Global Corporate Ethical Behavior Improves, Challenges Remain

More than half (52.4%) of C-suite and other executives say global corporate ethical behavior has improved since the enactment of the Sarbanes-Oxley Act in July 2002, according to a recent Deloitte poll. Yet only 41.3% of executives say their organizations’ global ethics cultures are strong.

“As we’ve seen for decades, no organization is immune to unethical behavior,” says Don Fancher, partner at New York-based Deloitte. “But, the field of ethics compliance is evolving, as professionals’ skillsets, technologies to help hone and monitor programs, and multi-jurisdictional regulator coordination all improve. Now is a great time for global organizations to take a hard look at modernizing their ethical compliance programs – particularly for those relying heavily on employees to report misconduct.”

Less than one-third (32.5%) of executives polled are highly confident their organizations’ employees will report unethical behavior. Executives say the biggest challenges to employees complying with global ethics programs include inconsistency of clear, concise and frequent ethics program communications and training for all employees (28.5%); lacking incentives and repercussions around ethical and unethical behavior, respectively (16%); varied ethical postures of third parties with whom employees regularly interact (14.8%); and, differing ethical standards for various employee groups (12.5%).

“Whether they need to monitor internal, external or both aspects of culture risk, we see leading companies leverage technology to modernize their compliance programs,” says Carey Oven, Deloitte partner. “Some use cognitive solutions to identify anomalous employee behaviors. Others use advanced analytics to identify third-party patterns. The learnings from culture risk detection systems can help enhance the information leadership teams use to make decisions around ethics compliance policies and procedures.”

Questions to ask of your global ethics program include:

  • Do all leaders support the program? Strong ethics programs are organization-wide with ongoing, full C-suite and board attention, as opposed to being managed by the general counsel or chief compliance officer alone.
  • Is the whistleblower hotline or speak-up line evolving? The level, frequency and type of reports via whistleblower communication channels can be telling. Testing can help discern reasonable levels of reporting and false positives, so that uncharacteristic reports are quickly identified and investigated.
  • Are employees surveyed to gauge ethics culture? By surveying employees about ethical standards and behaviors on an annual basis – as well as in exit interviews – organizations can make better informed updates to standards language, employee training and communications.
  • Is third-party due diligence conducted annually at minimum? Personnel changes, financial strain, and other factors can change cultures quickly.

Six Risk Management Mistakes CPA Firms Make

Managing CPA liability risk exposures is a complex process, and it’s easy to underestimate the potential for risk along the way.

The following six mistakes can be avoided by being aware and taking the right steps, says Tim Huggins, who is manager of underwriting operations of CAMICO.

  1. Not discussing questions about the insurance application with your underwriter or agent. Whether it’s for a new or renewal policy, the better the job you do with the application, the better your chances for avoiding mistakes and problems. Take time to review the questions and determine what information and data you will need for it. State information accurately. Applications are not opportunities to market or embellish your firm’s profile. Misstatements may result in a higher premium or even the rescission of a policy based on wrong information.
  2. Not having appropriate policy limits for your firm profile. Excessively high limits of insurance offered at bargain prices are red flags. High limits will often put a bigger bulls eye on your firm and potentially lengthen the claims process. However, you also need to carry enough limit to be able to protect yourself in the event of a bad claim, or to fight a frivolous claim. A specialized underwriter, agent or account executive can discuss your firm’s specific risk exposures, policy limits and coverage options.
  3. Admitting liability, assuming damages, voluntarily making any payments or incurring claims expenses. These are all actions a CPA firm must avoid without the prior written consent of the insurance company. Such actions will likely violate policy conditions, which may result in a denial of coverage. Policyholders should not take action without first receiving guidance from a risk adviser with the insurance company. Avoid agreements that include “hold harmless” or indemnification provisions that are one sided and not in the firm’s favor.
  4. Not reporting a potential claim as early as possible. The sooner claims and potential claims are reported, an insurer can more effectively achieve an early resolution. Early reporting will also help assure coverage for the potential claim. Some insurers encourage early reporting by reducing the deductible for any potential claim reported before a claim is made. Further, if it is determined that it is appropriate to retain legal counsel to assist with a pre-claim situation, some insurers will absorb the legal expenses, help policyholders achieve a resolution with the client, prepare a tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide subpoena and other services if the need arises. CPAs are often so busy they don’t recognize or acknowledge a potential claim as it is developing. This can be particularly devastating when the damages claimed are significant and are not covered because of late reporting.
  5. Not utilizing the insurance program’s advisory, loss prevention and risk management services. The best way to avoid a claim is to manage risks that lead to claims. Some basic risk management tools – such as client screening, engagement letters and follow-up documentation – are crucial in managing potentially major problems into minor problems. The more tools and resources an insurance program provides for policyholders, the better those policyholders will be at avoiding or minimizing problems and disputes. A good insurance program will also advise you on how to utilize its resources to help your firm improve its practices.
  6. “Dabbling” in high-risk work without doing enough to stay proficient at it. Claims data show high loss ratios for services that comprise less than 15% of a firm’s work. By the same token, loss ratios are low for services that comprise 65% or more of a firm’s work. Also, part of the client screening process includes making sure an engagement is a good fit for the firm’s expertise.

