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NT - Footnote disclosures on audited financials


BulldogTom

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Sorry in advance for the long post.   This is for my CPA friends on the board.

My day job is controller for a partnership.  I am not a CPA, even though my degree is in accounting.  I keep up "generally" with the FASB and AICPA requirements for financial statements, but only as it pertains to posting transactions to stay in compliance with GAAP (revenue recognition, lease accounting, etc).   Otherwise, I don't really pay much attention to the reporting requirements.   That is what we pay the CPA firm 60K per year to do - right?

So anyways, when I came to work here, the books and records were a mess.   I went through the prior year financials and I found all kinds of errors that the CPA passed on the prior year, though they did mention the items in the management letter.  The 2018 management letter was about 9 pages long.   I came on board late Oct 2019 and by some miracle, I got the balance sheet back in balance and had a pretty solid handle on the Balance Sheet accounts.   The income statement was a little rough as to the accounts used to post the expenses, but the most important ones were pretty well dialed in.  In January 2020 I revamped the entire accounting scheme and reporting, and now I have a pretty solid set of books for the company.   Divisional Accounting, back up schedules for all the balance sheet accounts, proper monthly accruals, labor that ties out to the 941s, Monthly bank recs, daily cash transactional posting, etc.

When we went through the 2019 audit with our CPA firm, they included 4 items in the management letter - 1) SOP's not up to date (OK, that is true, I did not have them at the audit, but I do now) 2) They want separate cash accounts for the various divisions, which ownership will not do 3) They want us to implement purchase orders, which ownership does not want, and 4) The controller does not know how to draft complete financial statements including footnote disclosures.   

Number 4 is correct.   I don't do the footnotes enough (ever!) to be good at it.   I have always had the CPA firm draft them.   We discuss the things they want to know, I give them the info, and ta-da! they show up in my financial statement.  Now the owner wants me to learn how to do the footnotes.   He wants a clean management letter.   I told him that I would need to learn how to do it.   

Is there a "Footnotes for Dummies" book out there that I can get my hands on so that I can write the footnote disclosures for this jerkwad CPA firm?   I need to be an expert by 12/31/20.  Otherwise I will be reduced to copying and pasting the prior year footnotes, changing the dates and crossing my fingers.

Thanks for reading.

Tom
Modesto, CA

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I'm also not a CPA and haven't had to learn footnotes. (My MBA is in finance, but I was only one accounting course short of a double major in accounting. My best instructor told me to major in accounting but to never tell anyone or I'd end up doing all the grunt work!)

I do know that CCH has great textbooks. Also, webinars. And, they purchased CPELink a few years ago, so all the CCH CPELink education now benefits from the CCH inhouse experts/CPAs/lawyers as well as their stable of national speakers/writers.

I would think AICPA would have great resources, too.

Good luck. They are lucky to have you. Compute the CPA firm's hourly amount on their $60K per year ($750/hour?) and apply it to your 2,080 or more annual hours -- and ask for a raise! 

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GAAP, partnership, audited financials.  Knowing the specific industry may also be helpful if there are specific guides for it.

Fwiw, I use only the guides from PPC (Practitioner Publishing Co) through Thomson Reuters. If looking at its products, I'd start with the guide called "Preparing Financial Statements" that goes through each major item on each statement and has a chapter on disclosures that includes summary and comprehensive checklists of required disclosures, either in the statements themselves or in the notes. The appendix to that chapter also has some illustrative notes.  PPC also has a "Trends" volume that I believe is also included with this particular publication that has complete financials submitted by practitioners that includes the notes. The index to that guide allows the user to look up examples of individual notes by subject also.

PPC guides are the only ones I've ever used, and I'm sure other publishers of reference materials will have something along similar lines, including WK/CCH, and the AICPA. 

PPC non-subscription products have a 30-day satisfaction guarantee. Those on recurring subscription have a different cancellation policy.

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Don’t quote me on this, the AICPA or our state’s society prohibits non- CPA (licensed) on preparing financial statement to present to third parties and worst prepare notes.  I believe this applies to when compilations and audits are required, I remember in the past sneaky clients would say, can you send the bank our companies financial statements on your letterhead, here is our QB backup, they are already done.

