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The new requirements for in-kind gifts reporting for nonprofits

Nonprofits remain one of the most important aspects in the front lines of helping communities in need. During times of crisis, such as the COVID-19 pandemic, many may find themselves with an influx in donations and in-kind gifts. Remember to use the new reporting requirements outlined by the Financial Accounting Standards Board (FASB) in accounting standards update No. 2020-07 released in September 2020.

Check out what reporting changes must be made by nonprofits and when they should go into effect.

What is considered an in-kind gift?

When nonprofits receive non-financial gifts from donors, they are more than likely considered a in-kind gifts. The FASB Master Glossary defines these as gifts of nonfinancial assets or fixed assets (e.g.. buildings, land, equipment), the use of fixed assets or utilities, materials and supplies, unconditional promises of assets, and intangible assets and services.

In-kind gifts allow nonprofits to focus more on their mission and the communities they serve while building relationships with businesses and individuals who may choose to or need to contribute in a non-financial manner.

When will the reporting requirements go into effect?

According to the accounting standards update No. 2020-07 by the FASB, nonprofits must include the new reporting requirements on annual financial reports for fiscal years beginning after June 15, 2021. If your organization follows a nontraditional fiscal year, you may already be tracking in-kind gifts in more detail. If you follow the calendar year, your organization will need to implement new procedures for recording in-kind gifts in the new year.

What are the new reporting requirements?

Nonprofits are now, or will soon be, depending on their fiscal year, required to report in-kind gifts as a separate line item on the statement of activities. This should be separate from cash or other financial assets.

When recording in-kind gifts throughout the year, keep the following reporting needs in mind. If you’re tracking these correctly along the way, creating the updated financial reports should be less daunting.

Statement of Activities reporting requirements:

  • In-kind gifts as a separate line item and further broken down by category to show the type of non-financial assets.

Disclosures for in-kind gifts:

  • Nonprofits must disclose the following for each category type:
    • If the gifts were monetized or used during the reporting period and how they or the money was used.
    • The policies in place for monetizing in-kind gifts.
    • A description of any donor-imposed restrictions, if applicable.
    • How the nonprofit arrived at the valuation for the in-kind gifts received.
    • Principal (or most advantageous) market used to calculate the fair market valuations.

 

Other reminders for reporting in-kind gifts

In addition to the new requirements, nonprofit organizations should be mindful of generally accepted accounting practices for in-kind gifts. When receiving in-kind gifts, recognize them as income in the period they were pledged or committed to your organization, using fair market value at the time of the gift. This does not apply if there are certain stipulations that dictate how the contribution should be used or if it is part of a conditional transaction.

Nonprofits can also act as an agent if the donor specifies the in-kind gift has another beneficiary. This is because the donor hasn’t given up their “variance power.” If contributed services are donated, they only need to be recorded in financial statements if the service “creates or enhances non-financial assets” or the service “requires specialized skills provided by individuals with those skills that would typically need to be purchased if they were not previously donated.” Examples of these types of services include accounting, medical care, legal services, and construction work.

For clarification on in-kind gifts or assistance establishing a method for tracking and reporting these contributions, reach out to our team of knowledgeable professionals today.

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IRS releases W-2 reporting requirements for qualified leave in 2021

The IRS recently issued Notice 2021-53, providing guidance on reporting qualified leave and sick wages to employees. Qualified sick and leave wages are those that are defined by the Families First Coronavirus Response Act (FFCRA), which was amended by the COVID-Related Tax Relief Act of 2020 and the American Rescue Plan Act of 2021

How are wages reported?

According to the notice, the wages must be reported to employees with their W-2. Employers can choose to place the wages either on Form W-2, Box 14, or by providing documentation delivered with the Form W-2. The notice provides sample language employers may use if providing a separate statement.

The IRS also noted that self-employed individuals can determine what, if any, sick and family leave wages are qualified for tax credits. This is a follow-up to Notice 2020-54 released in 2020 regarding reporting of qualified sick and family leave wages paid in 2020.

What are qualified wages?

The FFCRA defines qualified wages as those paid for sick or family leave related to COVID-19.