Research: Women Underrepresented in Top Accounting Jobs

Accounting firms often rank highly for their gender equality efforts but new research suggests that women are substantially underrepresented in higher positions.

Women make up just 17% of audit partners of U.S. audit clients, according to the new report, and in major U.S. metropolitan areas like San Jose, Calif., and Washington, D.C., the number is closer to 10%.

The analysis, from researchers at Bentley University, University of Colorado Denver and Northeastern University, was enabled by a rule from the PCAOB that requires accounting firms to disclose the name of the partner in charge of each public company audit.

The Big 4 firms all report having more than 40% female employees but the new data reveals that in these firms only 19% of audit partners are women. PwC has the highest representation of women audit partners (22%) and KPMG the lowest among the Big 4 (15.3%). At non-Big 4 audit firms, the representation of women as partners is even lower, at 15%, the new research found.

The research also found:

  • In states that voted for Republican presidential candidates in the last four elections, a mere 14% of audit partners are female.
  • In states that voted for Democratic candidates in the last four presidential elections, more than 20% of audit partners are female.
  • Within major metropolitan areas, female audit partners are most common in Minneapolis (32%), Los Angeles (24.1%), Boston (22.5%) and New York (21.7%).
  • Female audit partners are least common in San Jose, Calif., (9.7%), Washington, D.C. (10.9%), Atlanta (11.6%) and Philadelphia (12.2%).

While the current representation of women at the partner level is underwhelming, some accounting firms have made noticeable progress in promoting qualified female talent, the study said. In 2015, Deloitte named its first female CEO, Cathy Engelbert, and in 2016, PwC’s newly inducted audit partner class was 30% female.

Forbes: AI, Machine Learning Will Complement Accountants, Not Replace Them

Robots are not going to replace all human accountants or bookkeepers – at least not anytime soon.

So says Bernard Marr, an author, consultant and specialist in Big Data, who writes for Forbes magazine.

Marr contends that many professionals are starting to fear that technology will make their jobs obsolete, but fear not. “The profession is going to become more interesting as repetitive tasks shift to machines. There will be changes, but those changes won’t completely eliminate the need for human accountants, they will just alter their contributions,” Marr wrote in a July 7 article.

He describes machine learning as the leading edge of artificial intelligence (AI). Machines can learn by using algorithms to interpret data to predict outcomes and learn from successes and failures. As machines take over the more mundane, repetitive and time-consuming accounting tasks, accountants and bookkeepers will be able to devote more time to analyze and interpret the data and help clients by making recommendations.

Some of the possibilities for accountants, working with machines as their new colleagues:

  • Auditing of expense submissions – Machines can learn a company’s expense policy, read receipts and audit expense claims to ensure compliance and only identify and forward questionable claims to humans.
  • Risk assessment – Machine learning can pull data from every project a company had ever completed to compare it to a proposed project.
  • Analytics calculation – Machines can learn to provide information on revenue for a certain product in a certain quarter, or growth in a particular division of the company over a period of years.
  • Siri-type interface for business finance – A conversational app called Pegg, which works with Slack, a messaging app, can create invoices and respond to questions about revenues and expenses.
  • Automated invoice categorization – Accounting software firm Xero is deploying a machine learning automation system that will be able to learn over time how to categorize invoices.
  • Bank reconciliation – Machines can learn how to completely automate bank reconciliations.

