Increasing Fee Pressures
At one time or another, every Attorney, CPA, or business professional has received push-back from a client who is less than happy with the amount of fees charged for services. Professional service providers gain expertise as a result of years of training, experience, and ongoing education, all of which translates to passing on tremendous value for clients. Sometimes, however, communicating the value of services to a client can be a challenge. There is a saying, “If you think a good lawyer is expensive, wait until you see how much a bad one can cost you!”
Fee pressures have become increasingly intense, particularly as a growing portion of consumers have decided to utilize online companies that provide an array of commoditized, lower-cost professional services. However, clients that use these online services don’t know what they don’t know, and sometimes a conversation with a legal professional can uncover an issue that, left unchecked, could develop into a significant legal or financial problem. For example, during an in-person consultation, a client might casually mention a business practice that could expose him to huge legal or financial liability; or a client could refer to her new business location in a different state, where she has not properly registered or started paying the required taxes. Getting clients to come in for a consultation can often persuade them that the services of a professional are necessary. But many clients still insist on keeping their costs as low as possible.
Communication Is Key
What is a professional to do?
The most important thing you can do, of course, is to communicate in an upfront and transparent manner about your fee structure and the anticipated costs to your client. Whether you bill by the job or by the hour, utilize retainers, monthly fees, or some other billing method. Clients should have a clear idea of what to expect when they receive your bill. In addition, describe the value they will receive from paying your fees, such as personalized and attentive service.
There are steps you can take to keep your clients’ costs reasonable while still providing quality services. This can be accomplished, in part, by keeping your own expenses down.
Reducing Operating Expenses
Some firms have lowered their own overhead by decreasing their physical footprint in high-cost metropolitan areas, or leaving these areas altogether for nearby, less expensive, locations. Firms can also use space more efficiently. According to one source, 26% of attorneys have office space exceeding 1,000 square feet per attorney (that’s larger than many apartments!). Reducing administrative costs by re-evaluating staff needs and/or outsourcing tasks when practical and automating procedures such as time-tracking and invoicing may provide additional savings. Some other cost-cutting measures could include renegotiating lease terms and shopping around for savings on travel, insurance, technology, and even office supplies.
Clear and transparent communication with your clients about fees and taking measures to regularly examine how your operating costs can be reduced may still not make your client happy to receive your bill, but it should provide a greater opportunity to meet a client’s expectations.
The implementation of the Tax Cuts and Jobs Act in late 2017 has significantly impacted the way companies depreciate their assets. If you own real estate or a business, or if you operate in the real estate or construction industries specifically, you need to learn more about the recent, potentially major changes to the depreciation and expensing rules for business assets.
Section 179
Section 179 of the IRS tax code allows businesses to deduct the purchase price of qualifying equipment and/or software purchased or financed during the tax year. For tax years beginning after December 31, 2017, the allowable IRC Section 179 deduction has almost doubled from $510,000 to $1 million. The maximum asset spending phaseout has also increased from $2.03 million to $2.5 million.
Under the former tax law, qualified improvement property was not eligible for Section 179. However, under the TCJA all leasehold improvements, provided they are made to the interior portion of nonresidential rental property after the building has been placed in service, will be eligible for immediate Section 179 expensing. Any improvements to a building’s interior qualify if they are not attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building. Before the TCJA passed, certain types of building improvements did not normally meet the definition of qualified improvement property because they are improvements made to a structural component of a building. However, under the TCJA the qualifying property for Section 179 expensing has been expanded to include the following improvements to non-residential real property: roofs, heating, ventilation, air conditioning, and fire/alarm protection systems.
Bonus Depreciation
Prior to the TCJA, bonus depreciation was limited to 50% of eligible new property. However, the TCJA reform extends and modifies bonus depreciation to allow businesses to immediately deduct 100% of eligible property placed in service after September 27, 2017 and before January 1, 2023. When 2023 hits, the amount of bonus depreciation will decrease by 20% per year until the end of 2026. Qualified improvement property, which now includes restaurant and retail improvements, as well as tenant and building improvements, has been added as eligible property. Eligible property has also been expanded to include used property, which is a significant and favorable change from previous bonus depreciation rules. Additionally, the TCJA eliminates the requirement that the original use of the qualified property must begin with the current taxpayer. This means that businesses can take bonus depreciation on assets that are acquired from a previous user, as long as the current taxpayer did not previously use the acquired property and the property was not acquired from a related party. The TCJA also added qualified film, television, and live theatrical productions as types of qualified property that are eligible for 100% bonus depreciation. In addition, there is no limit to asset spending in a given year and no limit on the deduction amount that can be taken.