Qualified wages can be paid to employees who are:

  1. Subject to state, local, or federal quarantine.
  2. Advised by a healthcare provider to self-quarantine.
  3. Experiencing COVID-19 symptoms and seeking a medical diagnosis.
  4. Caring for someone who is self-quarantining in accordance to bullets 1 and 2 above.
  5. Experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
  6. Caring for a child or dependent whose school or place of care is closed or unavailable related to COVID-19.

What are the limits on wages paid?

The FFCRA allows for full-time employees to be paid up to 80 hours (two weeks) worth of paid leave for the reasons mentioned above and for part-time employees to receive paid wages for up to two weeks equal to their normal weekly scheduled hours.

The paid leave is extended to equal up to 12 weeks of leave at their normally scheduled work period hours for those providing care because of COVID-related childcare and school closures.

Read more on the FFCRA requirements here, or contact our team of experts to discuss how to determine which leave hours are qualified and how to track them for Form W-2 reporting purposes.

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How nonprofits can help when disaster strikes

When disaster strikes a region, it often flips a switch in humanity, triggering their need to help in ways that everyday struggles don’t. We saw it with Hurricane Katrina years ago and again with Hurricane Ida this year. While nonprofits, businesses, and individuals alike wish to do something to help those affected, it’s important to be informed on how to best contribute, so they don’t fall victim to scams or tax problems down the road.

Temporarily shifting the nonprofit’s focus

If you’ve wondered whether you can temporarily shift your nonprofit’s focus to help with disaster relief, the answer is yes, but there are some limitations. When originally filing for tax-exempt status with the IRS, your organization provided the purpose or focus of your nonprofit.

Disaster relief efforts allow for some leeway in that purpose. However, you’ll want to protect your organization against accusations of violating the prohibition for private benefit in the tax code and disclose any change in focus on the annual Form 990 filing. Keep very thorough records that include:

  • Dates of assistance
  • Assistance provided
  • Purpose of the assistance
  • Name and address of recipients
  • How recipient(s) was selected for assistance
  • Who is selecting the individuals receiving assistance
  • Any personal relationships between members of your nonprofit and recipients.

If you take these precautions and consult with your trusted tax advisor beforehand, providing disaster relief instead of your core organizational focus can be achieved.

Struggling nonprofits and partners

Nonprofits and their partners are not immune to hard times and could be struggling through a natural disaster while they’re trying to provide assistance. If your nonprofit finds some of your partnership organizations have been affected, there is still a way to help.

For example, there are often preapproved grants at the local level that help charitable nonprofits provide disaster relief. As part of your disaster recovery planning, make sure to review what grant options are available in your area. Doing so will allow you to apply for assistance more quickly if disaster strikes.

Other considerations nonprofits should be aware of

When nonprofits and individuals jump into action, they can hit several roadblocks along the way. While collecting and donating food, clothing, and supplies seems like an easy way to help, it can be met with logistical problems. First, collections take time. Second, transportation of these items is often expensive and often waylaid by restrictions accessing affected areas until it’s safe to do so.

Monetary donations to nonprofit organizations with their boots already on the ground can be implemented more quickly, and they’re often more aware of exactly what the community they’re serving needs. Reach out to nonprofits in the area to discuss how your organization can help them help the community.

There may be times when those who are impacted cannot communicate with your nonprofit team due to language barriers. Having team members who speak secondary languages can help overcome those barriers to provide assistance for those community members. Another option would be contracting with a translating service that offers remote capabilities.

In addition, the IRS often announces disaster relief for individuals and businesses who may be impacted in the form of extending deadlines for tax filings. Keep an eye out for those announcements, should you need them.

How to advise individuals looking to help

There are several resources available to consumers and businesses alike to help them determine if the organization they’re donating to is legitimate. Typically, nonprofits working on disaster relief efforts are registered on the Center for Disaster Philanthropy. In addition, they can use the IRS Tax-Exempt Organization Search tool to confirm their donations are going to a registered nonprofit.

Our team of professionals is here to help you navigate how to shift to disaster relief efforts. Give us a call with any questions you have.

