The Role of the CPA in a Crowdfunding Future

In 2010, many sectors of the U.S. economy began to improve from the Great Recessionhowever, small businesses lagged behind, largely as a result of having trouble raising the capital they needed in a still tenuous financial recovery.

This led to the advent of a concept called crowdfunding. Crowdfundinginspired by crowdsourcing describes the collective cooperation, attention and trust by people who network and pool their money together, usually via the Internet, in order to support efforts initiated by other people or organizations.

At one time, saving up to start a business required a lot of effortand connectionsto raise the needed capital. Crowd funding sites, such as Kickstarter and growVC, now allow entrepreneurs to pitch their ideas to the world through social networks to raise the capital needed through community financing, instead of relying on traditional loans, investment banks or venture capitalists.These crowdfunding platforms have already proven to be a viable alternative for raising capital to fund small businesses and start-ups. Almost $1.5 billion was raised by crowdfunding platforms worldwide in 2011, representing more than 1 million successful fund-raising campaigns; and it is estimated that amount will grow to more than $2.8 billion in 2012.

Thanks to a few dedicated individuals, the CrowdFund Investing framework was signed into law as part of the 2012 JOBS Act. This allows the crowdfunding industry in the U.S. to extend to investment-based crowdfunding, which permits the online sale of securities, largely to unaccredited investors, through licensed and registered intermediaries called portals. These portals will be registered with the SEC and FINRA.

We are entering a unique moment in time when web applications are starting to democratize capital formation and financial services.

Companies will be required to undergo independent accounting reviews or audits (depending on the amount raised) and filings with the SEC. Still, many questions remain and critics have said it goes too far in scaling back important protections for investors.

These changes will have significant impact to the accounting profession. CPAs working with small-business clients may be required to provide audits or financial statements unique to those that use crowdfunding. A whole new suite of investment options may be developed for the clients of CPAs offering financial advisory services and an opportunity exists for CPAs to continue to work hand-in-hand with the startup community to ensure that good ideas are not only getting funded, but that they have a long-term plan in place to grow their businesses.

With more investors to communicate with, these companies will need an effective document management system that offers enhanced transparency and simultaneous access to critical documents. The organization and professional presentation of key documents, such as financial statements, will be vital to driving the fundraising process, improving buyer confidence and meeting investor expectations.

The JOBS Act legislated that the SEC and the self-regulatory organization for equity-based crowdfunding would have 270 days to write rules which would govern these investments and the portal community that will be used. Portals cannot conduct any crowdfunding for equity business until the rulemaking phase is complete .

As this process continues to play out, the AICPA will continue to offer resources and training to CPAs to ensure they have the information they need to advise their clients. The AICPA is hosting a webinar, The JOBS Act: Jumpstarting Capital Formation for Emerging Companies. from 11 a.m. to 12 p.m. on Sept. 25, which will explore the details of the JOBS Act.

Michael Ramos, Director of CPE and Training, American Institute of CPAs. Mike sets the strategic direction and manages operations of the professional development business unit at the AICPA. He combines his understanding of technical audit and accounting issues with his communication skills and experience to advance AICPA CPE offerings. He is the author of many books and training courses on SOX 404, internal control and other auditing matters.

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CPAs: The Startup Community Needs You

There is a joke in Hollywood that no matter what ones day job is, everyone has a headshot in their back pocket. In business, the back pocket accessory isnt the headshotits the business plan. The startup community is exploding across the U.S. Whether its Silicon Valley, New York City or Detroit, state and local governments are embracing startups and encouraging talent to call their fair city home. According to the Global Entrepreneurship Monitor, there was a 60% increase in startups from 2010 to 2011. But there is one important thing most startups are missing: financial guidance .

You and I know the value a CPA brings to any organization. But many startups dont. The qualities a CPA possessesintegrity, competence and objectivityare needed and missing from some startups. Not to mention the financial and business knowledge that makes CPAs trusted business advisers. Recently, a report was released that examined the appointments of accounting and financial experts to audit committees. exploring whether concerns about the status of these experts discouraged companies from appointing them.

Case in point: Groupon.