Things to Remember
Businesses must keep in mind that not all states allow bonus depreciation, and therefore, the deduction may need to be added back to income on the respective state return(s). Also, businesses do not have the option to select specific items for the deduction. In a given year, taking bonus depreciation on one asset requires the company to take bonus depreciation on all assets that fall into that respective asset class.
Looking Ahead
The TCJA will help businesses with cash flow issues in particular, because it could potentially reduce their taxable income in the year of the deduction, therefore lowering their tax liability. However, even if your business is not experiencing cash flow issues the TCJA can still be a boon. The TCJA is the biggest tax overhaul since the Tax Reform Act of 1986 and these specific depreciation and expensing changes can have a profound effect on your business taxes. You do not want to miss an opportunity to expense 100% of certain assets and improvements, especially if you are in the real estate or construction industry.
To learn how you can achieve the greatest benefit for your business today, contact John J. Rainone, CPA/MBA, CCFIP at 401-921-200 or jrainone@disantopriest.com.
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On Thursday, June 21, 2018, the U.S. Supreme Court overturned its previous 1967 and 1992 rulings on two cases, National Bellas Hess vs. Illinois and Quill vs. North Dakota, that had upheld physical presence being required in a state before it could impose sales tax on purchases made by residents in their state. In a 5 – 4 decision in Wayfair vs. South Dakota, the Supreme Court ruled in favor of the state authority to require online retailers to collect sales taxes without regard to physical presence in the state.
With this decision, states stand to gain much-needed tax revenues for their budget deficits. In addition, there may be even more significant cost consequences for small online retailers that do business in multiple states.
As part of the ruling in the 1992 Quill vs. North Dakota case, Congress was given ultimate power to resolve sales tax issues pertaining to interstate commerce. Discussions surrounding the concept of an “internet sales tax” is not new. Each year, since 2010, legislation has been introduced that proposed a federal tax bill; however, to date, Congress has failed to pass any such legislation that would lend a sense of uniformity to sales tax regulations.
Now that states are being given the authority to pass their own legislation to impose sales tax on purchases from out-of-state retailers regardless of physical presence, and with the inevitable increased complexity that retailers will be forced to comply with, it is possible that Congress will be spurred to provide federal guidance surrounding applicability and compliance as a result of the ruling.
In our previous post, Authenticated Financial Information, we explored the need for a private company clearinghouse that can be used to protect and deliver trustworthy financial information. One of the ways firms and their business clients are utilizing a clearinghouse is for SOC report distribution – a process that is becoming more challenging to manage as an increased focus on third-party controls has led to a rise in requests for reports.
If you consider the way most service organizations distribute SOC reports today, you might think of basic methods like email and mail, often with no standardized process or central group managing it. Requests are often sent to various individuals at a service organization from different types of requestors. While convenient, these methods offer little in their ability to track where reports have been sent to and in verifying that the person requesting the report is qualified to receive it. What happens when there is a change or updated report available? How would the previous recipients be notified? What is the approval process? Are NDAs appropriately collected?
Aside from internal challenges, what about the customer experience? Providing customers with an easy, quick way to receive reports is important, but one should also consider if their distribution methods reflect a level of security and control that one would expect from an organization that has already undergone a SOC engagement.
RIVIO solves all these challenges and boasts a high level of user-friendliness for all parties. It puts a service organization in control over the distribution of their SOC reports while also keeping everything confidential and secure.
How does it work?
RIVIO Clearinghouse is a platform designed for three different users: CPA firms, businesses, and third-party users. It provides one location for each party to request, share, and verify information – all through a secure, accessible environment that has undergone all three SOC examinations, has received an ISO 27001 Certification for Service, TRUSTe Privacy Policy Certified, and EU-US Privacy Shield certified.
