Accounting & Auditing Conference · Accounting & Auditing Conference October 14, 2019 THANK YOU FOR...

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Accounting & Auditing Conference

October 14, 2019WSCPA Learning Center and Webcast

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Accounting & Auditing Conference October 14, 2019

THANK YOU FOR ATTENDING THE ACCOUNTING & AUDITING CONFERENCE!

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SCHEDULE OF EVENTS

7:00-7:50 am Sign-In and Breakfast 7:50-8:00 am Welcome and Announcements 8:00-9:30 am FASB Update: What’s New?

Michael Cheng, CPA, Frazier & Deeter 9:30-9:45 am Networking Break

9:45-10:45 am The Impact of Artificial Intelligence and Cognitive Technologies on Audits Jared Theis, CPA, KPMG LLP

10:45-11:00 am Networking Break 11:00 am-12:00 am Auditing the Implementation of ASC 606: A Practical Example

from a Mid-Market Firm Peter Miller, CPA, CFE, Clark Nuber PS

12:00-12:45 pm Lunch 12:45-1:45 pm Utilizing Data Visualization and Analytics in Auditing

Tania Fleming, Washington State Auditor’s Office 1:45-200 pm Networking Break

2:00-3:30 pm Lease Accounting Michael Cheng, CPA, Frazier & Deeter

3:30-3:40 pm Networking Break 3:40-4:40 pm

Finding Fraud in an Audit Nancy Pasternack, Foster School of Business, University of Washington

5:00 pm Adjourn


FASB Update: What’s New?

Michael Cheng, CPA, Frazier & Deeter

Find out what's new with FASB and how it could affect private companies. Learn about new standards that may have a significant impact on private companies and hear an overview of select projects on the PCC and FASB’s current technical agenda.

Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of this role, he specializes in assisting clients with complex accounting and financial reporting issues. Prior to joining the firm, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). At the FASB, he served as the Private Company Council (PCC) coordinator, where he was responsible for all PCC related matters. In addition, Mike led projects to simplify the accounting for non-employee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, he worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842). Prior to joining the FASB, Mike held various management positions with PricewaterhouseCoopers. He was an Audit Senior Manager, Private Company Services, in the firm’s Stamford, CT office. From 2003-2011, he also held roles of increasing responsibility in PwC’s Core Assurance divisions in Buffalo and Rochester, NY.

TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480

NOTES

General FASB UpdateWSCPAOctober 14, 2019

Michael Cheng

Partner

This is what every winter looked like growing up

22

Yummy!!! A Garbage Plate!!!!!

33

44

ASUs Effective in 2019 – Private Companies (Calendar Year End)

5

• ASUs: 2014-02, 2015-14, 2016-08, 2016-10, 2016-12, 2017-05, 2017-10

Revenue Rec (Topic 606)

• ASU 2016-01, 2018-03Financial Instruments – Rec & Measurement

• ASU 2017-07Presenting

Pension/OPEB Cost

• ASU 2017-01 (Def of Business)Business

Combination

• ASU 2016-04Liabilities – breakage of

prepaid cards

• ASU 2016-15 (various), 2016-18 (restricted cash)Cash Flows

ASUs Effective in 2019 – Private Companies (Calendar Year End)

6

• ASU 2018-08NFP – Contribution Guidance

• ASU 2016-16Taxes – Intra-entity transfers

• ASU 2018-02Stranded Tax Effects in OCI from Tax Cuts and Jobs Act

• ASU 2017-06Plan Accounting: Defined Benefit

• ASU 2017-15Eliminating Steamship Entity Guidance

ASU 2016-01Recognizing and Measuring Financial Instruments

What’s Changing?

8

Equity Investments at FV Through Net Income

More Common Exceptions

Equity

investments

without readily

determinable fair

value (latest

observable)

Equity method

investments

Less Common Exceptions:

Equity

investments that

result in

consolidation of

the investee

Equity

investment in

federal home

loan bank and

federal reserve

bank stock

Ownership

interest in an

exchange

What’s Changing?

Fair value change resulting from changes in own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income (OCI)

9

What’s Changing? -Disclosure Changes

Private entities not required to disclose fair value of financial instruments not recognized at fair value on balance sheet

Reduced disclosures for public entities of methods and assumptions used to estimate fair value for financial instruments not recognized at fair value on balance sheet

10

What’s Changing? -Disclosure ChangesFair value measurements for financial instruments to be based on exit price notion (current GAAP includes practical expedient to measure fair value of certain financial instruments using entry price notion)

Financial assets to be presented grouped by measurement category and form of instrument

Financial liabilities to be presented grouped by measurement category

11

Effective Date for Final Standard

12

All Public Business Entities

Annual & Interim Reporting Periods beginning after Dec.

15, 2017

Non-Public Business Entities*

Annual Periods beginning after Dec.15, 2018

Non-Public Business Entities*

Annual and Interim Periods beginning after

Dec. 15, 2019

*Includes not-for-profit entities and employee benefit plans

Entire standard is available for early application after Dec. 15, 2017

Certain provisions are available for early application upon issuance:

1. Presentation of FV changes due to entity’s own credit changes in financial liabilities in OCI

2. Non-Public Business Entities no longer required to disclose fair value of financial instruments not recognized at fair value on B/S

Early Application:

ASU 2017-07 -Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

Presentation of net benefit cost in the income statement (retrospectively application)Presentation of net benefit cost in the income statement (retrospectively application)

• Service cost in the same line item or items as other current employee compensation costs

• Remaining components separated from service cost and outside a subtotal of income from operations, if one is presented

Capitalization of only service cost in assets (prospective application)Capitalization of only service cost in assets (prospective application)

Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)

14

Net Periodic Pension Cost Effective Date (ASU 2017-07)

15

• Annual periods beginning after December 15, 2017, including interim periods within those fiscal years

Public Business Entities

• Annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019

All other entities (including private companies and NFPs)

• Permitted for all organizations, including application in an interim period

Early Application

Intro to Topic 805Business Combinations

Seller:

You purchased land 30 years ago in Seattle and now you’re planning to sell it

Net book value of the land is $1,000,000

How do you determine what to sell it for?

Buyer:

How much are you willing to pay for it?

How would you account for this?

Do you think the number recorded is close to fair value?

Do we call a simple transaction like this fair value accounting?

Consider this…

17

Seller:

Selling a controlling stake in Whole Foods

Buyer (Amazon):

What am I buying?

~13 Billion Purchase Price

• Generating ~9 Billion in goodwill

• Why would anyone do this?

Consider this…

18

19

Overview of Business Combinations

Broad Steps in Business Combination Accounting

Definition of a Business (ASU 2017-01)

ID the Acquirer

Determine the Acquisition Date

ID and Measure Consideration Transferred

Generally Recognize FV of assets and liabilities assumed

Goodwill or Bargain Purchase


20


Why Does It Matter?Some Acquisition Accounting Differences

21

Asset Business

Contingent

Consideration

Accounted for based on other GAAP (ASC 815, ASC 450)

Recognized at the acquisition date fair value while changes in estimate recognized through earnings after

the acquisition date

In‐Process Research

and Development

Expensed as incurred unless it has an alternative future use

Measured at fair value and recognized as an indefinite‐lived intangible asset until completion or

abandonment of the project.

Transaction Costs Capitalized Expensed

Initial Measurement Allocated cost on a relative fair value basis Measured at fair value

Goodwill/Bargain

Purchase

Goodwill/bargain purchases are not recognized. The overpayment or underpayment is allocated to identifiable assets and liabilities on a relative

fair value basis

Goodwill is recognized as an asset. Bargain purchase recognized immediately in earnings as a gain

(ASU 2017-01) Major Changes

22

Single or Similar Asset Threshold

• If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business

• The Board intends for this to be a practical “screen”

At a minimum, to be a business, a set must include an input and a substantive process

Remove the evaluation of whether a market participant could replace missing elements

Outputs should be defined similar to goods or services provided to customers (i.e., focus on revenue)

Similar Asset Threshold

23

Not a business when substantially all the FV of gross assets acquired is concentrated in a single asset or group of similar assets

Numerator:

• Single Asset under Topic 805• Similar Asset:

• Nature and risk associated managing and creating outputs

Denominator: (805-10-55-5A)

• Gross Assets includes consideration in excess of net assets• Less

• acquired cash, deferred tax assets and goodwill created from deferred tax liabilities

What’s a Business? (805-10-55-3A)

24

Inputs

Processes

Ability to create outputs

To be considered a business

25

Set is not creating outputs (i.e., no revenues)

Need employees that form an organized workforce

Creating Outputs, then a set is a business when

Employees that form an organized workforce

Acquired Contract that provides access to organized

workforce

Process that can’t be replaced without significant cost, effort or

delay

Process that is considered unique or scarce

26


Consideration equals the sum of the acquisition-date fair value of:

Assets transferred (e.g., cash)

Liabilities incurred by acquirer (e.g., debt)

Equity issued by acquirer (e.g., debt)

Contingent consideration

Consideration excludes:

Transaction costs

Financing costs

Compensation for future services

Consideration Transferred

27

Additional consideration provided to sellers if a future condition is met (aka, Earnout)

For example:

Payment to occur if certain revenue amount is met

Payment if certain EBITDA target is hit

Successful negotiation of contract

Milestone is met

What is Contingent Consideration?

28

At acquisition-date:

Include as consideration measured at fair value

Subsequent measurement:

Usually a liability remeasured at fair value each reporting period until contingency is resolved.