You may have been following the accounting troubles Groupon encountered while trying to file for its IPO. Recently Groupon had to revise its fourth-quarter results, reducing its revenue by $14.3 million. Groupon also announced it had discovered material weakness in controls over its financial statements. Earlier in Groupons history, the company touted some creative valuation equations in an effort to boost its IPO value. In response to criticism, Groupon looked for and found some experienced executives and offered many of them seats on the Board of Directors.But there was still something missing from Groupon: a CPA. While Groupons audit committee had much more financial expertise after its IPO than previously, it was still lacking solid accounting financial experience. Even though the company had business professionals like Howard Schultz, chief executive of Starbucks, there wasnt one CPA on the audit committee. And while the Sarbanes-Oxley Act requires at least one financial expert on the audit committee, it can be fulfilled by someone who has only supervised finance and accounting staff. It wasnt until May that Groupon finally realized it was missing a critical component and replaced Schultz and another member of the audit committee with accounting financial experts: Daniel Henry, CFO of American Express, and Robert Bass, former vice chairman at Deloitte (now retired). Bass is a CPA and an AICPA member.

Andrew Mason, CEO of Groupon, could have saved a lot of time and money though if he brought a CPA into his circle of advisers a lot earlier. The truth is that startups are focused on developing and launching their service or product, and rightly so. Its not until someone, whether an investor or bank or stock exchange, requires a CPA to be involved that most startups pay attention to their financials. But that doesnt have to be the case.

The value a CPA brings to an audit committee is invaluable. Thats why CPAs need to integrate with the startup community and share their knowledge. CPAs have the opportunity to shape the future of this country and guide the next Mark Zuckerbergs and Andrew Masons. This is the role that the CPA reputation has earned and startups are yearning for that information and financial expertise. What has been your professional experience with startups?

Arleen Thomas, CPA, CGMA. Senior Vice President — Management Accounting, American Institute of CPAs.

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AUGUST 6, 2012

BY JIM BRENDEL

The trendy new term in the high-tech arena is crowdfunding. Both the President and Congress jumped on the crowdfunding bandwagon as a way to show they are doing something about the economy by passing the JOBS Act. What exactly is crowdfunding? Heres one introduction through the eyes of a professional accountant and auditor.

Essentially, crowdfunding is the ability for a large group of people to band together and make small investments that collectively are enough to fund a startup company. Prior to the act, that wasnt feasible because the limit on the number of shareholders before having to report as a public company was 500. The legislation not only raises that limit to 2,000, but also excludes investors in crowdfunding transactions from the calculation of shareholders of record. What that means is that there is no limit on the number of investors in a crowdfunding transaction.

Naturally, this will be done over the Internet, through what the legislation terms funding portals.

Its a hot topic for businesses because they are always looking to raise capital. The hard part is figuring out a way to get investors together. Without some kind of exchange, only tech-savvy companies that had a Web-based business could raise money that way. Now several funding portal Web sites have risen to fill the crowdfunding void. Anyone, even if not incorporated, will be able to use crowdfunding. It is only limited by the attractiveness of your idea and your ability to present it.

Kickstarter, CircleUp and Fundable

The remarkable thing about crowdfunding is how successful its been even though the SEC hasnt created rules for it; they are not due until the end of 2012. The appetite for small investments in companies is proven by the report that the Web site Kickstarter has raised more than $200 million for 22,000 product offerings. Two million people have supported these products, receiving nothing more than what amounts to a digital attaboy and maybe a sample of the product. Investors are termed supporters because they dont currently receive any ownership in or financial information about the retail product startups. In April, the SEC reminded issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.

Kickstarter started all this three years ago. Co-founder Yancey Stricker was quoted as saying that only 5 percent of the projects appealing for funding are rejected, while 56 percent of them fail to meet their fundraising goals. Film fundings are the most successful projects on the site, with 12 Kickstarter films showing in the Tribeca Film Festival this year. Company officials say they wont switch to equity shares, even when the SEC rules are out.

Heres a typical reward for supporters of ReAct Theater in Seattle: For $10, you get admission to a play in the theater; for only $30, you receive invitations to cast events and backstage passes; for $250, you can have dinner with the theaters board; and for $1,000 or more get a special VIP night with a pre-show dinner, front-row seats and drinks after with cast members.

CircleUp. on the other hand, offers direct share ownership in consumer product startups in return for your financial support. According to the companys website, Your ownership will be proportional to the amount you invest. As the company grows, so will your equity investment. This ownership will allow you to receive distributions when the business is sold or if dividends are paid. The site does not offer a rewards model. CircleUp is able to offer equity because they currently only accept accredited investors, who must have $200,000 of annual income or $1 million in net worth.