- Request: The platform offers a way for organizations to request SOC reports from their CPA firms and provides a way for customers to request reports from their service providers. When requests are issued, a notification is generated through the system and produces a link for the appropriate party to respond by uploading the SOC report.
- Share: SOC reports can be shared with individual customers or with groups through defined distribution lists. The platform tracks recipients of reports and also provides a way to recall information, should a report be updated.
- Verify: The platform has a validation process to confirm information came from an authentic source and has been unaltered.
Are you ready to take control of SOC report requests? Visit RIVIO.com to learn more.
There is a growing demand today for accurate, source-verified financial information. But, what is driving this demand? Users of audited financial statements, such as investors and lenders, have increased their focus on the authenticity of the information they receive. While technology has positively impacted the speed and accessibility of information, it has also had some negative impacts – creating new ways to alter and compromise information.
Unfortunately, there are plenty of instances of fraud occurring, either by altering information after it’s been reviewed by a CPA firm, completely falsifying an audited financial statement, or even creating a fictitious firm. Those committing these types of fraud have put the information that others provide under great scrutiny. How can those receiving the information be sure of its validity?
For public companies, this is avoided by use of EDGAR. However, for private companies, there hasn’t been a similar Clearinghouse until recently. CPA.com, an AICPA company, collaborated with Confirmation.com to develop RIVIO Clearinghouse to not only ensure that financial information provided by a CPA firm is protected, but also to provide a more efficient way for all parties to exchange information.
RIVIO provides an online platform that enables CPA firms to exchange information with their private business clients who can then share it out to any third parties that may need this information. It streamlines and controls the process while also ensuring that third parties receive authenticated financial information. For private businesses, it brings more trust to the information provided to third parties and facilitates a more efficient manner for exchanging information.
This cutting-edge solution is a gamechanger for CPA firms and their private business clients, and it is rapidly gaining market acceptance. In a time where it is becoming more challenging to control and protect information, RIVIO is positioned to meet the growing need for authenticated information.
Learn more at RIVIO.com
It’s a small world, after all.
Our partner Bill Pirolli just returned from a whirlwind tour of China as part of his service to the profession. Bill is a member of the US Board of Directors of the American Institute of Certified Public Accountants (AICPA) and the 38-member Board of Directors of the Association of International Certified Professional Accountants.
The Association Board is the combined efforts of AICPA and the Chartered Institute of Management Accountants (CIMA). Combined, these organizations represent the world’s largest and most influential collection of accounting professionals with over 650,000 CPA and CGMA members and students from 179 countries worldwide.
The trip’s purpose was to meet with the leaders of the Chinese and South Asian markets of CIMA and get a viewpoint of the economy, culture, and the profession from the other side of the world.
With a population of 1.3 billion people, China is the world’s second-largest economy; yet, in many ways, it is still a developing country outside of its major cities like Shanghai, Beijing, Guangzhou, and Shenzhen. These four cities alone are where over 100 million people live and work. Compare that to the largest four cities in the United States – New York, Los Angeles, Chicago, and Houston – where the total population is a mere 17 million.
In the past 20 years, the economy of China has boomed along with the need for trained accounting professionals and many other specialized workers. The market capital of Alibaba is almost that of Amazon, and Tencent is now larger than Facebook. Bill had the opportunity to meet with many Chinese CFOs (including Coke China) and hear about the regional differences that businesses like McDonald’s, Coca Cola, KFC, and Subway make in their products or delivery to suit the Chinese market.
The trip also included an event to honor recent graduates of the CGMA (Chartered Global Management Accountant) program and their induction into CIMA membership. The highlight of the Board’s activities was a visit to the residence of the US Ambassador to China, Terry Branstad, to hear about some of the top financial, cultural, and political issues of the day.
Yes, regardless of how big, it is a small world.
The American Institute of Certified Public Accountants (AICPA), and more specifically the AICPA Assurance Executive Committee (ASEC), recently issued TSP Section 100, a new set of Trust Services Criteria that apply to SOC 2, SOC 3, SOC for cybersecurity engagements, and supersedes the 2016 TSP Section 100A.