How to Account for Contingent Consideration

29

30


Measuring Assets – Some Examples

31

Cash

Accounts Receivable

Inventory

PP&E

Intangible Assets:• Contractual legal and separable

Measuring Liabilities – Some examples

32

Accounts Payable

Leases

Debt• Deferred Financing Costs

Guarantees

Deferred Revenue

Some exceptions – Not a complete list

33

Assets held for sale

Share-based payments

Contingencies

Benefit Plans• Defined Benefit plans

• Generally follow Topic 715 but OCI stuff disappears• Multiemployer plan

• Follow Topic 450 (Contingencies)

34

Goodwill or Bargain Purchase Gain


35

• Difference is Goodwill

If Consideration > FV of Net Assets

• Bargain Purchase• If you have a Bargain be skeptical

If FV of Net Assets > Consideration

Company Hungry purchases all common share of Company Tasty for $100MM on January 1, 20XX

Company Hungry incurs $10MM in expenses for legal and other professional services related to the transaction

Company Hungry agrees to pay Company Tasty shareholders another $10MM if revenues exceed $250MM in 2 years. FV of this arrangement is $2MM

FV of tangible assets equal $70MM (e.g., inventory, PP&E, etc.)

FV of liabilities assumed equal $35MM

FV of intangibles equal $25MM (i.e, brand, customer relationship)

Company Hungry intends to incur $18MM of restructuring costs shortly thereafter

Business Combination Example

36

How should Hungry Company apply the acquisition method?

How should Hungry Company account for the acquisition costs of $10MM?

What about the restructuring costs that have been planned?


37

38

Example Walkthrough…

Broad Steps in Business Combination Accounting


ID the Acquirer

Determine the Acquisition Date




How should Company Hungry account for the acquisition costs?

DR Acquisition Expense $10MM

CR Cash $10MM

What is the Consideration Transferred?

$102MM

• $100MM for common shares

• $2MM Contingent Consideration

What has Company Hungry acquired?

Tangible Assets $70MM

Intangible Assets $25MM

Liabilities ($35MM)

Net FV $60MM


39

What are the debits and credits for the acquisition?

DR Tangible Assets $70MM

DR Intangible Assets $25MM

DR Goodwill $42MM

CR Liabilities Assumed $35MM

CR Cash $100MM

CR Contingent Consid. $2MM


40

Employee Arrangements in a Business Combination

41

Employee compensation should be analyzed to determine if who this benefit.

Benefit Aquiree Precombination services (i.e., consideration transferred)

Benefit AquirerPostcombination services (i.e., expensed in post-acquisition)

Or a mix of both

Consider:

Reason for the transaction?

Who initiated the transaction?

Timing of the transaction?

Employee Arrangements

42

The employment contract for the CEO of Company Tasty provides that if Company Tasty is acquired by another company, the CEO will receive a $5 million cash payment if the CEO remains employed through the acquisition date

Several years after the employment contract is signed, Company Tasty is acquired by Company Hungry.

The CEO is not obligated to remain employed after the acquisition date.

Question - How should Company A account for the cash payment to the Company B CEO?

Example - Golden Parachute Arrangement

43

Who did this primarily benefit?

Company Tasty or Company Hungry?

What was the reason for the bonus payment?

Who initiated the transaction or arrangement?

When was the employee payment contemplated?

Example - Golden Parachute Arrangement

44

Company Hungry acquires Company Tasty and agrees to provide each of the key officers of Company Tasty a cash payment of $1 million if they remain employed with the combined company for at least one year from the acquisition date.

If the key officers resign prior to the first anniversary of the acquisition date, the cash payment of $1 million will be forfeited.

Example – Please Stay Bonus!

45

Who did this primarily benefit?

Company Tasty or Company Hungry?

What was the reason for the bonus payment?

Who initiated the transaction or arrangement?

When was the employee payment contemplated?

Example – Please Stay Bonus!

46

Private Company Alternatives

47

ASU 2014-02 – Amortize Goodwill

Amortize goodwill over 10 years or less

Impairment test based on trigger event

Reporting Unit or Entity Level

ASU 2014-18 – Subsuming Certain Intangibles

Subsume the following into goodwill:

• Customer-related intangibles that can’t make money on its own

• Noncompetition agreements

If elected, must apply ASU 2014-02

Private Company Alternatives

48

4949

5050

Needed reinforcements

5151

Consolidations – ASU 2018-17Focus on Private Company Accounting Alternative

52

Legal Entity?

Scope Exception?

Variable Interest?

Variable Interest Entity?

First… A Recap of VIEs

53

Primary Beneficiary

Related Party Tie-breaker?

Does VIE Guidance Apply?

Who has Controlling Financial Interest?

What’s the problem? - Engine Co. Example

54

OWNER

Car Co.

100% Equity

100% Equity

Purchases90% of Engines Produced

Engine Co.

• Engine Co. has insufficient equity (Equity = 5% of funding)• Industry standard for sufficient equity is 20%

• Loan to Engine Co. represents 15% of funding• Engine Co financed remaining 80% with Bank ABC• Car Co. makes significant decisions • Arms-length pricing

$15k Loan

Another common example…

55

OWNER

Operating Co.

100% Equity

100% Equity

Leases Factory from Lease Co.Lease Co

• Operating Company leases a factory from Lease Co.• Lease Co’s only asset is the factory

• Lease Co financed the purchase of the factory through a mortgage

Lease Payments

Consolidations: Private Company Alternative

56

Policy Election not to apply VIE Guidance to Entities Under Common Control

Criteria to Qualify

• Private company and legal entity under common control• Common control parent is not a PBE• Legal Entity is not a PBE• Don’t have a majority of the voting interest in the Legal Entity

Required Disclosures to under involvement and exposure to legal entity under common control

Accounting Alternative for Leasing Arrangements under common control (ASU 2014-07) Superseded

Combined statements still permitted if entities are under common control

In addition to existing related party disclosures, disclose the following:

a) Nature and risks associated with legal entity under common control.

b) How does legal entity affect the reporting entity’s balance sheet, financial performance, and cash flows.

c) Assets and liabilities on the reporting entity’s balance sheet resulting from its involvement with the legal entity

d) The reporting entity’s maximum exposure to loss related to the legal entity.

e) If the entity’s maximum exposure to loss exceeds assets and liabilities as described in (c), the reporting entity shall provide information to allow users of financial statements to understand the excess exposure. Consider both explicit and implicit arrangements

Consolidations – Private Company Disclosures

57

Calendar-Year End Private Companies -> 2021

Early adoption permitted

Effective Date

58

Leasing arrangements under common control

What do I recognize and measure under Topic 842

What about leasehold improvements?

How does this interact with the Topic 842

59

Michael ChengNational Professional Practice Partner

Michael ChengNational Professional Practice [email protected]

Direct Phone: 404.573.4538

1230 Peachtree Street NESuite 1500Atlanta, GA 30309

Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of his role, Mike specializes in assisting clients with complex accounting and financial reporting issues. Mike currently serves on AICPA’s PCPS Technical Issues Committee

Prior to joining Frazier & Deeter, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). In addition to serving as the Private Company Council Coordinator, Mike led projects to: simplify the accounting for nonemployee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, Mike worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842).

Prior to joining the FASB, Mike was an Audit Senior Manager at PricewaterhouseCoopers (PwC).

Mike earned his Bachelor of Science degree in Accounting with a concentration in Finance from Binghamton University in Binghamton, New York.


The Impact of Artificial Intelligence and Cognitive Technologies on Audits

Jared Theis, CPA, KPMG LLP

This session will provide an overview of current technologies that are currently being used on audits or that are currently being developed and tested for use. It will also cover how these technologies are disrupting the traditional audit approach for firms, clients, and those entering the profession in the coming years. The session will cover:

• Overview of some of the current technologies that are being enabled on audits

• The impact of these technologies on the audit process, client deliverables, and evidence obtained

• How these technologies may change the tools and skillsets required by auditors in the future

Jared Theis, CPA, is an Audit Senior Manager in the Seattle office of KPMG LLP, working remotely out of Spokane. He provides financial statement and internal control audit services to a variety of public and non-public companies, primarily in the forest products, manufacturing, and real estate industries. Jared maintains an in-depth understanding of requirements and standards of the PCAOB, FASB, SEC, and Private Company Council. He is also frequently a guest speaker at various professional events and local college campuses, and currently serves as a member of the Accounting Advisory Boards for Washington State University and Eastern Washington University. He is a member of the WSCPA Board of Directors, serving as Vice Chair for 2019-2020.


NOTES

The technology enabled audit

Jared Theis

October 14, 2019

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541


Agenda

The worldis changing

Automation in action

Accounting innovation

journey

What is expected of

professionals

The world is changing



The data shift: How do we make sense of the data being generated?