Read this:  https://www.accountingweb.com/aa/standards/new-financial-statement-service-a-gift-to-cpas-and-clients

Maybe they think you are a CPA

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5 hours ago, ILLMAS said:

Don’t quote me on this, the AICPA or our state’s society prohibits non- CPA (licensed) on preparing financial statement to present to third parties and worst prepare notes.

Controllers are allowed to compile a set of financial statements for management's internal purposes, and is typically part of the job requirement to do so.

To be clear, the statements Tom asked about are not being issued directly by him to any third parties.  Company management would be handing them over to the company's outside CPA that has been hired to audit them.  The outside CPA firm is the party that is "issuing"  the audit report as part of the complete set of financial statements by doing a lot of work that gives reasonable assurance that the monetary amount and other disclosures fairly represents the position and results of operations of the company and are not materially misleading to the reader.

Except for very large clients, I really wouldn't expect anyone other than the CPA firm, or in-house CPA or CMA, to write the notes to the financial statements, especially with the complexity of today's reporting requirements. Sounds too much like someone is passing the buck here, and yet the CPA firm will still be required to go through its disclosure checklist to verify that everything is adequately disclosed, and if something is missing, they'll still have to address it in communication with management to have it corrected.

Tom, I agree with PapaJoe that you can start with updating from last year.  Basically, that is what the CPA firms do to update from the prior year's statement, and then add or modify as needed.  The problem with the CPA asking you to write them is that the auditing firm expects you to know what disclosures are required, and exactly what information on those subjects must be included, either in the financials themselves or in the notes.

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Everything I send outside of the organization (banks, insurance companies, etc.) is labeled "Unaudited".  I have a good idea of what I am and am not allowed to do in my position in the company.   I don't sign on the bank accounts (especially payroll) because I do our internal audits and bank recs.   I don't make any assurances that the work I have done can be relied upon for credit or lending decisions.   In fact I always state that the financial statements are not to be relied upon for any reason and I reserve the right to revise or correct them as needed without notification.   

Hey, maybe I could be a CPA.  I think this is what the 4 page engagement letter they send me every year says.😇

Tom
Modesto, CA

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Hi Tom -

You're quite lucky - you're getting good help from CPAs who are familiar.  The last time I had the unmitigated nerve to ask a GAAP question, a few outraged CPAs chastised me for entering the realm of public accounting.  You would think I touched the Ark of the Covenant from the old Indiana Jones movie.  But as to be expected, there were also some CPAs who were quite conciliatory.

I'm surprised that an expensive CPA firm would expect the local controller to furnish "Notes."  I'm sure they include "Summary of Significant Accounting Policies" and for a company your size this could be 15 pages or more.  I'm also convinced your owner is not in synch with normal relations between a company and its Attest professional, as their request is not normal.  I'm wondering if this condition is a trend of things to come but I doubt it.  I'm wondering if their position would be different if another CPA were hired - and if a professional standard places a requirement on a successor firm to disclose why the previous firm was disposed.

Judy, Margaret, and others are great help when it comes to resources and particulars, and I am not so I'll shut up.  Good luck Tom, and I see where Fresno St is starting to play again.

 

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1 hour ago, Corduroy Frog said:

You're quite lucky - you're getting good help from CPAs who are familiar.  The last time I had the unmitigated nerve to ask a GAAP question, a few outraged CPAs chastised me for entering the realm of public accounting.  You would think I touched the Ark of the Covenant from the old Indiana Jones movie.  But as to be expected, there were also some CPAs who were quite conciliatory.

The difference is that Tom asked for suggestions for books or resources to prepare the notes to be submitted to the CPA, and the CPA is the one being engaged and paid to be auditing and ultimately issuing the statements.  In your case, iirc, you were the one being engaged for pay and asking for direct help for work that was then going to be "issued" by the company's bookkeeper directly to the bank.  There is a difference.

 

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If you go back and follow the thread, it started with a simple question - Is tax depreciation a valid election under GAAP?  I would think this would be as simple as "yes" or "no" and that could have ended before the cannons came out and the discourse degenerated.

