Audit Archives - CironeFriedberg, LLP

401(k) Plans: Know the Rules

August 29, 2022 by Sandra Callanan CPA

If you offer a 401(k) plan — in any of its various flavors — to your employees, everyone should know the tax rules that govern them. Although the details can get very technical, you can learn the basics. To start with, many companies find that since a 401(k) plan is much prized by employees, it’s a good idea to not only offer one but also to match contributions. You even get encouragement to do so: Employer contributions are deductible on the employer’s federal income tax return. However, for tax-favored status, a plan must be operated in accordance with applicable rules. To qualify for the tax benefits, your plan must contain language that meets certain requirements of the tax law and be operated in accordance with the plan’s provisions. Employers make matching contributions based on employees’ elective deferrals. There are several types of 401(k) plans available to employers:

Traditional 401(k): This allows eligible employees to make pretax elective deferrals through payroll deductions. Any employer contributions can be subject to a vesting schedule. The employer must perform annual tests, known as the Actual Deferral Percentage and the Actual Contribution Percentage tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
Safe harbor 401(k): This must provide for employer contributions that are fully vested when made. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
SIMPLE 401(k) plans: This was created so that small businesses could have an effective, cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests, and the employer is required to make employer contributions that are fully vested.

A plan that allows for vesting may require completion of a specific number of years of service for vesting. For instance, a plan may require an employee to complete two years for a 20% vested interest in employer contributions and additional years of service for increases in the vested percentage. If a traditional plan is top-heavy — has significant participation from owners or officers — the employer may be required to make minimum contributions on behalf of certain employees. The rules relating to the determination of whether a plan is top-heavy are complex. A plan is considered top-heavy when 60% or more of the assets in the plan are owned by key employees:

Anyone who owns 5% or more of the company sponsoring the plan.
Anyone who owns 1% or more of the company sponsoring the plan and who also earns more than $150,000 annually from the company.
Anyone who holds an officer position at the company sponsoring the plan and earns more than $185,000 from the company.

These limits may be adjusted from year to year. If you own more than one business, these rules apply to anyone who has an ownership stake in any of the related companies. The point here is you don’t want most of the plan money at the top of the company belonging to the key company leaders instead of the rest of the employee base. This is also applicable to the family of owners, so that any owners’ spouses and other immediate family members will count as key employees if they participate in the plan. The IRS requires top-heavy tests to make sure that no plan disproportionately benefits the key employees of your company. If top-heavy, you can bring your plan back into balance by making contributions to all regular employees. You also could add a safe harbor to the plan, for instance, offering a 3% automatic contribution regardless of whether employees want to contribute. This ensures that the plan treats all employees equitably, and this will satisfy any contribution requirements of the IRS. You report elective deferrals on the participant’s W-2 Form. Though the amounts aren’t treated as current income for federal tax purposes, they are included as wages subject to Social Security or FICA, Medicare and federal unemployment taxes. This is just a summary of a complex series of rules. Be sure to work closely with qualified professionals to make sure you are in full compliance at all times.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Financial Transparency and Nonprofit Audits

June 10, 2022 by Sandra Callanan CPA

You want to demonstrate your commitment to financial transparency. By publishing an independent audit report on your website and providing the report to anyone who requests it, you’ll be assuring your donors and the public that your financial practices meet accepted standards — for handling contributions, for instance.

Many public and private foundations — and funders — require charitable nonprofits to submit audited financial statements to be eligible for funding. Budgets and cash-flow statements predict your nonprofit organization’s financial future, but you need a review of each year’s annual income and expenses in your financial statement, which tells the story of your organization’s past.

Preparing and interpreting your financial statements is a special area of expertise. An audit involves a formal study of your policies and systems for managing your finances, a review of financial statements and commentary about the accuracy of those statements.

Such charity watchdogs as CharityWatch, Charities Review Council and Charity Navigator take into consideration whether a charitable organization has an annual independent audit when they do their ratings. To exercise their due diligence, your top management committee or board of directors may want the assurance offered by an independent audit that the financial statements are free of material misstatements.

In an audit, the CPA expresses an opinion as to the accuracy and completeness of financial statements, based upon test procedures and an evaluation of your internal controls. Analytical procedures coupled with inquiries of management allow the CPA to attest that no material modifications are needed for the financial statements to be in accordance with generally accepted accounting principles (GAAP) — the common set of accounting principles, standards and procedures used to present financial statements.

Getting Started

A first step, then, is to decide who in the organization will oversee the audit process. Typically, the audit is overseen by an audit committee or the Executive Committee. That committee should oversee the selection of the audit firm.