When is the change effective?
SOC 2 reports can be issued under the 2016 guidance through December 14, 2018. However, any report issued on or after December 15, 2018, will be required to use the new 2017 Trust Services Criteria. However, early adoption is permitted.
What changed and why?
Formerly referred to as Trust Services Principles and Criteria, the name of the new guidance has been changed to the Trust Services Criteria.
The principal reason for issuing the updated guidance was to more closely link the TSP with the Committee of Sponsoring Organizations (COSO) 2013 Integrated Framework. This is most commonly recognized by the business community as the framework of choice to assess the design and operating effectiveness of an entity’s internal control over financial reporting. The TSP, like COSO, is used to evaluate internal controls and, more specifically, controls over security, availability, processing integrity, confidentiality, and privacy. According to the AICPA, one of the key benefits of this update was to more closely link these two essential frameworks. Additionally, the AICPA noted that the updated TSP framework allows for cybersecurity risks to be better addressed and allows for a more flexible application.
COSO Internal Control – Integrated Framework
COSO is comprised of 17 principles which are organized into 5 categories:
- Control Environment
- Communication & Information
- Risk Assessment
- Monitoring Activities
- Control Activities
As noted more specifically in COSO Principle No. 12, “The organization deploys control activities through policies that establish what is expected and procedures that put policies into action.” By more closely linking the COSO Integrated Framework with the TSP as well as the addition of what is now referred to as the “supplemental criteria,” the new TSP augments the COSO principles in terms of evaluating internal controls over security, availability, processing integrity, confidentiality, and privacy. Particularly, TSP Section 100.5 defines the supplemental criteria as follows:
- Logical and physical access controls: The criteria relevant to how an entity restricts logical and physical access, provides and removes that access, and prevents unauthorized access
- System operations: The criteria relevant to how an entity manages the operation of system(s) and detects and mitigates processing deviations, including logical and physical security deviations
- Change management: The criteria relevant to how an entity identifies the need for changes, makes changes using a controlled change management process, and prevents unauthorized changes from being made
- Risk mitigation: The criteria relevant to how the entity identifies, selects, and develops risk mitigation activities arising from potential business disruptions and the use of vendors and business partners
Points of Focus
Part of the COSO and TSP integration included the adoption of points of focus into the new TSP. Points of focus provide guidance and examples of important characteristics that should be considered for each control criterion. While the points of focus are new to the TSP, they have always been a part of the COSO Integrated Framework.
The TSP does not require each point of focus to be addressed, however, management should customize particular points of focus, or identify and evaluate other characteristics, based on specific facts and circumstances applicable to their system of controls. As any SOC auditor will freely admit, the application of the TSP involves judgment, and that will be crucial when reviewing the points of focus as they will not all be applicable or suitable for each service organization.
The 2017 Trust Services Criteria can be purchased from the AICPA store (which can be accessed by following this link here). Additionally, click here to download a mapping of the 2017 Trust Services Criteria to the 2016 TSP from the AICPA’s website, including the updated points of focus for each criterion.
We receive regular checkups to monitor, maintain, and improve our health. But did you know that you should do the same for your company? Financial statements provide the vital statistics necessary to track a company’s health. Investors use financial statements to research potential investments, bankers base lending decisions on a company’s financial statements, and valuation experts utilize financial statements to determine a company’s worth. By routinely scrutinizing your financial statements, you can monitor and improve your company’s performance and, ultimately, its value.
A comprehensive financial analysis employs ratios to measure a company’s past and current operations, allowing you to compare its results to others in its industry. This type of review offers insight into the historical growth, profitability, debt capacity, and overall liquidity of the subject company in the context of its industry. All such factors can be important indicators of a company’s ultimate value and provide useful information to business owners and managers who want to more effectively and efficiently manage their operations.
You can perform your own financial checkup for your business. To begin, obtain a history of your company’s financial statements; five years’ worth is usually a good base. Next, convert the financial statements to common size. Common size financial statements are simply your company’s financials expressed in the form of percentages rather than dollars. A common size format readily identifies trends and growth patterns. Additionally, since industry benchmark data is often produced in this format, it makes it easier to compare your results with the competition. Industry benchmark information can be obtained from a commercial vendor, your accountant, or, depending upon the industry, from trade associations.