Fundable attempts a combination of both methods. The company said that it willas required by the new lawregister with the SEC and a yet-to-be decided self-regulatory body as a broker-dealer before it can sell shares of companies. CircleUp will have to do the same in order to offer shares to the public. Fundable charges companies 5 percent of every dollar raised. One of its successful products was an elevation training mask that simulates training at elevation for runners and cyclists. The product goal was to raise $10,000, and it had raised $14,000 a month before its deadline. The most popular reward level was $75. For that you got a mask, a beanie and a t-shirt.

To the trained eye, there are some obvious challenges to crowdfunding. The first and most obvious is the probability that it could be used for fraudulent activity. The second is that even if investors receive actual shares of the company once the SEC rules are set, these shares are private and illiquid, meaning that once youve bought them, theres little chance that you will be able to sell them to someone else. The crowdfunding sites are not exchanges, just angel investment collectors. The third is that there are few requirementsif anyto inform investors about whats happening with the company. SEC chairwoman Mary Schapiro has already said that the JOBS Act would weaken investor protection.

SEC attorney John Eckstein of Fairfield & Woods in Denver noted that crowdfunded shares, according to the JOBS Act, are to be sold in a transaction that is exempt from registration under the 1933 Act (new Section 4(a)(6)).

We are all assuming that the shares, once they have come to rest in the hands of an investor, will be ‘restricted’ stock which cannot be resold unless they are subsequently registered under the 1934 Act or exempt (e.g. Rule 144 or Section 4(a)(1 1/2) type transactions, Eckstein said. The SEC has a lot of regulation writing to do to make the rules for this new exemption clear and facile for the use by issuers, intermediaries, investors and service providers such as accountants and lawyers. Many things are yet to be determined.

Eckstein said there is a political battle for the right to be the self-regulatory agency over portals.

FINRA [Financial Industry Regulatory Authority] would certainly like the job, but there is at least one new portal trade association [Crowdfund Intermediary Regulatory Association] trying to form to do the job. My bet is on FINRA, which is also trying to get the job of regulating registered investment advisers after Dodd-Frank, but there are reasons why FINRA may not be the best public policy choice, Eckstein said.

Crowdfunded companies that raise more than $1 million during one 12-month period or have more than 500 shareholders will have to register as public companies and begin public reporting. Until then, these new looser regulations will no doubt allow some winning companies to emerge. They will probably be in the minority, however, as some real stinkers emerge a year or two after they receive funding. Of course, thats the nature of venture investing.

James Brendel, CPA, CFE, is the national director of audit and accounting for Hein & Associates LLP. a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas and Orange County. He specializes in SEC reporting and assists companies with public offerings and complex accounting issues. Brendel can be reached at jbrendel@heincpa.com or (303) 298-9600.

Written by T. Steel Rose, CPA, ACS Editor

The need for CPA audits and reviews is expected to explode based on the Jumpstart Our Business Startups (JOBS) Act stock offering exemption. Section 4 of the Securities Act of 1933 is amended to permit crowdfunding investments in the stock of companies defined as emerging growth companies (EGC) of up to $1,000,000. Non-accredited investors may invest 5% of their annual income that is under $100,000 or $2,000 each.

The JOBS Act, signed April 5, recognizes crowdfunding as an offering of unregistered securities through a registered Internet intermediary website or broker from a large pool of investors. With only eight months remaining before the SEC issues its final standards for crowdfunding, the time for CPAs to begin preparing is now.

Different offering amounts have different SEC standards. If an EGC plans on raising between $100,000 and $500,000 their financial statements would have to be reviewed by a CPA. Those looking to raise more than $500,000 and up to $1 million are required to have their financial statements audited.

To invest in an exempt EGC, you are limited on crowdfunding to 5% of $100,000 net worth or income. If the net worth is [between] $100,000 and $1 million, its 10%, said Executive Director and founder of the National Crowdfunding Association (NLCFA), David Marlett.

Prior to enactment of the JOBS Act entrepreneurs and charities had success on the Internet raising money from contributors in exchange for rewards or completed products. Carl Esposti, founder of crowdsourcing.org runs the research firm Massolution which identified 452 crowdfunding platforms (CFPs) worldwide. Esposti told CPA Magazine that these CFPs raised almost $1.5 billion in 2011 .