Source: https://medium.com/@VidrihMarko/this-happens-every-60-seconds-online-in-2018-27a81e5fa306

Every MINUTE of the DAY

2018 AMAZON

SHIPS 1,111PACKAGES

THE WEATHERCHANNEL

RECEIVES18,055,555FORECAST REQUESTS

GIPHYSERVES UP1,388,889GIFS

NETFLIX

USERS STREAM97,222

HRS OF VIDEO

SNAPCHATUSERS SHARE2,083,333SNAPS

LINKEDIN

GAINS 120+ NEW PROFESSIONALS

YOUTUBE

USERS WATCH4,333,560VIDEOS

TWITTERUSERS

SEND473,400

TWEETS

12,986,111

TEXTS SENT

SKYPEUSERS MAKE176,220CALLS

INSTAGRAMUSERS POST

49,380PHOTOS

AMERICANSUSE 3,138,420 GBOF INTERNET DATA

SPOTIFYSTREAMS OVER 750,000SONGS

UBER USERSTAKE1,389

RIDES

VENMOPROCESSES $68,493PEER-TO-PEERTRANSACTIONS

TINDERUSERS MATCH6,940 TIMES

GOOGLECONDUCTS3,877,140 SEARCHES

1.25 NEW

BITCOINARE CREATED

SOCIAL NEWSRECEIVES 1,944NEW COMMENTS

TUMBLRUSERS PUBLISH79,740 POST



Making sense of the data

How can auditors effectively capture, analyze and ultimately use the vast amount of information that is now available for an audit?

Digital tools

Automation and robotics

Tech savvy people

Cognitive computing

Data analytics

The Answer lies in a combination of capabilities


Marketplace perspective

Google recently announced they have changed from“mobile first” to “AI first.”

There are now more than

1,500 AI start-ups with

$10 billion in funding.4

Global market forAI systems will reach

$70 billion by 2020.4

Amount of data collected each day:

2.5 billion GBs or 2,500,000,000,000,000,000 bytes1

Google, Microsoft, and Amazonwill each spend more than

$12 billion on R&D this year,2

(with much of this dedicated todigitization and intelligent automation).

of CEO’s considertheir company to bea technology company.3

1. Source: 2017 JPMorgan annual report2. Source: Satya Nadella – September, 2017

3. Source: Fortune CEO Daily – June 18, 20174. Source: KPMG Innovation snapshot #74 – January 6, 2017

71%



US CEO views on the impact of technology

Source: KPMG U.S. CEO Outlook 2018 Survey, May 2019

of US CEOs feel personally responsible for leading technology strategy. 89%

of US CEOs prioritize technology investments over people investments, yet they are aware of disruptors beyond technology.

68%

of US CEOs cite disruptive technology as the risk posing the greatest risk to their organization’s growth

23%

of US CEOs believe that, overall, technology will be a job creator. 72%


Audit 2025: The future is now

A KPMG and Forbes Insights survey reveals that auditors need to use technology to expand their roles, but this need has grown much stronger over the last two years

25%Increase in the number of executives who

believe auditors should be more proactive about expanding the role of the audit

27%Increase in the number of executives who believe the auditor of the future needs technology skills

Skills that are becoming more important

66%Communicationskills

65%Critical thinking and judgment skills

59%Investigative financial skills

49%Ability to work across siloes

Future auditors should have the following skills:

Learn more by downloading, “audit 2025: the future is now.”

Accounting Innovation Journey


Meeting the challenge of innovation

Key investments are needed in:

PeopleEnhancedMethodologies

Strategic Relationships

Today Tomorrow

People, intellectual property and audit processes

Cognitive and deep learning

Robotics and leading D&A tools

Strategic relationships with leading technology companies



Transformation through technology

Market disruptors

Digital Labor

Client Investments

Explosion of Data

Disruptive Technologies

Influencing the vision for change

Robust Shared Services

Next Gen Auditors

Innovative audit platform

EnablingTechnologies

Enhanced Client Experience

Our profession’s commitment to quality demands that we drive change as well through innovative ideas, processes, and tools.

Automation in action



Understanding the automation spectrum

Emerging technologies are integral to the KPMG Audit Transformation strategy and cover the full spectrum of automation leveraging key elements including robotics, natural language processing, machine learning and Artificial Intelligence.

Automation of entry-level, transactional, rule-based, and repeatable processes

Processing of unstructured data and base knowledge

Automation driven by self learning and adaptive technologies

Macro-based

Unstructured Data

NaturalLanguageProcessing

KnowledgeBase

ActiveLearning

Macro-based

UnstructuredData


KnowledgeBase

ActiveLearning

Macro-based

UnstructuredData


KnowledgeBase

ActiveLearning

PredictiveAnalytics

MachineLearning

Reasoning Large-ScaleProcessing

Big DataAnalytics

PredictiveAnalytics

MachineLearning


Big DataAnalytics

PredictiveAnalytics

MachineLearning


Big DataAnalytics

Basic Automation

Enhanced Automation

Cognitive Automation

Key features Key features Key features



Digital automation

Through data extraction and analysis, the following audit-related insights can be attained:

— Investment in ERP/Integrated accounting system is not being leveraged properly

— There is manual intervention in processes that should be automated

— Internal policies and procedures may not be complied with

— Insight into specific countries or departments that are recording the most manual and/or unusual journal entries

Journal entry analysis

— Areas where information is being stored outside of the core GL system

— Transactions processed manually, rather than via automated processes

— Potential for missed revenue opportunities

— Process improvement opportunities

Revenue three way match

— Compliance with segregation of duties policies

— Potential fraudulent transactions

— Opportunities to reduce risk exposure

Segregation of dutiesanalysis


Journal entries analysis

Generate highly customizable analyses for identification of inappropriate journal entries.

— Journal entries recorded on weekends, holidays, or unusual times outside of business hours that may indicate fraudulent activity

— All journal entries recorded by a preparer or approver, can be analyzed

Filter weekend Values

Saturday Sunday

Automated or manual entry User name

Document number –distinct count

Amount in document currency – sum

Document number –distinct count

Amount in document currency – sum

Automated 69,791 2,083,786 5,744 1,042,157

Manual EC241F8E-315 53 1,907,300

0954B949-649 5 15,608 2 3,070

E8DEE2FC-1AF 1 740

EC241F8E-315 32 3,558,601 316 673,069

Manual Total 90 5,481,509 319 676,879

Grand Total 69,881 7,565,295 6,063 1,719,036

Account number Account category Dr amount Cr amount Local currency

User namePosting date

Entry dateAuto or manual?

A6B98EB7-D Trade receivables third party

1,097,300 - USD EC241F8E-315 2013-09-30 2013-10-05 Manual

99AC9424-6 Non current assets - 1,097,300 USD EC241F8E-315 2013-09-30 2013-10-05 Manual

99AC9424-6 Non current assets 1,097,300 - USD EC241F8E-315 2013-09-30 2013-10-05 Manual

A1A21AX7-B Cash - 1,097,300 USD EC241F8E-315 2013-09-30 2013-10-05 Manual


Revenue 3 way match – Price results

Price difference analysis

Price risk categoryRevenues subject

to 3 way match# of

transactions%

(amount) % (number)Extended

difference

No difference 303,232,241 1640 94.5% 92.9% 0

PO > invoice price 14,438,076 73 4.5% 4.2% 823,682

PO < invoice price 3,175,837 51 1.0% 2.9% 98,740

Total 320,846,154 1764 100.% 100.0% 922,422

124 transactions for a total of $17,613,913 were identified with price differences

94.5% of transactions analyzed contained no price differences

$922,422 total “extended” difference or 0.3% of total amount tested


Intelligent automation – Expense vouching


Conflicting authorization in purchasing

Potential risk where 7 users posted $10 million in transactions with conflicting authorizations: goods/service receipt entry, A/P invoice entry, and payment approval

After investigating the underlying transactions and discussing with the client, we may conclude there is little or no risk here.

The business may wish to streamline authorizations and eliminate a potential control deficiency related to the number of individuals with conflicting duties.


Impact of weather patterns

Thechallenge

— Model the impact of discrete weather behavior at individual locations on weekly store sales performance.

KPMG response

— Create a model that statistically linked weather observations geo-mapped to individual store locations with differences between forecast and actual store sales.

— Calculate the impact of weather on sales for a given week and adjusted rates for same-store weekly sales comps.

$

Do I buy something in

store?

Yes

No

Yes

No

Other…

Brand Preference

Availability/Schedule

Ability

to Pay

Consumer Profile

? Yes

No

W eather aside, will I go to the

store?

Yes

No

Given the weather, do I go

to the store?Shopping Triggers

Other…

“Need”1

Marketing

By definition, the “No” paths are not modeled because they cannot be observed these in the sales and traffic data

Do I buy something online?

Scope of modeled weather impact

30

10

15

Reported LY Comp

105

Forecast Growth

Weather-Adjusted LY Comp

Actual Weather Impact

Non-Weather Impact

Actual

+20%+5%

100

Weekly Dollar Sales

TY LY


Predicting student withdrawals

The challenge

— A leading university wanted to reduce students leaving before graduating by approaching at-risk students with targeted remedial actions to prevent their withdrawal.

KPMG response

— Developed a survival analysis model that combined advanced analytics, various data sources, along with machine learning, to identify characteristics of students likely to leave the university prematurely.

— Model examined over 1,500 initial data signals, pulls data from relevant sources, and provides a hazard score for each student.

— Model enables the university to intervene on a timely basis with customized interventions to improve student retention.


What is cognitive technology?

Cognitive technology employs a range of capabilities that can:

Perceive Reason Learn

The analytical capabilities of cognitive technology are well-suited tothe expanding data volumes

and automated processes prevalent in today’s audit environment.

Hypothesize and weigh supporting evidence

Improve confidence levels with experience

Interpret sensory input beyond traditional data



More effective decision making

Cognitive technology and data and analytics are highly complementary capabilities that support complex decision making.

