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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Andrew Tellijohn
March 2006

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Accounting

 

Stricter auditing rules
mean new scrutiny
for private firms

by Rick Ehrich  

A controller was once quoted as saying that an audit can be almost enjoyable with the right audit team. Then she repeated “almost.”

Audits of financial statements usually fall somewhere between car repairs and dental work on the “necessary-but-burdensome” meter for managers of private companies. The burden falls on those managers to provide all the required documentation while the necessity often comes from ownership needs, government regulations or external funding requirements.

On the positive side, audits provide an additional layer of accountability for owners and can help private companies discover ways of improving internal systems that result in greater efficiency and cost savings. An audit of financial statements can also provide valuable benchmarks for more effective strategic planning – perhaps including a future public offering or sale.

Of course, not all private companies are required to have their financial statements audited. It depends upon the type of ownership and debt and funding structures. Starting this year, however, new standards will hold private companies to some of the same reporting and internal control requirements as public companies.

Much of the responsibility for complying with these new standards falls squarely on the audit team, at least on the documentation side. They introduce a new methodology for considering misstatements caused by either company or auditor errors, and represent the most significant revisions to how auditors perform their jobs in the last 30 years.

Auditors will be required to have a greater understanding of a company’s internal controls and its overall control environment. That is, they will need to have a sufficient understanding of material business events that impact the financial statements. The auditors, as well as company management, will need to reach the conclusion that internal controls are effective – and that company employees are actually using them.

Whether or not your company or organization has experienced an audit, you should be aware that future auditing processes will require more detailed checklists and financial documentation and more walk-throughs of transactions with the audit team. From all perspectives, this will result in more work and higher audit fees. Let’s address these in more depth.

More detailed checklists
Accounting firms live by checklists. They are, and will continue to be, necessary to ensure completeness and consistency in audit procedures. In the past, auditors could ask a client to complete a checklist detailing procedures and related documentation.

This was required to assure that certain internal accounting controls were implemented and were operating effectively. This is no longer sufficient under the new audit standards.

If the audit team does not have sufficient documentation of, for example, how your company or organization reconciles its significant accounts and the specific procedures in place to resolve improperly processed transactions, then those procedures must be included in the checklist of requested information.

Auditors will need to be aware of industry trends. For example, if fuel prices are rising and they are auditing a transportation firm, they should be looking for higher fuel expenses. Additional documentation will be required to support the conclusions reached by the auditors.

If your audit team has used the same control environment documentation for the last three to five years, the new standards will require additional explanations for procedures performed at each annual audit.

More walk-throughs
Audit procedures will be expanded to include a walk-through of all significant transactions.

It will no longer be sufficient to take the client’s word on ethical behavior or the proper use of internal controls. Auditors will need to see it for themselves, which for many clients will mean significantly more “on-site” time observing, documenting and testing internal controls.

Auditors will also need to prove that the tests performed do link directly to the specific risks of misstatement they’ve identified for a client. For example, if there is a risk that the client will not capture all invoices on the year-end balance sheet, the tests must be designed to detect those possible errors. Prior requirements were much more general and non-specific.

Higher fees
For a small number of engagements where the auditors already customize their procedures for a particular client, the new standards may not increase audit time significantly. But for most audits, professional time and fees will go up.

Business owners should discuss this with their auditors before any work begins to ensure an understanding of the costs associated with the audit.

They should also choose an auditing firm that has experience with similar companies and knowledge of their industry. In this new environment, you don’t want to waste time and money training the auditor.

Aside from the extra time and effort, the progression of audit standards is not all bad. The worst-case scenario for any company would be that the auditor determines that a company’s financial statements cannot be audited, either because the proper documentation is not available or the documents do not back up the financials.

When this occurs, a company could face a number of serious consequences, ranging from an immediate loss of funding, regulatory sanctions, and loss of customers or vendors, to an immediate shutdown.

The best-case scenario is when the audit team assists a company in improving its internal controls. It was through an audit recommendation, for example, that a St. Paul-based wholesale bakery discovered an overpayment in taxes of more than $70,000. The refund more than paid for the cost of the year’s audit process.

Now that’s enjoyable.

contact Rick Ehrich is a CPA, principal, and the ERISA and audit niche leader for Olsen Thielen CPAs & Consultants in St. Paul: 651.481.1780; rehrich@olsen-thielen.com; www.olsen-thielen.com