need single audits, some for the first time. On this episode of the Journal of Accountancy podcast, we’ll discuss the topic of single audits as well as other topics of interest to the finance world, after this brief sponsor message.

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Amato: This is Journal of Accountancy senior editor Neil Amato. Coming up next is my conversation on single audits with Deetra Watson. Deetra is a CPA who holds the CGMA designation and is a principal at the accounting firm Blackman & Sloop.

Deetra, welcome to the podcast. In the wake of all the government pandemic relief that has been granted in the past 18 months, it appears that many organizations will need single audits for the first time. How do you know if you need a single audit? And if you need one, what’s the best process for finding the right auditor for your situation?

Deetra Watson: Thanks, Neil, for having me today. You ask a very good question. In the wake of all the funding that has gone on in the past 18 months, there are a lot of organizations that are having to receive a single audit for the very first time, some that are not even aware of the requirement when receiving federal funds. The bottom line that they want to start with is to look at the funding and see how much they’ve actually expended in their fiscal year. You’re actually subject to a single audit if you spend $750,000 or more of federal financial assistance within your fiscal year. This does include the COVID-19 assistance, either in grants or loans, and in addition to all your other non-COVID-19 federal financial assistance that you’ve expended in your fiscal year.

Amato: You mentioned that amount and kind of what counts and what doesn’t toward that $750,000 threshold that triggers a single audit. Can you tell me some more about maybe the uncertainty of what programs count and what don’t?

Watson: Absolutely, and this has been something very challenging, not just for organizations but for auditors as well. Because there’s been so much funding that’s come out so quickly, and some of the guidelines were delayed in actually coming out to the public in understanding what counts and what does not count.

So, some of the more popular funding that we’ve seen out there or people have heard about mostly, there is some guidance already out there. The big one is the Paycheck Protection Program, or PPP funding. That is not subject to single audits. But your Economic Injury Disaster Loans — some people call it the EIDL loan — is subject to single audit. Some of your other bigger funding out there: The educational stabilization fund, or your Higher Education Emergency Relief Fund (HEERF) funding, that is applicable to single audit. The provider relief fund, which primarily relates to your healthcare organizations, that is also subject to single audit. And the coronavirus relief funds as well. So, you really just have to understand the types of funds you received to determine whether or not it is subject to single audits.

Amato: The increased number of clients needing single audit engagements means there are more opportunities out there for auditors. These are obviously very specialized engagements that require precise expertise. Can you talk about the competencies that are necessary to perform one of these audits?

Watson: Yes, at the competency level, now that auditors need to be able to perform these audits at this point in time, in many different rules and guidelines out there. I know the AICPA has put out studies on single audit in the past, and recommending that you do about 10 or fewer single audits that you really make sure you’re getting the necessary continuing education to be able to perform a single audit at the level that is required, to perform them in accordance with the federal regulation. And, it’s really just about getting that continuing education.

And also, this is a time where auditors cannot work in a silo. It is really good to have that connection with other audit firms, so that you can all talk and collaborate to make sure you’re understanding and interpreting the guidelines in the correct way. It’s all about understanding what’s out there, communicating with other auditors, and then what we in the public accounting profession are here to do, which is serve our clients, and being able to relay that back to our clients, so they have all the information they need to make sure they are in compliance.

Amato: For practitioners, what advice do you have to make sure these engagements are of the highest quality?

Watson: First of all, it’s kind of what I just stated, to make sure you are getting the continuing education, making sure you are reading everything you can about these funds. And a big thing for me and I know our firm is being a part of the AICPA’s Governmental Audit Quality Center (GAQC). Having a resource or having someone that’s out there that is going through the information together, so you can read it and put it in a format that’s easy to understand, is critical during these times. Having a resource and being able to go to frequently asked questions and being able to research to find out if your interpretation is correct, that is definitely key for any practitioner during these times.

Amato: This has been a great conversation. Anything to add in closing?

Watson: I would just say in closing that this is a great opportunity for auditors out there to learn, to increase their knowledge base, but also, it’s a great time to provide great service to our clients. Our clients are really looking to us to be able to interpret the guidelines of what they’re seeing regarding the funds, to make sure they’re doing what they’re supposed to do with receiving the funding. It’s a lot out there, and a lot of work to be done, but it’s also a time where you have to understand what you’re doing and make sure you have those resources available.

Amato: Deetra, thank you for sharing your insight on this topic.

Watson: Thank you for having me.

Amato: Again, that was Deetra Watson with Blackman & Sloop. Next up is a conversation with Ed Karl, the AICPA’s vice president–Tax Policy & Advocacy. He’s sharing why tax preparer regulation could be part of a larger infrastructure bill in Washington. Ed Karl is a CPA who holds the CGMA designation. He is a colleague of mine. He’s a repeat guest on this podcast. Ed, tell us some more about this bill, House Bill 4184, the Taxpayer Protection and Preparer Proficiency Act. Why is the AICPA interested and backing this?