Logic

AnalyticsRationale

CognitiveAnalyze

Compare

Measure

Optimize

Calculate

Prevent

Monitor

Prescribe

Learn

Assess

Infer

Debate

Hypothesize

Probability

Analogize

Options

001001010100110011

Help me do THINGS right Help me do the RIGHT things



Cognitive technology in action

Key attributes from unstructured data

Cognitive system to perform judgmental activities

1. Extract 2. Train

More detailed evidence forauditor evaluation

Machine learning to enhance points 1 and 2

4. Generate3. Engage

Client Information


The benefits of cognitive technology

Cognitive technology

Inp

uts

Ou

tco

mes

Analyze data

Generate hypothesis

Evaluate evidence

Judgment based decisions

Insights

Cognitive technology drives audit quality by enhancing:

Speed Enablement Focus

Of audit professionals for success in a digital and mobile world

Deeper views into data to better identify risks for high confidence outcomes

Accelerated path to meaningful insights and decision making

Transformed sampling techniques



CMLA – Journey to cognitive automation

Credit file

Understand the facts

Translate into a loan rating

Interpret a client-specific loan grading scale

Prepare summary of findings

Manual processes are limited to a subset* of the entire loan population.Today

* Approximately 40-60 credit files


CMLA – Journey to cognitive automation

We will be able to analyze larger, more complete data sets from selected loan portfolios up to, and including, the entire bank loan portfolio.

KPMG and client scales alignedWeighting scale

Payment History: Weak

PSOR: Strong

Collateral: Strong

Guarantor: Weak

Loan Amount: $10M

Purpose: re-finance

Collateral: A properties

Appraised value: $100M

Third-party information

100

90

80

70

AAA

AA

A

Evidence

Understand facts

Assign weightsto facts

Translate into a loan

rating

Extract facts from credit file and

other sources

Auditor reviews potential

exceptions

Loan #

KPMGrating

Clientrating

1

2

3

B

C

AAA

B

B

AAA

Future

What is expected of audit professionals


The next generation of audit professionals

Is prepared for an evolving profession

Has strong investigative skills

Applies critical thinking and reasoned judgment

Is innovative

Embraces change

Applies advanced technologies

— Core technical skills in audit and accounting

— Business process acumen

— Understanding of statistics and predictive analytics

— Analytical mindset

— Interpersonal

— Flexible and agile

Technical skills

Soft skills


What you can do now

Stay current on trendsand seize industry opportunities

Challengeyourself to thinkcritically

Gain dataand analyticsskills

Learn effective communication

Questions

Thank you

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

kpmg.com/socialmedia

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.


Auditing the Implementation of ASC 606: A Practical Example from a Mid-Market Firm

Peter Miller, CPA, CFE, Clark Nuber PS

The long-anticipated guidance related to Revenue from Contracts with Customers is nearly upon us. Given the prolonged implementation period, the basics of this new guidance have been covered many times over. This session will provide a practical example for how the implementation of ASC 606 was applied by a mid-market firm serving private companies and nonprofits. TAKEAWAYS:

• For attendees in the practice of public accounting this session will provide an example of a practical approach to auditing the implementation of ASC 606.

• For attendees preparing financial statements this session will provide clarity on what you can expect from your service provider and what you will need to have prepared.

Pete Miller, CPA, CFE, is a shareholder in the audit and assurance practice at the accounting firm Clark Nuber PS, headquartered in Bellevue, Washington. Pete serves privately-held and closely-held businesses in a wide range of industries and sizes. Clark Nuber partners with those businesses to help them achieve their financial goals and Pete primarily does this by providing executive leadership to a number of concurrent teams conducting audits, reviews and compilations. In addition to these duties, Pete directs the firm’s Forensic Accounting and Fraud Investigation practice, which includes the examination of internal control environments, the analysis of a variety of cash flow behavior, due diligence reviews, and a variety of litigation support projects. Pete has been a practicing CPA (Certified Public Accountant) since 2000 and a practicing CFE (Certified Fraud Examiner) since 2006. In his free time, Pete and his family enjoy hiking, running, and camping – just about anything outdoors. As an avid music lover, Pete can be found drumming in the company rock band or expanding his 70K+ song digital music collection.


NOTES

© 2017 Clark Nuber all materials included Seek permission for republishing

Auditing the Implementation of ASC 606

A Practical Example from a Mid‐Market Firm

Pete Miller, CPA, CFE

Shareholder, Clark Nuber P.S.

[email protected]; 425.709.6696

1. Our journey to here

2. Key takeaways of the new guidance

3. What a client can expect to be asked

4. Our planned audit strategy

5. Disclosures

6. Transition items

Agenda

1. The amount of revenue you recognize may not change, but the path will be different.

2. How will you know that you are complying with the new standard?

3. How will your CPA be able to audit that you are compliant with the new standard?

4. How will you know which disclosure requirements apply to you?

Why is this important?

1. It is important to read through the guidance in its entirety at some point.• Consider forming a multi‐disciplined steering committee

2. Effective for years beginning after 12/15/2018.• Years beginning after 12/15/2017 for public business entity

3. Linear process involving 5 steps:i. Identify the contract(s) with a customerii. Identify the performance obligations in the contractiii. Determine the transaction priceiv. Allocate the transaction price to the performance obligations in the contractv. Recognize revenue when (or as) the entity satisfies a performance obligation

4. Many industry‐specific Transition Resource Groups have been developed to assist in analyzing implementation issues.

8 Things to Know About ASC 606

5. Revenue amounts/timing may change as a result; disclosure requirements likely will change.

6. Two ways to implement this change:i. Full restatement – prior periods would be recast to show comparative

information as though the new guidance were in place.

ii. Modified retrospective approach – record an adjustment to retained earnings and not restate previous years.

7. Commissions expensemay be impacted as a byproduct of this process.

8. Tax treatment will generally need to follow GAAP.

8 Things to Know About ASC 606

Revenue Recognition Task Force (assume 12/31 YE)

Individual TrainingJuly/Aug 2017

Group TrainingSept 2017

Initial RRTF

MeetingDec 2017

Research consult Feb 2018

Publish talking points

Early March

Publish mock‐up of new disclosures

End of March

Develop narrative/ questionnaire tool for clients

March ‐ April

Rollout client narrative/

questionnaireMay

Consult and assess with clientsMay – December 2018

Audit testing and implementationQ4 2019 and forward

Revenue Recognition Timeline

Discuss overall timeline and milestonesMonth XX

CN to provide sample

transition disclosureMonth XX

Formal audit walkthroughs at interimQ4 2019

Complete narrative/

questionnaireMonth XX

Assess validity of new policy against small sample of existing

contractsMonth XX

December 31, 2018

Monitor inputs for estimates and adjust modelongoing

Go liveJanuary 1, 2019

• Different from other ASC Topics

• Auditing the discrete event

• Requests from clients

• Audit plan• Obtain an understanding• Test changes to revenue recognition timing

• Consider completeness of disclosures

• Do the same steps with costs to obtain a contract

• Consider the need to modify the auditor’s report

Auditing the implementation of 606

• Audit plan• Obtain client analysis of homogenous revenue streams

• Review analysis in light of prior audit knowledge for reasonableness• If necessary, review sample of customer contracts to further consider

• If no change to revenue recognition timing, stop here

• If changes to timing,• Consider the transition method elected by the client

• Test the calculation

Auditing the implementation of 606

• ADD DISCLOSURE CHECKLIST MATERIALS

Disclosures

• Simple example

• More complicated

Disclosure examples

• Transition disclosures?• Material impact?

• No material impact?

• Emphasis of a matter?

Transition items

Questions

State and Local Tax Considerations in Mergers and Acquisitions 13


Utilizing Data Visualization and Analytics in Auditing

Tania Fleming, Washington State Auditor’s Office

Data is everywhere, but it’s how we present that data that make it so valuable. Data storytelling helps connect the dots. The Office of the Washington State Auditor uses charts, graphs, maps, and dashboards to make the results from their audits understandable and dynamic. During this session, you'll learn about how:

1) The Office of the Washington State Auditor uses data to tell stories, 2) To effectively communicate with data by choosing the right chart, and 3) To drive effective decision making.

TAKEAWAYS:

• Power of data visualization to communicate audit results • How data visualization helps tell stories

Tania Fleming is a performance auditor and MPA graduate with experience in program evaluation, process improvement, statistical analysis, international development, legislative research, Korean language skills, and exposure to NGOs in Afghanistan, Ghana, South Korea, and Japan. She is an expert in higher education performance-based funding systems, state financial management systems, and low-income rental housing subsidies. She developed and managed budgets, teams and timelines for projects including a review of practices, tools and policies used by Washington's government to process public records requests. I also designed and conducted research methods that included qualitative and quantitative research including phone and web surveys, focus groups, and research on dozens of other states. In addition to project and research management and design, Tania conducted several presentations to legislative committees and other groups, and distilled complex technical information to provide concise, understandable, and informative reports on topics ranging from Public Records Act requests, higher education performance funding, impartiality of administrative appeals, and others.


NOTES

Storytelling withDataWSCPA Accounting & Auditing Conference

Pat McCarthyWashington StateAuditor

Tania Fleming

Principal Performance Auditor

October 14, 2019

Storytelling withDataWSCPA Accounting & Auditing Conference

Objectives

• Why visualize data?• What’s the right chart?• What are practical tips for effective

visualizations?

Why visualizedata?