“As accounting firms and departments begin to rely more heavily on machines to do the heavy lifting of calculating, reconciliations and responding to inquiries from other team members and clients about balances and verifying info, accountants and bookkeepers will be able to deliver more value to their clients and handle more clients than ever before,” Marr writes. “It is high time for every accountant to reflect on their job, identify the opportunities machine learning could offer to them, and focus less on the tasks that can be automated and more on those inherently human aspects of their jobs.”

CFOs Advised to Fire Auditors Early

A study says firing an auditor “doubles the odds of a restatement and more than quadruple[s] the odds of a material weakness over the next two years,” CFO magazine recently reported.

CFOs considering firing their company’s independent auditors should do so before the end of their fiscal second quarter, an author of a new study of auditor dismissals advises.

If a company announces the dismissal of its auditor after the second quarter, it risks being “lumped in with the bad apples,” that want to end the relationship to cover up “nefarious” doings, Jeff Burks told the magazine. Burks is an associate professor of accountancy at Notre Dame’s Mendoza College of Business.

“Investors have a good idea that firms tend to sign up their auditors early in the year,” he says. “So if you’re changing auditors later in the year, that’s a pretty good sign you’ve changed your mind.” That message often results in questions such as, “What prompted you to change your mind? You knew what the auditors fee was going to be, so what’s likely is that you were prompted by some kind of conflict with the auditor,” Burks adds.

Auditors, who must maintain confidentiality, don’t talk about clients or even former clients, so an assumption may be made that the problem lies with the company’s financial reporting.

“Firms that dismiss auditors after the second fiscal quarter have markedly higher rates of future restatements, material weaknesses, and delistings compared with firms that dismiss auditors shortly after filing the prior year’s 10-K,” according to the unpublished paper, “Auditor Dismissals: Opaque Disclosures and the Light of Timing.”

For the study, the authors culled data from Audit Analytics, a research firm, to identify 16,096 auditor dismissals announced between 2000 and 2013. They studied dismissals falling within fiscal years 2001-2012 that matched data from Compustat, the Center for Research in Security Prices, and the Securities and Exchange Commission’s Edgar database, leaving 3,976 dismissals.

Citing earlier studies by other researchers, the paper says that when it’s the auditors who quit, it’s a clear sign of accounting woes or elevated audit risk at the company. The reason? Auditors “typically have little incentive to drop healthy, low-risk clients.”

Four Myths About Millennial Business Owners

A study by Bill.com shows that accounting firm leaders often hold misguided beliefs about Millennial business executives or owners, who are starting to make the final decisions about accounting firm hiring and firing.

The 2017 Millennial Business Owner-Accounting Firm Survey polled more than 1,000 business owners to determine what these young professionals require from their accounting firms. Each of the respondents is responsible for the accounting firm relationship.

With the data from this survey, Bill.com explodes common myths:

Myth No. 1: Millennials are too young and don’t generate enough business revenue to be accounting clients.

Millennials are generally considered to be born from the mid-1980s to the mid-2000s. However, some researchers place the birth year at 1977. This means the oldest Millennials can be 40, old enough to serve as business leaders.

Almost one-third of the millennial business owners polled lead companies with $1.1 million to more than $25 million in revenue each year (compared to 38% of respondents of all ages). “These numbers represent two advantages for accounting firms,” Bill.com reports. “First, there are Millennial-led businesses that need and can afford accounting services. Second, the figures illustrate the potential for long-term impacts via partnerships, referrals, and future ventures.”

Myth No. 2: There’s no need to diversify beyond tax services.

While Millennials select taxes as the No. 1 accounting firm service, they want a different blend of services than previous generations.

The survey says, for example, that 54% seek bookkeeping services, compared with 34% of those aged 40 to 55 and 30% for those 56 and older. Nearly a quarter want technology training and recommendations, 20% want invoicing and 22% use bill payment services. Also, 52% say they want strategic insight and guidance from their accountants.

Myth No. 3: Clients want hourly billing.