Next, financial ratios are calculated. There are a number of ratios to choose from – some of the more common ratios measure liquidity, debt coverage, leverage, and operating and profit performance. Their relevance is dependent upon your company, its operating characteristics, and the industry. Bankers and accountants can be especially useful in identifying the more pertinent ratios.
The information gathered thus far is analyzed and compiled on a trended, composite, and industry basis. The results of this analysis, when performed regularly, help you to monitor and recognize the vital statistics necessary to maintain the success and growth of your business. The benefits of this assessment include:
Competitive Advantages & Disadvantages
An industry assessment enables you to identify your company’s strengths and weaknesses and acquire valuable information on the competition.
Budgeting & Forecasting
Studying trends and growth patterns is a very effective preliminary step in preparing internal budgets and forecasts.
Strategic Planning
Recognizing specific performance measurements (company and industry) will help to set goals and objectives for the future (e.g. increasing sales, gross profit margins, and net income).
Acquisition Opportunities
Knowledge of key performance measurements assists in the evaluation of a proposed sale, merger, or acquisition.
Focus
Greater awareness of the interrelationship of the financial statements and a complete understanding of financial operations allows you to focus on the areas important to the growth and success of your business.
Regardless of whether you perform, or your accountant performs, a financial analysis is akin to your annual physical examination…it is crucial to understanding your company’s health – past, present, and future.
Our partner, Leah Szlatenyi, directs the Bentley Consulting Group, LLC and has over 25 years of tax, financial advisory, and business consulting experience. As a former member of the American Institute of Certified Public Accountants’ (AICPA) National Business Valuation Committee, Leah has extensive knowledge in the evaluation of an organization’s financial health, business planning and forecasting, and strategic implementation.
Is your company future ready? We are living in an incredible time of rapid change around the world. Technology, regulation, global economics, political uncertainty, business transformations, generational shifts; and there is no end in sight.
Planning for Market Shifts
We have always dealt with change but never has change come so rapidly. Your smartphone is only 10 years old. How has it changed your life and your business? Artificial intelligence, virtual reality, augmented reality, online commerce, blockchain, Bitcoin, driverless cars, and more. Are you ready for those changes to your business or organization? Will your organization be disrupted by the likes of Uber, Air B&B, Amazon, and others – or will you be a disruptor by creating the next big thing?
Like so many of us, we go through our business day focusing on the present and dealing with the past, but what about the future? Is your organization properly positioned to seize new opportunities and navigate upcoming threats? Have you addressed succession in ownership, management, and on the shop floor? What will your organization look like in three, five, and ten years? These are difficult questions that many simply put off.
Strategic Planning Engagements
Your financial advisor can certainly assist in projecting financials like revenue, profits, taxes, cash flow, and future capital needs, but, in some cases, they can also help you dream about the future of your organization through a formal Strategic Planning Engagement.
The process of developing a future strategy can be daunting, especially for smaller family-owned businesses or organizations with limited resources. The best way to accomplish this goal is to use an outside facilitator who understands the process of long-term planning and the business challenges that all U.S. companies face, serving as a neutral voice in building consensus.
Our partner, Bill Pirolli, has decades of just such experience. Not only has he been on the front lines with his clients for over 40 years as their trusted business advisor (as well as serving in management positions in DiSanto, Priest & Co.), he has also led dozens of strategic planning retreats for accounting and law firms, private businesses, and non-profit organizations.
About Bill Pirolli
Bill has been a volunteer to the accounting profession and business community for over 20 years. He has been the President and Chairman of the Rhode Island Society of CPAs (RISCPA), the Central Rhode Island Chamber of Commerce, and the American Institute of Certified Public Accountants’ (AICPA) Private Company Practice Section. He has held many other committee positions and is currently appointed to the United States and International Board of Directors of the AICPA, an organization with over 650,000 members in 189 countries. Through these experiences, Bill has participated in many strategic organizational visioning projects and learned the best practices for developing a future-proofed strategy.
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Contact us to see how strategic planning can propel your business into the future.