To learn about the impact of the JOBS Act and what it could mean for CPAs, we talked with Marlett a little more. Marlett is an attorney and non practicing CPA who describes himself as being like a vampire hunter whos job is to weed out the hucksters they may be involved in crowdfunding.

This entirely revolutionizes our financial system, this eight-decades-old law since the 1933 SEC act, said Marlett. The industry will need counsel on how much equity to give away. January 1, the gates are open. They [the SEC] may take longer. Its good it didnt start yet because nobody knows what they are doing. There would be too much fraud.

For CPAs with an entrepreneur interest, its a brave new world. If you are a guy like me it raises your spirits. So much of the economy is determined by expectations. How we feel about hope. Now a startup company can believe, I have the opportunity to be like everyone.

Douglas S. Ellenoff, a member of the law firm Ellenoff Grossman & Schole LLP, attended meetings between several department heads of the SEC and the crowdfunding industry in April. Ellenoff told CPA Magazine a $25 to $35 thousand audit fee for a private placement (including due diligence), which has been normal over the last 20 years, will be too high for a crowdfunding deal.

For a SPAC audit fee of $25,000 to $35,000 for a blind pool investment where you are auditing nothing, the auditor has to be concerned with the risk involved, said Ellenoff. I believe there will be people [CPAs] who will spread their costs over several [crowdfunding] deals and get the opportunity to provide them.

Richard Salute, a CPA with JH Cohn in New York, told CPA Magazine that you cant speculate on the audit costs.

99% of the time there must be comfort given outside of the financials, said Salute. There are also tax implications for the investor and the entity. The real question is going to be that historical information is not as essential as the business plan and how management can execute the plan. I believe the entity needs to create adequate transparency. This will separate the wheat from the chafe. There may be sustainability plans that predict a near term business model, which will help toward valuation which will drive this asset class.

[SEC] Chairwomen Schapiro wants the rules to be clear to protect the investors. The secret sauce is the efficiency of the raise. It tries to take friction out of the process. Under Reg. A, you did not have to issue financials.

To my way of thinking, its not just the fees; its the value you attribute to the stock, if you are getting a quid pro quo. An audit under generally accepted auditing standards requires 100-300 hours at $150 an hour, up to $250 an hour. A review would be much less, but you cant speculate on it, Salute warned.

Not everyone is a crowdfunding fan. Some believe the legislation increases the likelihood that individuals will invest in startups and lose money because the companies are riskier. The director of investor protection at the Consumer Federation of America sees Crowdfunding as something that has precisely the same place in the average persons investment portfolio that lottery tickets do. Salute found this statement disappointing.

If it is seen as a lottery ticket, it reduces the job formation possibilities and detracts capital formation, said Salute.

The JOBS Act prevents States from policing crowdfunding offerings until an alleged fraud has been committed. People will now need to do more research before they use the online sites.

Yeah, so there is going to be fraud, said Marlett. Every individual has a criminal intent sometimes. It [the JOBS Act] cant limit this. So we do have rules to limit investors, to immediately know when the limits are reached. Humans are very creative about cheating each other.

I have been in the boiler rooms where the idea is to take your money, to strategize, to come up with these things. We need to protect the grandmother who invests $2000 and then is asked for more money the next year. The danger is not grandmas $2000, but the over regulation that makes it [funding] too expensive.

Here is what I find so fascinating. Crowdfunding has taken off in Europe for two years; and donated crowd funding [in the U.S.] mainly in 2011, the two main websites, indiegogo.com and kickstarter.com raised $180 million. The fraud rate has been 2%. The daylight effect that the Internet brings us, limits it to 2% without regulation. I am so enthused by that. Human nature has its devious side, but social media is protecting us against ourselves. So fraud should not be a limiting factor.

This changing startup environment has revealed a tremendous opportunity for CPAs. The JOBS Act will now introduce new entrepreneurs to the world of professional accounting much earlier causing a rise in demand for CPAs.

The existing companies may be able to raise money more easily, but there will be more startups, said Marlett. CPAs can make money just getting companies ready. The minimum $100,000 [level] may not even have a CPA.

Insurance agents and attorneys are interested in this but CPAs are the ones poised to make the most money. Suddenly the issuer cannot just use QuickBooks. You can be an entrepreneur CPA on the Internet to get companies dressed up for the dance. This now commonizes finance for the average person. I would not be surprised if QuickBooks did not have a direct export to the portals.