In selecting the audit firm, it makes sense to choose one that has expertise and knowledge in performing an audit for charitable organizations. Before meeting with the candidates, develop goals and objectives to help narrow your search.

Auditors should present the results of their audit to management and the audit committee/executive committee. This presentation should include any recommendations to improve internal controls, which should be followed by a corrective action plan by management to correct any weaknesses in the systems of internal control.

For more information on this topic, read our article, Does Your Nonprofit Need an Independent Audit?

When You Need an Audit for Financing

May 8, 2022 by Sandra Callanan CPA

Many business owners think that as long as their companies remain private, they don’t have to get a financial statement audit. However, when it’s time to get financing from a bank, they may find that an audit is recommended, and even required. The following insight into audits may help you better understand why they can be helpful for you and your business.

First, according to a study cited in “Entrepreneur” magazine, companies that provide banks with audited financial statements generally can expect lower interest rates than companies that don’t have their statements audited. Of course, not all banks require an audit. A review provides less assurance, but for some banks that may be enough, and it’s a much less expensive proposition.

Most experts agree that it’s not sufficient to simply rely on your banker’s interpretation of your QuickBooks files. The Bplans entrepreneurial site (run by Palo Alto Software) notes that some level of assurance is a good idea, and quite possibly a requirement at any lending institution. Ask if the bank requires or recommends an audit — it may be worth the thousands of dollars you’ll have to spend. A bigger business may already have audited statements that were done for other purposes, but smaller businesses may not. Your CironeFriedberg CPA can advise you if and when a review may be sufficient for your particular situation.

Getting Venture Capital Funding

A common question is whether there’s a need for audited statements when you’re seeking cash from venture capital firms. The answer is generally yes. A lot may depend on what stage the company is in. An early-stage company may not need an audit or review, because the venture capital firms are more concerned with potential. However, if it’s a more established company, and it’s relying on its history as an important basis for seeking funding, then it may have to show audited statements.

No matter what the VC firm requires upfront, however, you can expect that it will require audits going forward as part of the terms of its investment.

Similarly, if you’re at a later stage in your company’s life — for example, seeking to be acquired as part of a retirement plan — you may need to have audited financial statements to show any potential suitors, even if you’re privately held.

Do you need an audit or a review in your situation? Give us a call, and we’ll go over your situation and financing needs, and help you make the right decision.

Does Your Nonprofit Need an Independent Audit?

March 5, 2022 by Sandra Callanan CPA

The Internal Revenue Service (IRS) doesn’t require nonprofits to have independent audits, but that doesn’t mean your nonprofit never needs an audit. Some federal, state and local government agencies require audits, as do some banks and foundations. For example, Connecticut requires an audit if gross revenues exceed $500,000. Generally, the requirements relate to the nonprofit’s size or spending.

When an Audit Is Required

An independent audit might be required in the following circumstance:

To respond to a request. A federal, state or local government requests a copy of your nonprofit’s audited financial statements.
To verify assistance. A nonprofit spends more than a certain about in federal or state financial assistance. Keep in mind that this amount includes funds received directly from the agency as well as funds that come through another entity (e.g., a donor-advised fund).
To solicit funds. A nonprofit is in a state that requires audits if you solicit funds by mail, phone or other means in their states, even if the organization isn’t located there. In states that require it, the audit must be submitted as part of the registration process.
To contract services. A nonprofit has a contract for services with federal, state or local government that requires an annual financial statement audit.
To apply for funds. A nonprofit receives or wants to apply for funding from a foundation or other entity that requires audited financial statements.

These requirements are straightforward. If your nonprofit falls into any of these categories, an independent audit is required.

When an Audit Is Beneficial

Sometimes, however, it is a good idea to have an audit even if one is not required. Better community relations and greater transparency can be compelling reasons to have an audit. Here are three ways an audit can be beneficial:

Demonstrates transparency. By eliminating the deduction for charitable deductions for taxpayers who don’t itemize their deductions, the Tax Cut and Jobs Act of 2017 (TCJA) has made obtaining funding more competitive. It has been estimated that nonprofit contributions may drop by $20 billion per year. This makes it even more important for your nonprofit to convince donors that their donations will be used to further the organization’s mission. Having an independent audit supports this argument by demonstrating your organization’s commitment to financial transparency to the public, the media and watchdog groups. An independent audit can support this argument.
Enhances internal controls. An independent audit can monitor your nonprofit’s internal controls and help prevent theft and embezzlement. Although these audits aren’t foolproof, they can spot vulnerabilities and risks that aren’t apparent on a day-to-day basis.
Increases accountability. As part of its fiduciary responsibilities, your nonprofit’s board of directors is responsible for overseeing its financials. Having an independent audit helps the board and the nonprofit’s executives be more accountable.