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Managing Partner’s Message – September 2021

Back to school!! Even though the Pandemic is not fully behind us the future is still ahead and we must all respond accordingly. For our children and those working to educate them it means a tenuous return to the classroom. For the past several months we have learned much of what the schools have been doing to ready their buildings and staff for being back in the classroom full time. With the increased need to add physical barriers, intense cleaning, and additional technology, our school clients have been working tirelessly to be as prepared as possible. Much of the funding for these necessities has been with Federal dollars, posing additional challenges to requirements for how the money should be spent. We have been helping our government, school, and nonprofit clients navigate the complexities of accounting for Federal funding. We are now entering the time when audits will determine compliance in accordance with the most up to date regulations. In preparation for the fiscal year 20-21 audit cycles, we once again held our annual school conference. Our Partners met virtually with our clients and shared important accounting and auditing updates to ensure there would be no “surprises” when audit season arrived. In a period of time when change is the normal and fear of the unknown is more prevalent than ever, we take seriously our role in making sure our clients are up to date. Our Partners have also been very busy over the past few months expanding their reach to other groups. Jeff Kowalczyk and Edmund Fosu-Laryea were both featured speakers at the PICPA annual school conference. Jeff also presented at PASBO and for the PICPA local government/nonprofit conferences. Our Partner Steve Kutsuflakis has been working closely with a Delaware private school where he serves on the Investment committee – helping the organization make critical decisions regarding funding and investment of funds while ensuring the school remains on track to meet the needs of their student population. I have been serving on the Covid grants review committee in conjunction with the Delaware Community Foundation. It is encouraging to witness all of the work being accomplished through mission driven individuals and organizations. It serves as a continued reminder that we will collectively move beyond the pandemic. We are busy planning two important events for this fall. Our 4th annual nonprofit story telling event is scheduled for November 2nd. We have a tremendous line-up for this popular event. We will be virtual once again this year but are hopeful that we will return in person in 2022. We have a diverse group of professionals lined up including representatives from Your Part-time Controller, Young, Conaway, Stargatt & Taylor, WSFS, AB Bernstein and Delaware Business Times. Our second event will be a webinar for the benefit of the local government community. We are working to put together an agenda that will bring current important information to this all-important sector of our communities. We are also excited to announce that after more than 40 years in the same location our offices are moving! We are scheduled to be in our new offices by the end of the year and we are looking forward to our new open space designed to be state of the art and welcoming. As we work on the design and amenities, we have our staff as well as our clients in mind. We will be sharing more as our move gets closer. In the meantime, we encourage our clients – existing and potential – to reach out to us. We are excited to be your trusted advisors and to do all that we can to assist as you navigate your financial obstacles.

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Risk management tasks to complete before returning to the workplace

In many parts of the country, nonprofit organizations are resuming normal operations and bringing staff back into the office. The logistical hurdles of making this happen aren’t the only thing nonprofits should focus on. Shifting how your organization operates is the best time to review potential risks for your organization. Below, we’ll discuss what this could look like for your nonprofit.

Why is reviewing policies and procedures important?

At the beginning of the pandemic, many businesses were shut down or forced to operate remotely as the world was faced with unprecedented wide-spread health concerns. Because of this, many nonprofits made adjustments on the fly so their employees and volunteers could continue to work, but at a remote location. What may have worked in a pinch may not be what’s best for your organization a year or more later.

In addition, all organizations, nonprofits included, are continuously evolving as new technology is launched or new problems emerge. New employees can find efficiencies that were potentially overlooked before because they’re coming with a fresh view. All of these are why regular review of policies, procedures, operations, and contracts is an important step for nonprofit organizations.

 

Items to consider during the nonprofit review:

Below are some tasks to get your started on your risk management review of your nonprofit’s operations. Consider this a starting point and add anything else that could be important to your organization.