This new market focus for CPAs will require new skills and the enhancement of old skills. Marlett explained the finer details.

The secret sauce of crowdfunding is thirds. The perfect balance, the golden mean of the Greeks was the perfect thirds, explained Marlett. Number one is the pledge you [the investors] are making to an escrow agent, but you [the crowdfund issuer] have to reach your ask. There have to be [say] 99 others willing to make the pledge. It helps encourage investment. The issuer cannot spend it because the escrow agent will hold it. Number two is the 2% fraud, which empirical data shows [crowdfunding] reduces fraud. Number 3 is [when] right around 40% of pledges are made then the total will be made. Who makes the 38% and who makes the final 62%? The original [group] are friends, family and community. So [then] the unknowns become interested. This is the perfect balance the Greeks believed.

If most of these are $499,000 deals to limit the audit, then the deal will take about 10-15% in fees. For example, Kickstarter charges 3-5%. Portals may be regulated by SEC. It would be better to keep the fees closer to 10%. You may need 5% for key man insurance, which may become required by the SEC. There will be an accreditation program for portals, and crowdfunding models.

Marlett emphasized how important it is for CPAs to mobilize, be proactive and take this new challenge head on immediately.

The one message is to come join us, help us do this right now, urged Marlett. The first rules will come out in 60 days, and there will be 90 days of comment after that. Advisors said they will need to be audited, and that is it. It is a tremendous opportunity to be ringleaders in this new space. I need the CPA world to help us help them.

Crowdfund & Small Firm Auditing

Written by T. Steel Rose, CPA

The signing of the Jumpstart Our Business Startups Act (JOBS Act) in April of this year has put the spotlight on auditing. Startups raising between $100,000 and $500,000 must be reviewed by a CPA while startups raising between $500,000 and one million dollars are required to be audited by a CPA. To get an idea of how this will affect CPAs across the country, CPA Magazine sat down with Angie Moss, CPA, audit partner with Sanford, Baumeister & Frazier, (SBF) in Dallas, Texas, Don Pfluger, CPA, audit partner with Gallina in Rancho Cordova, California, and Mike Sharp, CPA, Director at Sharp & Cash, LLP (a pseudonym) in New York.

CPA Magazine: How did you get involved in auditing and what do you like about it?

Moss: Well, I was hired off campus to join KPMG from the University of Texas Arlington.

Pfluger: After receiving a B.S. in Accounting from California State University, I started with Gallina 32 years ago. I originally wanted to be a lawyer, but I enjoyed accounting so I stuck with it. If there are technical issues they call me. I am also a practicing partner with assigned clients.

Sharp: My background is audit and tax because when you are dealing with entrepreneur companies, they may require an annual review and tax planning. I started with a larger firm, after graduating from college, and later moved to a boutique firm.

CPA Magazine: What is your experience with small firm audits?

Moss: I do a lot of audits of funds and broker/dealers who are required to be audited no matter what size they are.

Pfluger: We dont audit publicly traded companies, we audit large and small firms [general building contractors, engineering contractors, specialty subcontractors, and suppliers]. One firm [we audited] has over $1 billion in revenue.

Sharp: For clients to raise capital on crowdfunding sites regulated by the SEC, these portals will put in safeguards on how companies can raise money, since technically they are not going public. The biggest criterion is the SEC wants to protect the small investor. Anyone with over $100,000 annual income can invest 10% of yearly income. If under $100,000, the investor can invest 5% of annual income or up to $2,000. There are three parts of the Act. One focuses on startups, another on accredited investors with over $1 million net worth, and the third part is that they are lifting the ban on advertising. Previously, when over 500 investors or $5,000,000 capital is raised you would have to register with the SEC. Now, you do not have to register until after you have over 2,000 investors.

For our firm, we will focus on startups and established companies who are looking to expand for these emerging growth companies. Certain sites will focus on different specialized areas.

CPA Magazine: How do you approach an audit engagement for a firm that has not yet been audited?

Moss: You really have to do some due diligence to determine the capabilities of how the accounting comes together.

It may be the owners themselves. You determine an approach around that. You may need to get some help for the client [to put their books in order]. They may have only kept cash books. Or you may be able to make audit adjustments. A lot of them, almost all of them, use QuickBooks.