For some smaller nonprofits considering an independent audit that is not required, the cost of an audit may outweigh its benefits, however. These organizations should consider more cost-effective alternatives, such as a review, compilation or agreed-upon procedures. A review, in contrast, is a lower level of assurance on the reliability of the financial statements. It may be appropriate for some smaller nonprofits.

Another service is a compilation, where a certified public accountant takes information supplied by management of the organization and prepares financial statements, without offering any assurance. The differences between an audit, review and compilation are significant and warrant in depth discussion before deciding which route is right for your nonprofit.

Wondering Whether an Audit Can Benefit You?

January 24, 2022 by Sandra Callanan CPA

Constant, unwelcomed change and modern technological advances have driven demand for increased transparency. Businesses are required, and expected, to disclose more information about their taxes, financial records, operations and executive salaries. Although private companies are spared the intense scrutiny of professional auditors and are not required to provide an external review of their financial statements, business leaders should consider the advantages of having an external audit.

An External Audit Is Smart Business Your business should consider an audit for the following reasons:

Audits improve functioning of the business. Objective scrutiny of a business’s operations leads to creative improvements and controls, which result in better products and services and a fatter bottom line. Just as regular tune-ups improve an automobile engine’s functioning, the external audit achieves similar results by improving a company’s performance by reinforcing and strengthening what works and eliminating what’s slowing a business down. Internal controls are scrutinized to ensure that they’re achieving their goals and whether timetables and stakeholders’ interests and goals are being achieved.
All companies, regardless of size and industry, can benefit from an external audit. A common misconception is small companies don’t need to be audited. Auditors can identify and address potential problems that may be holding you back.
Audited financial statements are considered more reliable. Investing in an external audit is considered a proactive strategy that improves and enhances the image of the business in the public eye. It circumvents potential mistrust that comes when information is revealed after the fact. It also gives customers or clients (existing and potential) and investors a sense of security, knowing that your company’s financial statements have gone through the audit process.
The audit process encourages transparency. Financial statements that have been verified by an external auditor are considered more reliable in the business marketplace. External auditors are trained specifically to focus on tightening and improving business processes to reduce the amount of risk of misreporting financial data.
External auditors have no agenda other than the truth.
Audits foster a culture that encourages change and growth. Rather than view an external audit as a bureaucratic annoyance, managers ought to embrace the audit concept as a conduit to a stronger business, new systems and processes, all of which open the door to innovation.
Audits lead to better hiring decisions. A company’s employees (human capital) are as valuable as its products or services and business operations. After all, their expertise, motivation and attitude affect and define the company’s culture. A careful external audit evaluates every variable in a company’s machinery.

Do you want to know more about the advantages of an audit for your business, and what it would involve? Contact us.

What to Know About Audits and Financial Statements

December 16, 2021 by Sandra Callanan CPA

You will want to prepare your financial statements in accordance with an accounting framework that’s appropriate for your business. Most of the time, you’ll opt for a CPA to produce your financial statements. Getting an accountant’s blessing is especially useful when you are applying for more credit from a bank. Financial statements are intended to give you current information on your business’s financial standing so you can make more informed decisions. There are three levels of overview you can choose to take — compilation, review or audit — and what you select will have a lot to do with what your objective is.

The Compilation According to guidance from the American Institute of CPAs, a compilation is suitable for use by lenders and other outside parties who may appreciate the business’s association with a CPA. There is no assurance here, but the CPA will read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements. It may be appropriate when a company is seeking only relatively minor levels of financing and may have significant collateral.

The Review The next level is a review. According to the AICPA, the review is designed to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements. The CPA performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements and is intended to provide a user with a level of comfort on their accuracy. A review might be the right move for companies seeking larger levels of financing and have more complex credit needs.

The Audit The highest level of assurance is an audit. The CPA performs procedures to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement, according to the AICPA. The CPA is required to obtain an understanding of your business’s internal control and to assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures. An audit is an annual requirement for publicly held companies and may be advisable for other companies seeking high levels of finance and opening themselves to outside investors.

How often will you want your CPA to peruse your finances? Overviews can be done in any frequency that is useful to you and your business, or required by law: monthly, quarterly or annually. Some folks say that your financial statements are more than snapshots of your business and can be seen as resources to tell you where your risks and opportunities are. Financial statements can help you identify and solve potential problems before they compromise the health of your business. Be sure to keep in touch with your accountant to decide which financial services are right for your company.

401(k) Plans: Know the Rules

Financial Transparency and Nonprofit Audits

When You Need an Audit for Financing

Does Your Nonprofit Need an Independent Audit?

Wondering Whether an Audit Can Benefit You?

What to Know About Audits and Financial Statements

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