  • Review contracts and agreements. Were they negotiated pre-pandemic or early pandemic? Consider if the contract works for your organizational needs and how you operate. If not, consider renegotiating. Some contracts to consider including fundraising agreements, property or equipment leases, and even insurance policies.
  • Check over vendors and partners. Look at donor management software, board management software, and outsourced duties like human resources, payroll, accounting, administration, marketing, and IT. If these are no longer meeting your needs, talk about changing the contract or searching for new partnerships.
  • Establish return to work policies with human resources. Have a plan in place whether you’re going to ask team members to work full-time from the office, split time between office and home, or allow more flexibility in either working remote as needed or even 100 percent of the time. Also consider what liabilities you are taking on bringing the team back into the office and what your safety protocols look like.
  • Keep an eye on relief funding requirements. If your nonprofit accepted relief funds, like many others have, make sure you are aware of any stipulations attached and whether your nonprofit organization has met those rules or not.
  • Inspect internal policies. Has your nonprofit allowed internal policies or organizational bylaws slide during the pandemic? The most common concerns across the industry have been conflicts of interest and segregation of duties. It’s possible the policies need a refresh to work for the organization, or employee training needs to be completed on existing policies. If your Board decides to start enforcing rules you may have been lax about over the last eighteen months, consider giving employees a grace period before they’re expected to fully adhere to the written rules.

Taking a risk management approach to these reviews can help your nonprofit organization by limiting potential fraud, lawsuits, and other risks with a monetary penalty. Our team is available to help you review any financial concerns or to conduct financial audits. Give us a call to discuss your needs today.

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Key Performance Indicators Nonprofit Leaders Should Track

By Jeffrey A. Kowalczyk, CPA, CFE, CGAP

Key performance indicators nonprofit leaders should track

At the beginning of the pandemic, many nonprofit organizations saw a sharp decline in donations and participation. Amidst the uncertainty, donations dropped by up to 17 percent in April, May, and June. While the downward trend eventually reversed, and donations ended the year two percent above 2019 numbers, the decline brought to light the need for nonprofits to maintain a close eye on key performance indicators (KPIs).

KPIs are metrics leaders have prioritized, are updated regularly, and serve two functions. First, they provide nonprofit leaders the opportunity to keep an eye on the health of the organization. Second, they can be used to help new and existing donors decide where their finite resources are best contributed. Donors want to support a cause they care about, but they also want to know how their funds are being used.

This article will explore which KPIs are essential to track and how to calculate them.

Track these KPI’s

There is a seemingly limitless supply of ratios you can track when it comes to finances; however, the following ratios are often indicators of nonprofit organization health and financial impact.

  • Current ratio: This ratio allows organizations to see their ability to pay short-term organizations. Experts recommend this is at least 1:1  for most organizations.
    • Calculation: current assets/current liabilities
  • Liquidity: Your liquidity ratio allows leaders to understand how flexible they can be in a crisis or if a new opportunity emerges. Much like personal budgeting, experts recommend having 3-6 months in cash reserves.
    • Calculation: cash on hand/average monthly expenses
  • Administrative expenses: Tracking the percent of funds that go towards administrative costs will allow you to decide if you’re spending too much on administrative costs. This should be below 20 percent.
    • Calculation: management, administrative, and general expenses/total expenses
  • Program efficiency: On the other side of administrative expenses, program efficiency lets leaders and donors know how much of their donation is going toward actual charitable programs. Experts recommend staying around 75 percent.
    • Calculation: program service expenses/total expenses
  • Fundraising expenses: Fundraising is necessary to bring donations into a nonprofit, but it should not cost more than the funds you bring in. There are two ways nonprofits generally report fundraising expenses:
    • 1. Fundraising costs unrelated to special fundraising events. This is reported on the statement of functional expenses as fundraising expenses. This figure is generally less than 20 cents per contribution dollar.
    • 2. Fundraising costs directly related to special fundraising events. This is reported as a contra-revenue and will often be higher than 20 percent of event revenues, depending on the nature of the event. Organizations should perform year-over-year comparisons of event revenues to event expenses to ensure events continue to serve the organization’s needs.
  • Recurring unrestricted revenues: Knowing the total amount of recurring income allows a nonprofit organization to better budget each year.
    • Total of any recurring income, not including one-time grants, gifts, and contributions.
  • Liabilities to assets: When used correctly, debt can be helpful. However, too much debt can eventually catch up with an organization and cause problems. Debt should not be more than 50 percent of your assets.
    • Calculation: total liabilities/total assets
  • Full-cost coverage: If the building your organization owns needs repairs or if any equipment needed replacing, is your organization prepared for the cost? Budgeting for the depreciation of the assets and payment of debt principal allows organizations to have cash on hand when equipment needs replaced.
    • Calculation: add in the cost of depreciation, payments to debt principal, and a surplus when calculating annual budgets.