3

7 6 4 9 8 7 5 1 3 6 5

8 4 8 1 6 8 3 1 3 7 3

2 5 7 8 4 6 8 9 3 9 6

8 4 9 6 7 1 2 3 6 4 6

8 5 9 7 8 5 6 3 4 2 8

4 9 8 6 5 7 8 7 6 3 5

2 5 1 8 6 7 7 3 8 2 6

4 9 7 8 5 4 3 3 2 8 8

7 4 5 7 9 8 2 5 6 9 1

6 9 6 8 6 3 1 2 3 4 8

7 8 4 6 8 9 5 6 1 2 3

8 9 8 2 5 6 7 5 8 3 4

HOW MANY NINES ARE THERE?

Why visualizedata?

4

HOW MANY NINES ARE THERE?

7 6 4 9 8 7 5 1 3 6 5

8 4 8 1 6 8 3 1 3 7 3

2 5 7 8 4 6 8 9 3 9 6

8 4 9 6 7 1 2 3 6 4 6

8 5 9 7 8 5 6 3 4 2 8

4 9 8 6 5 7 8 7 6 3 5

2 5 1 8 6 7 7 3 8 2 6

4 9 7 8 5 4 3 3 2 8 8

7 4 5 7 9 8 2 5 6 9 1

6 9 6 8 6 3 1 2 3 4 8

7 8 4 6 8 9 5 6 1 2 3

8 9 8 2 5 6 7 5 8 3 4

Why visualizedata?CaseStudy:PublicRecordsRequests

QUESTION

How much does it cost government agencies to provide public records?

APPROACH

• Detail by entity type

• Filter by entity

ENTITIES SPENT MORE THAN $60MILLION

5

Why visualizedata?CaseStudy:AlternativeLearningExperience(ALE)Programs

QUESTION

How can we help Alternative Learning Experience programs learn how to improve?

APPROACH

• Information bylocation

• Filter by innovative approach

• Detailed examples

INNOVATIVE APPROACHES ALE OFFERS

6

Finding the RightChartA.Abela’sChartChooser

https://img.labnol.org/di/choosing_a_good_chart2.pdf

7

Finding the RightChartMarksandChannelsbyEffectiveness

Position on a common scale

Length

Tilt/angle

Area

Color luminance &saturation

Curvature

Volume (3D)

Least Effective8

Most Effective

Spatial region

Color hue

Shape

Tamara Munzner, Visualization Analysis & Design, 2015

Tips forBuildingDataVisualizations

Text

AdaptedfromStephanieEvergreen’sDataVisualizationChecklist

Short descriptive titleLabels are used sparinglyText size is hierarchical and readableData are labeled directly (rather than using a legend) Subtitle and/or annotations with additional information

Proportions are accurate Data intentionally ordered Axis intervals are equidistant Graph is 2DDisplay is free from decoration

Arrangement

Color scheme is intentionalColor is used to highlight key patternsColor is legible when printed in black and white Color is legible for people with colorblindnessText sufficiently contrasts background

Color

9

Data VisualizationChecklist

Gridlines, if present, are mutedGraph does not have border lineAxes do not have unnecessary tick marks or axis linesGraph has one horizontal and one vertical axis

Graph highlights significant finding or conclusionThe type of graph is appropriate for data Graph has appropriate level of precision

Individual chart elements work together to reinforce takeaway message

Overall

10

Lines

From http://stephanieevergreen.com/wp‐content/uploads/2016/10/DataVizChecklist_May2016.pdf

Howmanynines are there?

1 8 better proc

2 10 • Order

3 15 • Highlig

4 13 • Lines

5 14

6 20

7 15

8 25

9 12

11

How to help your brainess and

compare:

ht

• Labels

FiveThirtyEight’s BiggestDinosaur

12

13

Information

Contact Tania Fleming,

[email protected]

(360) 725‐5627


Lease Accounting

Michael Cheng, CPA, Frazier & Deeter

Topic 842 (Leases) is sure to have a major impact on your (or your client’s) balance sheet. This session provides an overview what you need to know about the upcoming changes to lease accounting from a lessee’s perspective. OBJECTIVES:

• Learn how to identify a leasing arrangement • Understand the overall model for finance and operating leases

Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of this role, he specializes in assisting clients with complex accounting and financial reporting issues. Prior to joining the firm, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). At the FASB, he served as the Private Company Council (PCC) coordinator, where he was responsible for all PCC related matters. In addition, Mike led projects to simplify the accounting for non-employee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, he worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842). Prior to joining the FASB, Mike held various management positions with PricewaterhouseCoopers. He was an Audit Senior Manager, Private Company Services, in the firm’s Stamford, CT office. From 2003-2011, he also held roles of increasing responsibility in PwC’s Core Assurance divisions in Buffalo and Rochester, NY.


NOTES

Topic 842 Overview –Lessee AccountingWSCPAOctober 14, 2019

Michael Cheng

Partner

Scope and Scope Exceptions

2

Topic 842 does not apply to:

Leases of intangible

assets (Topic 350)

Leases of assets under construction (Topic 360)

Leases of biological assets

(Topic 905)

Leases to explore for or

use nonregenerative

resources (Topics 930 and

932)

Leases of inventory (Topic

330)

Scope: All leases, including subleases

2

Right-of-Use Model

3

A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

Lessee Accounting – Let’s get the basics down!

Lessee Model

5

Finance lease if any of the following are met (otherwise it’s an operating lease):

Lease transfers ownership of

the underlying asset to the

lessee by the end of the lease

term

Lease grants the lessee an

option to purchase the asset that the

lessee is reasonably certain to exercise

Lease term is for a major part of the remaining economic life of the underlying

asset

PV of the lease payments and

any lease residual value guarantee not reflected in the

lease payments, equal or exceed substantially all of the asset’s

FV

Underlying asset is of such

specialized nature that it is

expected to have no

alternative use to the lessor at the end of the

lease term

Lessee Accounting Overview

6

Subsequent Measurement

Finance

Operating

Right-of-use (ROU) asset

Lease liability

Amortization expense

Interest expense

Cash paid for principal and

interest payments

Right-of-use (ROU) asset

Lease liability

Single lease expense on a straight-line basis

Cash paid for lease payments

Classification is similar to the classification in Topic 840

Recognition and measurement exemption for short-term leases

Lease Liability

Lease liability

Present value of remaining payments, using a discount rate calculated on the basis of

information available at the commencement date

ROU Asset - Operating

Lease liability

+ Unamortized initial direct costs

± Prepaid/Accrued lease payments

- Remaining balance of lease incentives received

ROU Asset

Lessee

Reassess only upon the occurrence of a significant event/change in circumstances

that is within the control of the lessee*

Lessor

Not required to reassess*

Initial Measurement

Consider all relevant factors that create an economic incentive to exercise a

renewal/purchase optionInclude if reasonably certain will exercise

Lease Term and Purchase Options

9


* Absent a modification

Lessee

Reassess VLPs based on an index or a rate only when the lessee remeasures the

lease liability for other reasons (e.g., change in lease term)*

Lessor

Not required to reassess*

Initial Measurement

Only include VLPs that are linked to an index or a rate or are “in-substance fixed payments”

Variable Lease Payments (VLPs)

10


* Absent a modification

Discount Rate

11

Reassessment

• The rate implicit in the lease, if readily determinable; otherwise the incremental borrowing rate

• Include initial direct costs of the lessor in the determination of the rate

Initial Determination

• Lessee: Reassess only when lease liability is remeasured for other reasons (e.g., change in the lease term)*

Reassessment

Private Companies and NFPs

• Discount Rate Accounting Policy Election: May use risk-free rates for measurement of all lease liabilities

Lessee – Simple Finance Lease• 5 year equipment lease entered at end of 2020

• Rent payment equals $1,000 the first year and increases $100 each year thereafter. Total payments over 5 years is $6,000

• Discount rate is 6%

• No initial direct costs recognized

• Assume this is a finance lease

12

Lessee – Simple Operating Lease• 5 year retail store lease entered at end of 2020



• No initial direct costs recognized

• Assume this is an operating lease

13

• For leases with a GAAP lease term of 12 months or less

• No longer based on maximum possible term, now aligned with definition of lease term

Recognition and Measurement

Exemption

Short-Term Leases Exemption

14

• Accounting policy election of risk-free rate to measure lease liability

Recognition and Measurement Election

Risk-Free Rate Election (Nonpublic)

15

• Account for related-party leases based on legally enforceable terms and conditions of the lease

Recognition and Measurement

Related-Party Leases

16

17

Lessee Financial Statement Presentation

Balance Sheet

• ROU Assets:• Separate line item

or • Within another line

item but separate from ROU Assets from finance leases

• Lease Liability• Separate line item

or• Within another line

item but separate from lease liabilities from finance leases

Income Statement

• Income from continuing operations (operating expense)

Cash Flows

• Lease payments are operating activities

Operating Leases

18

Lessee Financial Statement Presentation

Balance Sheet

• ROU Assets:• Separate line item or • Within another line item

but separate from ROU Assets from operating leases

• Lease Liability• Separate line item or• Within another line item

but separate from lease liabilities from operating leases

Income Statement

• ROU Asset Amortizationconsistent with depreciation/amortization of similar assets

• Interest expense on lease liability consistent with other interest expense.