Pfluger: They may not have any books. We may help them select their accounting system. It will be all along the gamut. They may have QuickBooks or they may be pure startups with no transaction history to speak of.

Sharp: Generally we are going to look for the purpose of the audited statements. They may have obtained a line of credit, and now they need the audit to maintain their covenants. You look to see how long they have been in business and what kind of accounting they have. Smaller companies usually have a few people doing everything. They dont have segregation of duties or internal controls.

Moss: I can do the whole audit or a staff member can with my involvement. It is not something a new, inexperienced person can work on. It may not take that much time, but there are particular reporting needs and SEC requirements even though they are not required to register [with the SEC]. You have to know the regulations that need to be addressed.

Pfluger: If it is a true startup, there may be nothing to audit because an audit is a historical review. If there are statements based on prospective financials we have procedures to review those.

Sharp: You would have a partner on the account who would budget for staff. We are peer reviewed and follow the standards for issuing financial statements.

CPA Magazine: How do they budget for the engagement?

Moss: In the smaller entity world the fee is very important. How do you juggle the work that has to be done to comply with the SEC and staff the engagement appropriately so you are not out of the range of what the small firm can tolerate? You need qualified people but you cant run up a large budget. A lot has to do with getting to know the client, including their skill set, before you even get started. One of the things I like to do is to explain, this is what it costs no matter what we do, and here is what it costs to do your audit.

Pfluger: We perform analytical procedures. We still have to look at the entity and the internal control. They [smaller companies] will be thinly staffed and rarely have segregation of duties. So we have to provide them some guidance in the management letter according to SAAS 115 to help them improve on internal controls and to enhance the business based on best practices that we know from other companies. [For them] Its kind of like seeing a trainer at a gym. The low cost provider [for an audit] will not be the best value. Suppliers, vendors, and other customers send prospective audit clients. It varies, but if there is no balance sheet, and a quarter or year-end [period to audit] with no transactions there is nothing to audit. The audit opinion cannot audit his hopes and dreams.

Sharp: When you are doing an initial audit it is hard to quote a fee unless we are able to get a good feeling on their books and records and their accounting staff. We hope to keep it in a certain range, but it is an estimate. We cant lock ourselves in or we could always quote it at our standard hourly rates. Each situation is different.

CPA Magazine: How long does an audit take on average?

Moss: Depending on the size of the fund, and the transactions, you can complete an audit in 1-2 weeks.

Pfluger: A couple days or a week or a month depending on what is there.

Sharp: On a small company it could take 2-3 weeks including planning, field work, and wrap-up.

Moss: When it becomes more difficult is when the investment is not marketable, like stock in a private company. That investment is hard to value. That is where the issues come in. You determine their valuation and determine fair value from other sources.

Pfluger: There are many issues faced in the initial audit of a startup company: 1) Lack of past history typically auditors look to past financial information to compare with the current year information to perform analytical procedures. With a startup there is no meaningful prior history to use. Often then we will try to benchmark against similar companies. 2) Lack of stability in employees performing key functions there may be a lot of turnover in staffing the accounting area for a startup as it grows. This lack of stability can make it hard to ask questions of people as they may have not been there for the entire reporting period and many individuals may have been performing the tasks at different times. 3) Lack of focus among personnel startups are generally a hubbub of activity with many personnel wearing many hats within the organization. They may lack the time and focus to be able to answer an auditors questions and respond in a timely manner. 4) Poor or weak internal controls.

Sharp: These startups dont have much of an accounting staff, and are without decent books and records and documentation or people in place to get the information. So you spend more time obtaining the records from the client. Most of them use QuickBooks because its inexpensive and it gets the job done.

CPA Magazine: What software helps with the workpapers and trial balance prep?

Moss: I used CCH ProSystem fx Engagement, like many non-national firms do. I currently use CaseWare. They are all pretty similar. They each have pros and cons for workpaper management. We use Practice Aids from Thomsom Reuters PPC products. They have tools that address specific industries. The larger firms tailor their approach to a specific industry. The overall time is probably 10% for the financial statement and note preparation.

Pfluger: We use PPC for workpapers, and CCH ProSystem fx Engagement handles the trial balance.

Sharp: CCH Engagement and PPC.

CPA Magazine: What is the range of costs if there are no problems?