Rethink about hourly billing if your firm wants Millennial clients since they believe that non-hourly arrangements are familiar, the study says. They rate monthly flat rates (44%) and fixed fees per project (35%) over hourly billing (21%).

Myth No. 4: Technology is a “nice to have,” not a “need to have.”

The right accounting technology – “in the cloud and on the go,” according to Bill.com – makes a big difference to Millennials selecting an accounting firm.

The survey says 82% require paperless accounting services, 56% want firms with cloud-based accounting technologies and 33% opt for digital payments. Also, 64% chose email as their primary communications tool for accountants, reflecting acceptance for working with virtual accounting firms.

“Accommodating Millennial business owners and decision-makers can future-proof your firm. After all, the demand for these preferences will only increase as more Millennials enter the workforce. By anticipating and creating practices that suit their preferences, an accounting firm can create the ideal set of services and benefits to generate a competitive edge and long-term, profitable results,” Bill.com says.

IPA INSIDER: June 2017 News

Listed below are the Top 10 most-read stories on the INSIDE Public Accounting blog for the month of June.

  1. Settlement Reached in Andersen Tax Trademark Dispute in California
  2. Kucera Named AAM’s 2017 Marketer of the Year
  3. CLA Merges in Southern California Firm
  4. IPA Vendor Spotlight On … Chandra Bhansali, AccountantsWorld
  5. Sikich Names Murphy PIC of Manufacturing and Distribution Practice
  6. Dempsey and Team Join CLA in Idaho
  7. Platt’s Perspective: Classifying Clients – It’s Good For The Top And Bottom Line (And Everything In Between)
  8. Canada’s MNP Announces Two Mergers
  9. AAFCPAs Hires New CFO
  10. Weiner Named Chair and CEO of Marcum, Bukzin Named Vice Chair

Survey: Businesses Say SOX Beneficial but Challenging

The annual Sarbanes-Oxley (SOX) Compliance Survey released by global consulting firm Protiviti reveals a new set of challenges facing public companies amid their compliance efforts.

PCAOB audit requirements, new revenue recognition standards and cybersecurity concerns were cited by survey respondents as factors that will influence SOX compliance efforts in 2017. However, companies are seeing the benefits of their SOX compliance work, with 70% reporting that their internal control over financial reporting structure has improved and 50% realizing continued improvement of business processes.

The survey report, Fine-Tuning SOX Costs, Hours and Controls, is based on a survey completed by 468 chief audit executives, and internal audit and finance leaders and professionals in U.S.-based public companies in a wide range of industries in the first quarter of 2017.

Of the respondents’ companies, 72% have annual revenues of $1 billion or more and 78% are beyond their second year of SOX compliance. Respondents looked back on their organizations’ SOX compliance efforts for the prior fiscal year – with attention to the factors potentially influencing observed changes in resources spent. The in-depth Protiviti report maps out the dynamic and evolving compliance landscape, 15 years after SOX was signed into legislation.

“SOX requirements and practices have changed with the times, and we’re pleased to see that many companies are reaping the benefits of their compliance efforts, which is also good news for investors,” says Brian Christensen, executive vice president, global internal audit and financial advisory at Protiviti. “By creating streamlined and lean processes, companies can respond to new and emerging business or regulatory challenges with agility. Conversely, those who aren’t following this model and are instead always playing catch-up may struggle to remain competitive over time.”

The Protiviti 2017 survey report identifies three emerging factors affecting SOX compliance:

  • PCAOB Requirements: Increasing inspection report requirements placed on external auditors by the PCAOB have resulted in stricter compliance activities for many organizations.
  • Revenue Recognition: A narrow majority (56%) of public companies started the process of updating controls documentation in 2016, ahead of the new revenue recognition accounting standard going into effect for most companies in the next fiscal year. Those who completed the antecedent work to meet the new standard have already identified gaps and updated critical accounting policies; 26% noted extensive or substantial increases in testing of controls over application of revenue recognition policies.
  • Cybersecurity: With the growing prevalence of cyberattacks and breaches during the last year came increasing scrutiny from external auditors, management and boards of directors. As cybersecurity grows beyond an IT concern into a fundamental business issue across the enterprise, it’s not surprising that survey respondents showed significant growth in the number of cybersecurity disclosures made in 2016. Of those who issued disclosures, 15% (compared to just 5% in 2015) increased their hours spent on SOX compliance by more than 20%. Overall, of those companies that had to issue a cybersecurity disclosure, nearly one out of three experienced an increase of at least 16% in SOX compliance hours.