Cash Flows

• Principal repayment on lease liability in Financing Activity

• Interest payments on lease liability typically in Operating Activities

• Variable lease paymentsin Operating Activities

Finance Leases

More Advanced Lessee Topics

Identifying a Lease

Lease contracts in the scope of Topic 842

involve

An identified asset

That is explicitly or implicitly specified

Supplier has no practical ability to substitute and would not economically benefit from substituting

the asset

The right to control the use during the lease

term

Decision-making authority over the use of

the asset

The ability to obtain substantially all

economic benefits from the use of the asset

Identifying a Lease

21

Example – Fiber Optic Cable

22

Is there a Lease?

Customer enters into a 15 year contract for the right to use 3 specified fibers within a larger cable connecting Hong Kong to Tokyo.

Customer makes decisions about the use of the fibers (e.g., decides what data and how much those fibers will transport)

Supplier is responsible for repairs and maintenance.

Is there a Lease?

Customer enters into a 15 year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to Tokyo.

Capacity is equivalent to the full use of 3 strands within a cable (the cable has 15 fibers with similar capacities).

Supplier makes decisions about the transmission of data (e.g., which fibers are used and electronic equipment used to operate the cable).

Example – Concession Space

23

Is there a Lease?

Coffee Company (Customer) enters into a contract with an airport (Supplier) to sell its goods for a 3 year period.

Contract states the amount of space required and the space may be located at any one of the several boarding areas.

Supplier has the right to change the Customer’s location at any time.

There are minimal costs to relocate the kiosk owned and operated by the Customer.

Many areas in the airport meet the space specifications.

Example - Detergent purchases

24

Is there a lease?

• Cleaning supply company sells cleaning agents and dishwashing detergent

• Pricing is extremely favorable but requires a 3 year commitment

• Annual minimum purchase requirements must be met by customer

• A high-end dishwasher is included during the 3 year term

• Professional installation is included

Example – Let’s take this a little further

25

Can you identify potential leasing arrangements?

• Pretend you work for a national restaurant chain

• Segments consist of

• casual dining,

• sports/bar concept

• fast food

Brainteaser

26

Is there a lease?

• Green office decorating and management

• Live plants

• No fuss because service provider takes care of everything (e.g., watering, pruning, etc.)

• 2 year term

Commencement Date

27

Lease Commencement Date

Starts when lessee has the right to use

the underlying asset (transfer of

control)

Timing of lease payments does not

affect the commencement

date

Example – When does a lease start?

28

Example:

Lessee signs a lease contract on 12/31/2020 for a prime location in a shopping mall

Lessor grants access to location starting on 5/1/2021

Lessee begins construction of leasehold improvements on 5/1/2021

Store is anticipated to open on 7/1/2021 when lease payments are due to the Lessor

Questions:

What is the lease commencement date?

Which date do I use to determine the discount rate?

Initial Direct Costs

Selling profit or loss: Expense IDC at lease commencement

No selling profit or loss: Include IDC in initial measurement of net investment in the lease

Recognize as an expense over the lease term on the same

basis as lease income

Include in the initial measurement of the ROU asset and amortize the costs over the lease term

Sales-Type Operating

Lessor

Lessee

IDC = only incremental costs that an entity would not have incurred if the lease had not been obtained (executed)

Finance & Operating

Include IDC in initial

measurement of net investment in

the lease

Direct Financing

Initial Direct Costs (IDC)

30

Initial Direct Costs (IDC) - Example

31


Costs incurred by lessee

$15,000 - External legal fees

$7,000 - Employee costs for negotiating lease terms and conditions

$20,000 - Payments made to existing tenant to obtain the lease

Question - What are the lessee’s IDCs?

Initial Direct Costs (IDC)

32


• Commissions• Payments made to an existing tenant

to incentivize that tenant to terminate its lease

Included

• General overheads• Cost to evaluate prospective lessee’s

financial condition• Costs to negotiate lease terms and

conditions• Legal fees

Excluded

Lessee – Simple Operating Lease w/ IDC

• 5 year retail store lease entered at end of 2020



• $500 paid as lease commissions to leasing agent


33

Lessee – Simple Operating Lease w/ IDC

• What are the entries when the lessee is granted access to the retail location?

• What are the entries at the end of 2021 when the expense is incurred and the payment is made?

34

Example – Simple Operating Lease w/ IDC

35

End of 2020 – Transfer Control of Warehouse and Payment of Lease Commission

DR ROU Asset (3) $5,506 (Lease liability + IDC)

CR Lease Liability (2) $5,006 (PV of remaining lease payments)

CR Cash (1) $500 (IDC – lease commissions)


36

End of 2021 – Lease expense and payment

DR Lease Expense (3) $1,300 (Straight-line rent expense)

DR Lease Liability (2) $1,000 (2021 lease payment)

CR Lease Liability (4) $300 (6% Interest on lease liability)

CR ROU Asset (5) $1,000 (ROU amortization)

CR Cash (1) $1,000 (2021 lease payment)


37

End of 2025 – Lease expense and payment

DR Lease Expense (3) $1,300 (Straight-line rent expense)

DR Lease Liability (2) $1,400 (2025 lease payment)

CR Lease Liability (4) $79 (6% Interest on lease liability)

CR ROU Asset (5) $1,221 (ROU amortization)

CR Cash (1) $1,400 (2025 lease payment)

Unit of Account

ID Units and Allocating Consideration

39

Step 1• Identify the components - lease and non-lease

components (e.g., service)

Step 2• Measure the consideration in the contract

Step 3

• Separate and allocate the consideration in the contract between the lease and non-lease components

Step 1 - Separating Components

40

Contract

Asset A Asset B Asset C

Separate Lease Component

Separate Lease Component

Service

NonLeaseComponent

Separate Lease Components

41

• Lessee can benefit from use of the asset on its own or together with other readily available resources

• The underlying asset is neither dependent on, nor highly interrelated with, the other underlying assets in the contract.

A right to use an underlying asset is a separate lease component if both:

Rights to use two or more underlying assets may be a single lease component

Similar to the distinct guidance in Topic 606 (the new revenue recognition standard).

Incentives paid or

payable to the lessee

Other variable

payments that

depend on an index or

rate

Other fixed or in-

substance fixed

payments

Payments related to the use of

the underlying

asset

Measuring Consideration

42

Consideration in the contract

The starting point for a lessee measuring the consideration in the contract is the

defined payments relating to the underlying asset, which are then adjusted

as follows. . .

Putting it all together!

43

Allocate “Consideration in the Contract”(Lease Payments – Lease Incentives)

Lease A Lease B Service (Nonlease)

Relative Standalone Price (Maximize Observable Inputs)

*Accounting Policy Election – Lessee may elect, by class of underlying asset, not to separate nonlease components from the lease component and account for the combined components as a single lease component.

Lessee – Net Operating Lease w/ CAM (Elect to combine)

44

• 5 year retail store lease entered at end of 2020

• The contract states that the lease payment is $950, and $50 relates to CAM. Each year thereafter, the lease payment will increase by $95 and CAM charges will increase by $5. In other words, the lease payment and CAM charge will equal $1,000 the first year and increase by a total of $100 each year thereafter.

• Each year, the LE is responsible for reimbursing the LR for property taxes and insurance fees. The taxes and fees estimated to total ~$100/year



• The standalone price for a similar lease and CAM is $850/yr and 150/yr, respectively, and the company believes the 85%:15% split will remain consistent for the next 5 years

• The entity elects to combine the leasing and non-leasing components

Lessee – Net Operating Lease w/ Variable Payments

45

• Step 1 – What are the components to the contract?

• Leasing component – retail store lease

• Nonleasing component - common area maint.

• Not a component at all- property taxes are not a component.

• The lessee doesn’t benefit.

• Don’t worry - EVERYTHING will be considered as a leasing component due to election.

• Step 2 - What is total consideration in the contract?

• $6,000 which are the fixed payments

• The variable payments is not included for allocation

• Step 3 - How do I allocate?

• Everything goes to the leasing component because of election

Lessee – Net Operating Lease w/ CAM (Elect to combine)

46

Straight

LineVariable Total Beg Int. (6%) Payment End Beg Amort. Ending

[a] [b] [c] =[a]‐[b]

2020 ‐ ‐ ‐ ‐ ‐ ‐ (5,006) ‐ 0 5,006

2021 1,200 94 1,294 (5,006) (300) 1,000 (4,306) 5,006 (900) 4,106

2022 1,200 97 1,297 (4,306) (258) 1,100 (3,465) 4,106 (942) 3,165

2023 1,200 101 1,301 (3,465) (208) 1,200 (2,472) 3,165 (992) 2,172

2024 1,200 103 1,303 (2,472) (148) 1,300 (1,321) 2,172 (1,052) 1,121

2025 1,200 105 1,305 (1,321) (79) 1,400 0 1,121 (1,121) 0

6,000 6,000

Year

Lease Cost Lease Liability Right of Use Asset

Lessee – Net Operating Lease w/ CAM (Elect to Combine)

47

End of 2020 – Transfer Control of Building and establish lease liability and ROU asset

What are the entries?

48

Lessee – Net Operating Lease w/CAM (Elect to Combine)

End of 2021 – Fixed lease expense and payment


End of 2021 – Variable lease expense and payment


Lessee Disclosures

- The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

- A lessee and a lessor should consider the level of detail necessary to satisfy the disclosure objective.

Disclosures

50

Overall Disclosure Objective

- - Information about:

- - The nature of leases

- Leases that have not yet commenced but that create significant rights and obligations for the lessee

- Significant assumptions and judgments made in applying the requirements of the leases standard

- The main terms and conditions of any sale and leaseback transactions.