We all have minimal exposure to GAAP - I have about 12 entities which require a "book" presentation on the Balance Sheet and disclosure of differences on the M-1.  Most of the customers present bookkeeping and will not pay a couple thousand of dollars for a review.  Crossing the line is not well-defined until representations are made to a third party.

 

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56 minutes ago, schirallicpa said:

oh let be snarky for a minute, but don't CPA firms do anything any more?

 

Sarcasm alert: 🚨  I'd guess they'll do all of the analytics using printouts spewed by a computer, confirmations that will be assigned to the most recently hired junior staff person, about an inch of checklists to document their thoughts and prayers... and then do a cut & paste of an auditors' report template from a reference book onto the financials and notes that Tom supplied.  Hopefully the auditor will remember to change the name in the template from "XYZ Company" before it is issued.  😬 🙄     /endsarcasm 😄

My highest level at this point are review statements, and it IS a lot of work even without the all of the documenting of the work I do, but I don't have all the fancy programs and have designed all of my workpapers and analytics on my own in Excel that I update each year.  All of that flows directly to the financials, again of my own devising that I tweak each year as needed or required.  I'm scheduled for my 3-year peer review on that work between now and February too.   It truly is a lot of thought and work that goes into it, but all the clients see are the final resulting statements and notes that, to them, look much like they did 30+ years ago🧐🧠🧮

In almost 40 years of practice, I only remember one client that truly had a complete set of financials including a complete all of the required disclosures, and that was in 1986 for a 72-store regional chain of pharmacies with a huge bookkeeping dept headed up by a someone with multiple degrees and many letters after his name. The only question for the accounting firm was for us to recheck his MACRS depreciation because the law was new at that time.  I helped with that but was not involved in the overall audit at year-end. I did work on the separate audit of its pension plan though.  That company was ultimately swallowed up by one of the well known national chains.

 

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I have been working with various CPA firms for over 20 years.   Audited financials, reviewed financials, 401K audits and tax consulting and preparation for the owners of the companies I worked for (I would never prepare the tax returns for the company that I do the books for - I want that second set of eyes on my work).   The owners always care more about the tax strategies than they do about the review or the audits.   The only question the owners have about the financials is usually "did we meet our covenant ratios for the bank"?   I have seen good and bad and average firms, but it never fails that the owners always prefer the firms that cater to their tax needs.   

The current firm I am working with has our audit with one partner that I cannot stand, and she works with a junior accountant without any experience.   It is awful.   I tried to get them fired, but guess what?   The owners love the principal of the company who personally does their business and personal tax returns.   I am stuck.   So I have to live with this crappy auditor and her incompetent side kick for the Financial and 401K audits.   

That is just the way it goes when you work for the man.   You take his money to do his work, and you will like it, and you will say thank you.

Tom
Modesto, CA

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3 hours ago, jklcpa said:

have designed all of my workpapers and analytics on my own in Excel that I update each year.  All of that flows directly to the financials, again of my own devising that I tweak each year as needed or required

Ant that, my friends, is how Medlin Software was born in the late 70's early 80's.  Jerry had an accounting franchise, and wrote his own programs to save time (handle more clients).  He shared his programs with others in the same line of work, and so on and so on...

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1 minute ago, Catherine said:

  /endsarcasm

Me too.  I see footnotes most often in email, about privacy and such things.  Funny thing is, unless sent via some sort of scrambled secure email, the email must be considered public, so such notice is moot.  It is public knowledge email providers, such as gmail, scan the content (to serve ads / make money), and  "security/spam" vendors who do the same.

Sometimes I ask those who send messages with such footnotes if they are aware any message they want to cover by privacy regs (230?) must be send scrambled and secure... and more often than not, they had not considered sending email via normal channels is not secure or private.

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4 minutes ago, Catherine said:

The key question is, did Jerry learn his lesson?  Or not?

I am sure many lessons :)  We are fairly like minded, which made the working relationship both easy and hard.  The big lesson he shared with me is there is no such thing as an "accounting emergency".  I have tried to apply this to as many things as possible, the "not an emergency" principle.

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