2017 INSIDE Public Accounting Benchmarking Report Pre-Publication Offer

The 2017 Benchmarking Tools will be available in September.

IPA’s National Benchmarking Report is one of the most thorough, complete and insightful analyses of CPA firms in the U.S. The report is well-respected throughout the profession for being independent and accurate.  Benchmarking is one of the most effective processed firms can do to improve operations, increase profitability and productivity.

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Deloitte Study: Only 13% of U.S. Workforce Is Passionate About Their Jobs

Despite 2017 corporate spending estimated at over $100 billion for training and over $1 billion for employee engagement, 68% of the U.S. workforce is not engaged at work, a new Deloitte’s Center for the Edge study says.

Further, the study found that only 35% of the workforce had the disposition to seek out challenges in their organization; even among engaged employees, more than 60% didn’t seek challenges. This lack of passion for work exists at all levels surveyed and job types in the workforce with 64% of all workers and 50% of executives and senior management surveyed being neither passionate nor engaged in their work.

These findings indicate that employers might be focused too narrowly on employee engagement, rather than developing a workforce with the necessary passion to solve complex challenges and pursue new opportunities during this period of rapid technological change. In addition, the findings indicate a shift to new types of learning and collaboration environments could in fact address key barriers to a more engaged and passionate workforce.

“We are in the early stages of a shift in the global economy that will require us to transition from an angst economy, driven by fear and erosion of trust, to a creative economy focused on markets with expanding opportunity,” says John Hagel, managing director, Deloitte Services LP and co-chairman, Center for the Edge. “Worker engagement may no longer be sufficient for performance improvement. In an environment of mounting performance pressure and increasing unpredictability, companies need a workforce that embraces challenge. Worker passion is becoming a key attribute for employees with the skill set that will contribute to sustained performance improvement for companies in increasingly competitive markets.”

According to the study, passionate workers generally exhibit three attributes: long-term commitment to making a significant impact in a domain; questing disposition that actively seeks out new challenges in order to improve faster; and connecting disposition that seeks to build trust-based relationships with others who can help them get to a better answer.

Respondents fell into three clusters:

  • Passionate Employee – 13% of respondents have all three attributes of worker passion.
  • Contented Employee – 23% of respondents score high on an index of engagement indicators, but do not have all three attributes of worker passion.
  • Half-hearted Employee – 64% of respondents do not have all three attributes of worker passion and do not score high on engagement.

The study found that only 38% of engaged employees had the questing disposition, and nearly half of engaged workers also lacked a desire to make a significant impact in their industry, function or specialty. Engagement seemed to have the most significant effect on workers’ tendency to reach out to others to solve challenges and improve their own performance.

Of those employees who are “passionate,” the study revealed the following:

  • 71% report working extra hours.
  • 89% report feeling focused, immersed and energized in their work.
  • 68% are optimistic about the future of their company.
  • 71% feel they are encouraged to work across the company.
  • 67% the company collaborates well with customers.

Furthermore, while position had some effect, with those in senior positions being more likely to be passionate, age wasn’t a significant factor: Millennials don’t have an edge when it comes to passion.

The study showed that respondents who were not passionate reported a lack of autonomy, inability to work across teams and a lack of involvement in decision-making.

Worker passion clearly needs to be “activated” in the workplace. To begin with, business leaders should evaluate whether they are acting with passion in taking on difficult challenges and pushing boundaries in potentially exciting directions. Tapping into this kind of passion can shift individuals from the fear of change or failure – to excitement about the opportunity to test boundaries. Additionally, some workers would benefit from guidance and role models who can serve as practical examples of how to quest, connect and create impact within the context of a specific organization.

The study suggests that trends such as automation, could open up new opportunities to drive worker passion. As more and more mundane, repeatable tasks are automated, the study identified opportunities for existing employees to focus on high growth areas that tap into capabilities that are uniquely human: curiosity, imagination, creativity, and emotional and social intelligence. Ultimately this has the potential to move the U.S. workforce toward higher levels of engagement and worker passion.