- Whether an accounting policy election was made for the short-term lease exemption.

Lessee Disclosures

51

Qualitative Disclosure Requirements

- Finance lease expense, segregated between amortization of ROU assets and interest on lease liabilities

- Operating lease cost

- Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less

- Variable lease cost

- Sublease income

- Gains and losses arising from sale and leaseback transactions

Lessee Disclosures

52

Quantitative Disclosure Requirements

- Separately for Finance and Operating leases:

- Cash paid for amounts included in lease liabilities, segregated between operating and financing cash flows

- Lease liabilities arising from obtaining ROU assets

- Weighted-average remaining lease term as of the reporting date

- Weighted-average discount rate for leases as of the reporting date

- Lease payments maturity analysis (similar to that in Topic 840 disclosures)

Lessee Disclosures

53

Quantitative Disclosure Requirements

What else do you probably need to know?

54

Lease Allocation Guidance – Very Complex

Impairment Model for ROU Assets

Sale Leaseback Accounting

Modification Accounting

Reassessment Accounting

Transition and Effective Date

Transition Approach and Practical Expedients

56

Package of practical expedients:

Modified Retrospective Earliest Period Presented OR Date of Adoption

Definition

May elect to use hindsight for lease term (lease renewals and purchase options) & Easements

Classification Initial Direct Costs

Existing leveraged leases were grandfathered

Package of practical expedients:

Lessee Transition

57

Existing Capital Leases Existing Operating Leases

Recognizethe lease liability

Measured at the carrying amount of the capital lease obligation under Topic 840

Measured at the PV of the remaining rental payments plus any amounts the lessee expects to pay to satisfy a RVG (UnderTopic 840);

Discount rate determined at transition point rather than leasecommencement

Recognize the ROU asset

Measured at the carrying amount of the capital lease asset under Topic 840; Qualified unamortized IDCs not included under Topic 840 should be subsumed into ROU asset

Should equal the lease liability, adjusted for any prepaid or accrued rent, lease incentives, or qualified unamortized IDCs

Effective Date

58

• Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

Public Companies*

• Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020

All Other Organizations

• Permitted for all organizations

Early Application

* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC

Intro to Lessee Modifications

Lease Modifications

60

If the lease modification grants the lessee:

An additional ROU, andThe increase in lease

payments commensurate with standalone price

Separate Contract:

Not a Separate Contract:

Lessor: • Topic 842 provides specific guidance for the effect of modifications

depending on the initial and post-modification classification of the lease

Lease Modifications (continued)

61

Lessee:Remeasure the lease liability, and if the changes resulted from


an increase in lease term, additional ROU, or change

in consideration, then

a decrease in scope of the lease, then

Adjust ROU asset Recognize Gain/Loss

Topic 842 provides specific guidance on accounting for modifications depending on the nature of the modification (e.g., extension/ reduction of lease term, change in consideration, right to use additional underlying asset)

FASB Example 15 - ModificationFact Pattern:

• Original - Lessee enters into 10 year lease for 10,000 sqft

• Modification:

• Beginning of Year 6, the lease is modified to include an additional 10,000 sqftfor the remainder of the 5 years

• Increase in lease payments for the additional 10,000 sqft is commensurate with market rate

Question:

• How do I account for this modification?

62

FASB Example 15 – New ContractFact Pattern:

• Original - Lessee enters into 10 year lease for 10,000 sqft

• Modification:

• Beginning of Year 6, the lease is modified to include an additional 10,000 sqftfor the remainder of the 5 years

• Increase in lease payments for the additional 10,000 sqft is commensurate with market rate

Question:


63

Answer:

• This is a new contract because there is (1) and increase in ROU and (2) increase in lease payments is commensurate with market rates

FASB Example 16 – Term Change

Fact Pattern:

• Original :

• Lessee enters into 10 year lease for 10,000 sqft

• Lease payment equal 100,000 per year

• Original IBR is 6%

• Modification:

• ROU Asset and Lease Liability balance is 421,236 at modification date

• Beginning of Year 6 (i.e., 5 years later), the lease is extended for another 5 years (i.e., 15 years in total)

• Lease payments are now 110,000 for the remaining 10 years

• IBR at modification is 7%

Question:

• Does the modification change the scope of the ROU asset? In other words does the lessee control more or less space?


64

FASB Example 16 – Term Change

65

Accounts

ROU Asset

Liability

Pre-mod Balance

421,236

421,236

Adjust

351,358

351,358

Post-Mod Balance

772,594

772,594

• Not a separate contract.

• Remeasure liability based on remaining payments at new IBR

• The adjustment required to remeasure liability will be offset to ROU Asset

• There is no gain or loss

FASB Example 18 – Decrease in ROU Scope

Fact Pattern:

• Original:

• 10 year lease for 10,000 sqft

• Lease payment equals 100,000 per year and increase 5% each year thereafter

• IBR at lease inception was 6%

• Modification:

• ROU Asset is 514,436 and Lease Liability is 590,767 right before modification

• Beginning of Year 6, the lease is modified to reduce leased space from 10,000 sqft to 5000 sqft

• No change in remaining lease term

• Lease payment is decreased to 68,000 and then to increase 5% each year thereafter

• IBR at modification date is 7%

• Remeasured liability of lease payments at 7% IBR is 306,098

Question:

• Does the modification change the scope of the ROU asset? In other words does the lessee control more or less space?

• How do I account for this modification?66

Lease Modifications (continued)

67

Lessee:Remeasure the lease liability, and if the changes resulted from


an increase in lease term, additional ROU, or change

in consideration, then

a decrease in scope of the lease, then

Adjust ROU asset Recognize Gain/Loss

Topic 842 provides specific guidance on accounting for modifications depending on the nature of the modification (e.g., extension/ reduction of lease term, change in consideration, right to use additional underlying asset)

FASB Example 18 – Liability Approach

68

Accounts

ROU Asset

Liability

Pre-mod Balance

514,436

(590,767)

Adjust both by -48.1%

(247,887.88)

284,669.00

(36,781.12)

Post-Mod Balance

266,548

(306,098)

Gain

FASB Example 18 – ROU Approach

69

Accounts

ROU Asset

Liability

Pre-mod Balance

514,436

(590,767)

Adjust both by -50%

(257,218)

295,833

(38,165)

Adjusted Balance

257,218

(295,384)

Plug Adj

10,714

(10,714)

Post Mod Balance

267,932

(306,098)

Gain

Consolidations – ASU 2018-17Focus on Private Company Accounting Alternative

70

Legal Entity?

Scope Exception?

Variable Interest?

Variable Interest Entity?

First… A Recap of VIEs

71

Primary Beneficiary

Related Party Tie-breaker?

Does VIE Guidance Apply?

Who has Controlling Financial Interest?

What’s the problem? - Engine Co. Example

72

OWNER

Car Co.

100% Equity

100% Equity

Purchases90% of Engines Produced

Engine Co.

• Engine Co. has insufficient equity (Equity = 5% of funding)• Industry standard for sufficient equity is 20%

• Loan to Engine Co. represents 15% of funding• Engine Co financed remaining 80% with Bank ABC• Car Co. makes significant decisions • Arms-length pricing

$15k Loan

Another common example…

73

OWNER

Operating Co.

100% Equity

100% Equity

Leases Factory from Lease Co.Lease Co

• Operating Company leases a factory from Lease Co.• Lease Co’s only asset is the factory

• Lease Co financed the purchase of the factory through a mortgage

Lease Payments

Consolidations: Private Company Alternative

74

Policy Election not to apply VIE Guidance to Entities Under Common Control

Criteria to Qualify

• Private company and legal entity under common control• Common control parent is not a PBE• Legal Entity is not a PBE• Don’t have a majority of the voting interest in the Legal Entity

Required Disclosures to under involvement and exposure to legal entity under common control

Accounting Alternative for Leasing Arrangements under common control (ASU 2014-07) Superseded

Combined statements still permitted if entities are under common control

In addition to existing related party disclosures, disclose the following:

a) Nature and risks associated with legal entity under common control.

b) How does legal entity affect the reporting entity’s balance sheet, financial performance, and cash flows.

c) Assets and liabilities on the reporting entity’s balance sheet resulting from its involvement with the legal entity

d) The reporting entity’s maximum exposure to loss related to the legal entity.

e) If the entity’s maximum exposure to loss exceeds assets and liabilities as described in (c), the reporting entity shall provide information to allow users of financial statements to understand the excess exposure. Consider both explicit and implicit arrangements

Consolidations – Private Company Disclosures

75

Calendar-Year End Private Companies -> 2021

Early adoption permitted

Effective Date

76

Leasing arrangements under common control

What do I recognize and measure under Topic 842

What about leasehold improvements?

How does this interact with the Topic 842

77

Michael ChengNational Professional Practice Partner

Michael ChengNational Professional Practice [email protected]

Direct Phone: 404.573.4538

1230 Peachtree Street NESuite 1500Atlanta, GA 30309

Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of his role, Mike specializes in assisting clients with complex accounting and financial reporting issues. Mike currently serves on AICPA’s PCPS Technical Issues Committee

Prior to joining Frazier & Deeter, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). In addition to serving as the Private Company Council Coordinator, Mike led projects to: simplify the accounting for nonemployee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, Mike worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842).

Prior to joining the FASB, Mike was an Audit Senior Manager at PricewaterhouseCoopers (PwC).