Moss: Say it is a $10,000,000 fund, $20,000 is not a bad number for an audit. It is based on who is doing the accounting at the client firm, how it is maintained. Is it a once a year thing? Some may be less, but they dont have any issues. There are audits that are under $10,000. The number of investors increases the fee. There is additional work to determine if the investors are accredited.

Pfluger: We have to do a risk assessment and audit planning and assess internal controls. Then we go in and audit the numbers. There may not be an awful lot to do for a startup, so it can be reasonably priced. It could be as little as $5,000 to $10,000. Associated with that is what the promoter says about the company. There will be MD & A (management discussion and analysis) to review.

On a startup, you need to get a retainer and make sure you get paid. We have a milestone billing practice. We match invoices with our workflow. So on the first day of field work we send out a bill. Then we send one at the end of field work, one at drafting of financial statements, and one at the end. They have to be paying as they go along. We may take a retainer of 50% for a brand new client. Then will invoice the remaining amount, 25% at the start of field work, and then the quarterly bills.

Sharp: We obtain a retainer on anyone who is new. One of the provisions of the engagement letter includes the retainer before we begin work. This is a totally new area that has opened up for companies to raise money. Part of the engagement could be to receive a consulting fee to get them to where they want to be. This is really new to everyone, so it is hard for everyone. Part of raising money is accounting fees. It is part of raising money. But it was not available to them before.

Moss: There may be a qualified financial statement, for an investment not valued according to accounting principles. I have not had an adverse or disclaimer of opinion. It could happen. If it was so material to the statements you might end up there. You find that out when you do your due diligence when you first get involved in the engagement. You go through that in the client acceptance process. You find that out in the beginning. They may have invested in something after the end of the year and it is difficult to determine fair value. Now you are facing a situation because they are already a client.

Pfluger: We talked to our E & O carrier who said this would have an added cost because of these startups. These crowdfunded companies do not fall under PCAOB [Public Company Accounting Oversight Board] so the peer review is the same. Depending on the procedures and how many startups you audit there would be additional costs [according to our professional liability insurance provider].

Sharp: The fees for professional liability can go up; so it exposes you to a greater number of people rather than to a bank. You could have a slew of people coming after you if something goes wrong. It is definitely more exposure. What will end up happening is firms that dont do audits will look to a larger firm to do the audit.

Moss: The valuation itself has to be determined by another firm, because that would be an independence issue. The firm will have to hire another valuation firm, which may be another CPA firm. There is a business valuation credential, and CPAs have it. If you are providing any assurance for an attest client a valuation would impair your independence. A separate valuation, as long as it has nothing to do with the audit could be performed— like, for an estate planning engagement [for the same client].

Pfluger: We dont do that kind of valuation for stocks. There are valuation credentials. It could be from the AICPA or another credential. That is not our area. We have to choose what we are going to be good at.

Sharp: It is not an area we are pursuing at this time.

CPA Magazine: Do you audit companies that you previously reviewed?

Moss: A review provides limited assurance that is limited to inquiry and analytics to evaluate whether the statements have material misstatements and correcting them. There is no confirmation, or third party verification. Some banks accept reviews. You dont confirm anything. You make inquiries whether cash was reconciled. You ask, was accounting consistent? You perform analytics on the numbers themselves. Then you write up the statements. A review can be a $10,000 engagement.

Pfluger: A review is a different level of service. You do ratio analysis and ask questions. You get limited assurance that things are not materially misstated. With an audit you get reasonable assurance there are no misstatements. The general rule is if an audit is $1, a review is 60 cents because you dont have to do the audit tests.

Sharp: A review is still an analytical procedure. Its the same disclosure for both. There is not as much third party verification or confirmation. You are relying on what the company is telling you in a review. A review is certainly less. If a review is $5,000, an audit could be $10,000, $15,000 to comply with all of the procedures and documentation internally to make sure we have done everything.

CPA Magazine: What do you like to do when youre not auditing?

Moss: Generally boating.

Pfluger: Reading and gardening, traveling and fishing. Spending time with family, my seven grown children; my youngest is 18.

Sharp: I generally like interaction with clients, helping them manage their businesses and planning taxes. I play tennis in my off-time. I play singles to stay in shape. I played doubles in the summer USTA [United States Tennis Association]. If I am losing it, it is because they are wearing me down. After 15-16 shots on one point, that is a lot for a recreational tennis player.