Knowing you are on the right track

In addition to tracking the KPI’s for your nonprofit organization, having a benchmark can help leaders know they are on the right track. Start by monitoring against your previous years’ data. This will allow you to see when you are growing or need to work harder in a specific area. Second, identify three to five comparable nonprofit organizations and track your KPI’s against theirs regularly. Form 990 for nonprofit organizations is public record, which means you can pull their reports every year and compare your organization’s performance to theirs.

Key performance indicators are an excellent way for business leaders of all kinds, especially nonprofit organizations, to monitor the health of their organization and determine what areas need more focus. We can help your nonprofit establish, understand, and track its KPIs. Give us a call today!

Also read our blog article 

About Barbacane, Thornton &

Company LLP

Barbacane, Thornton & Company LLP is a highly regarded, regional
certified public accounting and consulting firm specializing in auditing and
tax services for government agencies and nonprofits. For more information about
Barbacane, Thornton & Company LLP, please call (302) 478-8940 or visit
btcpa.com

 

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What You Need to Know About the Employee Retention Credit

What You Need to Know About the Employee Retention Credit

By Steven Kutsuflakis CPA

What You Need to Know About the Employee Retention Credit                                    

The Employee Retention Credit (“ERC”) was created to help employers recover from the government mandated COVID-19 related shutdowns by allowing employers that pay qualified wages including health plan expenses to receive a refundable tax credit of up to $5,000 per employee in 2020 and $28,000 per employee in 2021. 

The ERC was originally enacted under the March 2020 Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and has undergone a series of revisions with the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“the Relief Act”) enacted in December 2020 and later the American Rescue Plan Act of 2021 (“the American Rescue Plan Act”) enacted in March 2021.

Who is Eligible?

Employers, including tax-exempt entities, are eligible for the credit if they were carrying on a trade or business during the calendar quarter for which the credit is determined and experience either:

  1. the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  2. a significant decline in gross receipts when compared to the same quarters in 2019. For the 2021 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019. For the 2020 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019.

The ERC is not available to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (governmental entity) with some exceptions.

Qualified Wages

The definition of qualified wages depends on number of employees during 2019. 

If an employer averaged more than 100 full-time employees during 2019 (2020 small eligible employers), qualified wages are generally those wages, including certain health care costs, paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an employer averaged 100 or fewer full-time employees during 2019 (2020 large eligible employers), qualified wages are those wages, including health care costs, paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.

The Relief Act provides that large eligible employers are eligible employers for which the average number of full-time employees during 2019 was greater than 500 (2021 large eligible employees).   The Relief Act provides that small eligible employers are eligible employers for which the average number of full-time employees during 2019 was not greater than 500 (2021 small eligible employers).

Exclusion from Qualified Wages

An employer that is eligible for the ERC can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.

Claiming the Credit

As mentioned earlier the ERC is up to $5,000 per employee in 2020 (50% of qualified wages up to $10,000 per employee for all quarters) and $28,000 per employee in 2021 (70% of qualified wages up to $10,000 per employee for each quarter in 2021). 

There are various rules related to claiming the ERC, including circumstances under which an eligible employer may request an advance payment of the ERC. 

Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

To claim the ERC, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers.  The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.

In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, considering any reduction for deposits in anticipation of the paid sick and family leave credit.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Guidance for claiming the ERC can be found at www.irs.gov under IRS Notices 2021-20 and 2021-23. 

If you have questions or would like additional assistance in determining whether this funding is available to your Organization, please contact Steven N. Kutsuflakis, CPA, Partner at skutsuflakis@btcpa.com.

About Barbacane, Thornton &

Company LLP

Barbacane, Thornton & Company LLP is a highly regarded, regional
certified public accounting and consulting firm specializing in auditing and
tax services for government agencies and nonprofits. For more information about
Barbacane, Thornton & Company LLP, please call (302) 478-8940 or visit
btcpa.com

 

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Managing Partner’s Message – February 2021

Pamela W. Baker CPA Managing Partner

Who does not love a snowy day? When we were growing up and in school a snow day meant staying home, sledding, hot cocoa, and no homework. Five years ago, it meant major disruption to our schedules and workflows and the resulting crush to make up for time lost at client offices to ensure that work got completed to meet deadlines. This time last year it meant that staff would be able to work from home with little disruption as long as they had thought ahead in order to obtain information from clients. This year our physical office actually closed on the snow day with everyone – even our administrative staff – working effectively at home. A snow day means little change to the majority of our staff who, since last March, have fine tuned the art of being able to work remotely. We still “see” one another – but in a virtual manner with the use of technology. The only difference today is a pretty scenery outside with no hassle to shovel ourselves out.