Ed Karl: Yeah, thanks for asking about that, Neil, it’s something we’ve been working on for quite a while. Many of our members may recall that the IRS had a program back 10 years ago to regulate paid income tax return preparers, and a court case came along, the Loving decision, which was upheld under appeal, and that Loving decision said the IRS did not have the authority to regulate, and so that program was basically put on the shelf because the IRS couldn’t do it. And frankly, it’s something that the AICPA has supported for a while, the idea of improved compliance levels by paid income tax return preparers and enhanced ethical conduct. So think about that: We have our own enforceable statement on standards for tax services, enforceable tax ethical conduct that we expect of our members. So, an ethical tax environment is something that’s always been important to us.

Amato: The AICPA sent a letter to congressional leaders back on May 11. We’re recording the afternoon of July 6. What’s changed in that time span regarding this topic?

Karl: As I mentioned, we’ve been working on this since 2011, frankly, even several years before that. 2011 was when the program came live and then about a year later, the court case stopped it. So, what’s changed is that this House bill was actually introduced. It’s a bipartisan bill. Jimmy Panetta, D-Calif., and Tom Rice, R-S.C. — Tom Rice also a CPA — introduced this bill. Several months ago, we indicated our interest in a bill that would have various measures included in it. So we were not interested in the IRS being given broad authority to regulate without having parameters around it. So this bill includes the parameters that we support, and that’s why we actually support this bill and why it took several months for this bill to be introduced. And, frankly, this is just work in the House. For this to be able to likely move, there needs to be a companion bill in the Senate.

Amato: What is the legislative timeline for this bill as you see it, or can you predict at this point, now that it has been introduced in the House of Representatives?

Karl: Well, predicting or guessing is about the best we can do in Washington. We never know for sure. A bill that is, it’s important but it’s narrow in scope, is likely not to be enacted on its own. It would have to be part of some larger tax measure. However, this year we’re likely to see a larger tax measure. So, the listeners may be familiar with the discussion in Washington surrounding infrastructure legislation. Quite political, but there seems to be a bipartisan interest in some measure of infrastructure legislation. The Biden administration is also interested in a broader tax bill that would partly pay for this infrastructure legislation, but it would also take a broader view of what infrastructure means, so the bipartisan approach would look at infrastructure as traditional bridges and roads. The Biden administration would like to look at infrastructure from a broader perspective, maybe even human infrastructure, and trying to enable the laws to allow workers to be enhanced in the way they would be paid and enhanced with the way they would be hired.

So, what I’m getting at is broader tax legislation. And the likelihood is that if a tax preparer bill moves this year, it would have to be part of a larger tax bill, and that larger tax bill this year could possibly be infrastructure legislation.

Amato: Anything you’d like to add in closing as we continue in the summer with monitoring the progress of this bill?

Karl: So, two things. One is the likelihood of infrastructure legislation would be more enhanced toward the end of the year. So we’re looking at, probably if it passes, would be Q4 this year. So, not this summer, but more likely toward the end of the year. The preparer regulation legislation could move through the summer but then would have to be attached to the bigger infrastructure bill later this year.

There’s one piece of the bill we’ve been talking about, which was missing and which we’re interested in and will be pursuing a separate piece of legislation to get it attached to the bigger package. And that deals with a marketplace confusion proposal that was part of the original preparer regulation program 10 years ago, but it never got implemented because of this court case that interceded. It’s not part of the bill that was introduced a couple of weeks ago, but it’s something still important to us. It would require anyone who is a registered tax return preparer under the IRS’s program. If they advertise that they are this registered tax return preparer, they would have to have a tagline on their advertisement explaining that the IRS doesn’t endorse any particular tax return preparer. We heard from many of our members 10 years ago when this program first started, before the court case interceded, that tax return preparers who were advertising said they were IRS-authorized. And that just was misleading to the public. The IRS doesn’t really authorize any particular return preparer. They don’t endorse any particular return preparer. So this is basically a truth-in-advertising proposal, if you will, to help the public.

Amato: Ed, thank you so much for being on again, and thanks for the explanation of this topic.

Karl: It’s important, and something we’ll be hearing a lot more about this year, so thanks for asking about it.

Amato: In other news, the U.S. Small Business Administration’s Restaurant Revitalization Fund has closed after awarding $28.6 billion in funding to more than 100,000 eligible entities. And the AICPA has released a survey seeking feedback on preliminary content proposed for the redesigned CPA Exam. Our writers Jeff Drew and Ken Tysiac have more on those stories, and you can find the links in our show notes for this episode or by visiting journalofaccountancy.com. Thanks for listening to the Journal of Accountancy podcast. I’ll add in one request to you, the listener. If you like what you’re hearing, please subscribe, share, and leave us a rating or review. Thanks again.