Just like snow days – so much has changed for everyone. Over the past nine months we have experienced numerous firsts:

  1. A remote work environment
  2. Interviewing potential new hires on Zoom
  3. On-boarding staff remotely
  4. Attending board meetings through technology
  5. Establishing work groups via Microsoft teams
  6. Implementing electronic signature capabilities
  7. Moving administrative functions into a paperless environment
  8. Hosting virtual happy hours
  9. Our first virtual holiday party
  10. Hosting virtual conferences for schools and nonprofits
  11. Presenting at conferences via technology

Some of our firsts have been exciting and new. Others were a little more challenging, but we are so fortunate to have a team of dedicated and highly skilled individuals who did not give in or give up. We also need to pause to give a huge shout out to our clients. Everyone knows that for many people during the pandemic there were lost jobs, decreased sales, unemployment. Those are all real issues. For our clients – the nonprofits and schools and governments – there was never a time when they were not needed more. We have been witness to the dedication and hard work of those that needed to step up. The nonprofit sector has experienced lost revenue from cancelled fundraisers while the need for services has significantly increased. Our public schools have struggled to protect faculty and children while continuing to provide learning opportunities. Our governments had to continue to work to provide public safety, utilities, roads, and other vital services. We are more grateful than ever to be a niche-based CPA firm specializing in services to these essential workers.

We are hopeful that the year ahead will be a time to put the pandemic in the rear-view mirror. We will be excited to enjoy some of the things that had to be modified because of Covid-19 (like dropping into a client office to say Hi). At the same time, we are energized at what we have learned about each other, our clients, and our firm and we are confident that we will be better for it.

Be on the lookout for more virtual training opportunities, continued great service, and a trusted advisor to be here to meet your needs.

Pamela W. Baker, CPA, CGFM

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Exciting News! BTCPA Recently Welcomed A New Partner

Exciting News! BTCPA Recently Welcomed A New Partner
Dependability, integrity, honesty, and commitment are a few of the words our team uses to describe Edmund. Though new as a Partner, Edmund has been with BTCPA since 2009 when he joined after graduating from Goldey-Beacom College with a BS in Accounting in 2008. Edmund continued on to gain a Master’s degree in Business Administration, and became CPA licensed in the State of Delaware.

Edmund quickly became an important team member on several audit engagements, but it was his aptitude to understand the complexities of public housing authorities that soon differentiated him. Over the past eleven years, Edmund has been instrumental in our staff training and mentoring programs. His leadership style is very welcoming to others and he demonstrates on a regular basis that he can balance the needs of clients, the firm, and the quality of our work.

Barbacane, Thornton & Company is a highly regarded, regional certified public accounting and consulting firm specializing in auditing and tax services for government agencies and nonprofits.

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How Artificial Intelligence (AI) Will Improve The Audit Process

 

How Artificial Intelligence (AI) Will Improve The Audit Process 

How artificial intelligence (AI) will improve the audit process was the subject of a recent article in the Journal of Accountancy.  Our team member, Alex Frank, CPA, offers this summary of the article, and what it means for the future of our business and the way we will be able to use AI to positively impact our clients:

Summary of Article

  • AI can and will remove the need for audit sampling
  • Using Optical character recognition (OCR) the AI can quickly scan large documents (such as contracts, leases, debt agreements) and extract relevant terms or phrases OR the AI can flag an area of the contract that needs further examination
  • At first the AI will make many mistakes that the auditor will have to correct manually, but the AI will learn from those mistakes and make them less and less until there are little to no errors made, thereby improving accuracy and efficiency
  • The AI can also ask the auditor “what should I look for” and the auditor can set specific parameters to look for
  • AI can sort transactions based on the transactions risk based on knowledge obtained from client information and firm risk analysis
    • Allows the auditor to focus professional skepticism on a specific area as opposed to trying to apply it to all areas at an equal level
  • The AI can increase interest in auditing samples
    • Sampling will have a reason for why transactions are selected as opposed to haphazard or random sampling that has no real risk included in the sampling process.
    • The AI will select high risk transactions as a sample and will help teach auditors what is considered high risk and allow them to focus more time to apply judgement to analyze the data in front of them
  • As the AI continues to learn, it will begin to identify patterns and therefore be able to flag any anomalies in the data to help focus the auditor’s attention to riskier areas
  • AI will eventually lead to validation of 100% of client transactions in an almost real time basis
  • Auditors will be able to implement their own AI into a client system
    • The AI will analyze every transaction and journal entry and determine if processes are followed and will flag any transactions made erroneously or incorrectly or transactions that are risky in nature.
    • The AI will flag these transactions to alert the auditor as to what transactions need to be review as the transaction happens
    • This will create a shift from auditing as of the balance sheet date (historical data) to a form of continuous assurance that will take place as the transactions occur

How AI can apply to BTCPA

  • BTCPA has begun to implement some forms of technology (data analytics) in several of our audit processes.
    • This is a good first step into the world of automating the audit process but is several steps away from AI
  • AI has potential to help optimize some of our more uniform clients
    • Single audits (nonprofits and governments)
      • Search for compliance across entire populations of data
    • Delaware Charter Schools all utilize the same chart of accounts and all data is maintained in the same accounting system
    • Pennsylvania School Districts
      • they all share a common chart of accounts, so AI could analyze them all the same way
    • Small government clients
      • Share a common chart of accounts and all have relatively similar operational costs and revenues
    • Challenges to navigate:
      • Finding an AI technology that we can use and is easier to use from a staff perspective
        • Or learning how to create one
      • Finding a best practice for how to implement the technology
      • Training the AI to fit our client base (time consuming)
      • How would the implementation be viewed from a peer review standpoint?

What the Future looks like – and Why we remain committed to learning more

  • Allows for 100% transaction review of clients
  • Can eliminate the “routine-ness” of the annual audit process and allow for increased risk analysis
    • The annual audit approach would be able to tailor an approach on a per client basis and create a more meaningful analysis of the client data. Therefore, giving the client a more meaningful report more tailored to their activity during the year.
  • AI will eliminate the need to scan through checks or GL detail for samples or transaction details.
    • Instead AI will be able to tell you exactly what transactions we are testing or need to be examined more closely without the monotony.
    • The samples will have MEANING now
    • No more haphazard or random sampling
  • Since AI will automate the sampling process we can spend more time examining data and applying professional skepticism to the most important areas of the engagement.
  • AI will be able to compile client data into a uniform “structure” which will allow us to easily drill down into data and easily determine:
    • Transaction amounts
      • Exact accounts effected by a JE with out having to scan through a GL
    • Quickly determine if the client has a lease we do not have documented
    • Determine if the client has incorrectly coded a revenue or expense
    • Determine where issues exist that would cause the clients equity to not agree to the PY FS
      • No more comparing the CY with the PY and figuring out the difference manually. The AI would be able to compare information it already has on the client, find any discrepancies on its own and notify the auditor what needs to be fixed
    • If AI is implemented at the client and operates in the background, we would essentially eliminate “traditional audits”
      • Audits would not be done after year end examining “old” data
      • Instead, audits would be conducted by the AI on a continuous basis
        • Whenever there is a transaction that the AI identifies as an issue, it will notify the auditors and they would be able to test the transactions as they occur
      • With the impending implementation of Blockchain, AI will become a reality sooner rather than later.
        • AI is already prevalent in our everyday live whether it be Siri, Alexa, or a YouTube recommended video, AI is ever growing and evolving.
      • AI will seem scary at first, but once implemented the AI will streamline almost every step of the audit process
      • The future of Auditing looks different than anything we have ever seen, but it also looks much more efficient, and will allow for a more tailored audit experience for our clients.

 

Barbacane, Thornton & Company is a highly regarded, regional certified public accounting and consulting firm specializing in auditing and tax services for government agencies and nonprofits.

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