Mike earned his Bachelor of Science degree in Accounting with a concentration in Finance from Binghamton University in Binghamton, New York.


Finding Fraud in an Audit

Nancy Pasternack, Foster School or Business, University of Washington

Auditing to find fraud is difficult business. It is no easy task to determine if financial information is purposefully manipulated. An auditor needs a good balance of skills to examine not only data and numbers, but also the people behind those numbers. We will explore how auditing to find fraud involves a specialized approach and methodology to determine if fraud exists. We will discuss how to use various investigative techniques such as data analysis, interviewing, and risk assessment to increase the likelihood of finding fraud during an audit. TAKEAWAYS: Recognize the characteristics of organizations in which fraud is likely to occur. Identify the people who may be involved in a fraud. Scope and conduct an efficient audit that includes examining for fraud.

Nancy Pasternack has 20 years of experience performing audits and investigations. Currently she is developing and delivering the Fraud Examination course for the Accounting program at University of Washington. Previously she worked with Amazon Finance and Operations reviewing internal controls across all parts of the organization. Prior to that she was with KPMG Forensic, serving in the Washington, D.C., New Jersey/New York, and Seattle offices. She also completed a three-year national rotational assignment with the KPMG Business School where she developed and managed the global learning curricula for Forensic, Leadership and Governance, Risk and Compliance. She joined the investigative team at KPMG Forensic after serving as the Education Director for the Association of Certified Fraud Examiners in Austin, Texas. She is the past President of the Oregon Chapter of the ACFE, and served on the Steering Committee for the AICPA Fraud and Litigation Support Conference. She has taught extensively on various economic crime topics for many associations and universities. During her years in public accounting she led external and internal audit teams, conducted numerous financial investigations, performed complex data analysis, developed internal control systems, designed internal audit programs, and deployed numerous corporate training programs. Over the years, she has worked in government, private industry, Big 4, as well as local accounting firms.


NOTES

WSCPA 2019Finding Fraud in an

AuditNancy Pasternack, CPA, CIA, CFE

[email protected]

Overview

O MindsetO Fraud SkillsO Legal ConsiderationsO ScopingO Data AnalysisO Electronic EvidenceO InterviewingO Prevention

Definitions

O Audit – Internal and ExternalO Compliance and Operational

O Fraud Investigation/ExaminationO Detection, Prevention, Response

O Forensic Accounting

O Governing bodies:O Institute of Internal AuditorsO Association of Certified Fraud Examiners

Fraud Mindset

O Inquisitive and analyticalO Ask the What if…?sO Flexibility to work with many personalitiesO Work in other people’s spacesO Learn transaction flows - Cradle to graveO Risk assessmentsO Internal control assessments and testingO Analytical minds – Patterns, trends,

expectations

Fraud SkillsO Creative auditing skills

O Think of the obscure with heightened scrutinyO Risk assess via fraud triangle – rationalization,

incentive/pressure, opportunityO Legal concepts and rules – HR, chain of custodyO Forensic technology – testing full populations

such as journal entriesO PsychologyO Accounting rules (GAAP)

O Specialized industries such as banking would require money laundering knowledge

O Multi-disciplinary – technical and soft skills

Legal Considerations in Fraud

O Collection of evidenceO Preservation of evidenceO Chain of custodyO Giving testimonyO Rules of evidence, criminal and civil

procedureO Expert vs. fact witnessO Employee rights – attorney present, in

custody, privacy and property issues

ScopingAudit Fraud Investigation

O Sampling of many transactions

O Testing related to specific deliverable such as financial statements or supply chain efficiency

O Continuous auditing

O Full coverage of limited transactions – time period, person of interest

O Email and keyword searches

O Also continuous monitioring

Electronic Evidence and ToolsO Financial records

O DisbursementsO Payroll O Journal entries

O EmailsO Review softwareO Key word searches

O Internet searches:O Social mediaO Public records search such as Lexis-Nexus

Data AnalysisO Fraud analytics in audits and financial reportingO Predictive analyticsO Performance indicatorsO Preparing data

O Joining files and comparing transactionsO Specific searches:

O Round dollar amountsO Gaps in sequencesO Odd/unusual data such as Invoice #12345O Extract certain vendors, employees, etc.O Specialized tests - Benford’s Analysis

Types of Financial Analysis

O Relational AnalysisO Vertical AnalysisO Horizontal AnalysisO Ratio AnalysisO EPS vs promised returns

10

Vertical and Horizontal Analysis of Income Statement Fluctuations

11

INCOME STATEMENT

Change % Change

Net Sales 250,000 100% 450,000 100% 200,000 80%Cost of Goods Sold 125,000 50% 300,000 67% 175,000 140%Gross Margin 125,000 50% 150,000 33% 25,000 20%Operating Expenses Selling Expenses 50,000 20% 75,000 17% 25,000 50% Administrative Expenses 60,000 24% 100,000 22% 40,000 67%Net Income 15,000 6% (25,000) -6% (40,000) -267%

Vertical Analysis Horizontal Analysis

Year One Year Two

Vertical and Horizontal Analysis of Balance Sheet Fluctuations

12

BALANCE SHEET

Change % ChangeAssets Current Assets Cash 45,000 14% 15,000 4% (30,000) -67% Accts Receivable 150,000 45% 200,000 47% 50,000 33% Inventory 75,000 23% 150,000 35% 75,000 100% Fixed Assets (net) 60,000 18% 60,000 14% - 0%Total 330,000 100% 425,000 100% 95,000 29%

Acc'ts Payable 95,000 29% 215,000 51% 120,000 126%Long-term Debt 60,000 18% 60,000 14% - 0%Stockholder's Equity Common Stock 25,000 8% 25,000 6% - 0% Paid-in Capital 75,000 23% 75,000 18% - 0% Retained Earnings 75,000 23% 50,000 12% (25,000) -33%Total 330,000 100% 425,000 100% 95,000 29%

Year One Year Two

Vertical Analysis Horizontal Analysis

Ratio AnalysisO ACFE Top 9

O Focused on accounts and transactions with higher instances of fraud – Current ratio, turnovers, debt to equity, etc.

O Operations focused measurements and ratios O Focused on sustainability of operations and core

business – cash flow to income, free cash flow

O Professor Beneish’s Analysis O Focused on predicting likelihood of manipulated

financial statements

13

Operations Focused Measurements and Ratios

O Excess Cash Margin - Gauging earnings growth that is greater than operating cash flow growth. Divide OCF and OE by revenue in order to determine if they are both growing at the same rate as revenue.

O Cash Flow to Income -This ratio relates to the difference between cash provided by operations and income from operations. Divide operating cash flow by income from operations after nonrecurring items such as gains have been removed.

O Cash Interest Coverage Ratio - This ratio reveals the entity’s ability to cover interest payments with cash coming into the company. Cash flow from operating activities plus interest and tax divided by interest expense.

O Free cash flow – cash from operations minus cash from investing

14

Professor Beneish’s AnalysisO Model to distinguish manipulated from non-

manipulated reportingO Focus is on inflation of revenues, deflation of

expenses and bloating of assetsO Primary characteristic of manipulators is high growth

prior to periods of manipulationO Analyzed known manipulated financials against other

companies in the same industry O Result was 1) mean index and 2) on average,

manipulators have significantly larger increases in days sales in receivables, greater deterioration of gross margins and asset quality, higher growth, and larger accruals

15

InterviewsAudit Fraud Investigation

O Eliciting informationO Standard subjects

and questions –compliance oriented

O Witness vs. SuspectsO Bullseye

O EmotionalO PsychologyO Verbal and Non-verbal

behaviorO Attorneys may be

presentO Rooms could be

stacked with people

Communication in Interviews

O Generally Truthful BehaviorO Direct answersO Spontaneous answersO Attentive and interested O Non-verbally engagedO Verbal and non-verbal consistency

Verbal Deception

O Failure to answer the questionO Failure to deny (How could I?)O Repeating the questionO Overly specific answersO Inappropriate level of concernO Detour statements – (As I said…) O AttackO Truth in the lie

Verbal Deception

O Qualified responsesO Limiting qualifiers

O Basically, Sort of, Not really, Maybe, Possibly

O Enhancing qualifiersO Honestly, to be perfectly honest, to tell you the

truth

O Invoke religion (I swear to god)O Selective memory (to the best of my knowledge)O Failure to understand a simple term or question

Example Responses

O “I unequivocally and without any reservations totally deny all the allegations about sexual contact.” Alan Dershowicz, Professor Harvard Law

O “I am absolutely, 100 percent not guilty.” OJ Simpson

O “She was not choked. She was not punched.” Pastor Creflo Dollar

Example Responses

O “I’m very comfortable saying nobody did it as far as I know.” Tom Brady

O “ I barely knew the man and why would I kill him?” John McAfee

O “In my heart, I know I did not do these alleged disgusting acts.” Jerry Sandusky

Fraud Prevention Programs

• Setting “tone at the top”

• Anonymous reporting/hotline

• Code of conduct• Positive environment• Hiring and promoting good people

• Continuous education and training

• Fair and balanced discipline

• Identify and measure fraud risks

• Implement & monitor internal control

• Strong & independent audit committee

• Effective internal audit & use of technology

• Independent external audit

• Cross group collaboration

Thank you!

Nancy [email protected]

[email protected]

Accounting & Auditing Conference · Accounting & Auditing Conference October 14, 2019 THANK YOU FOR...

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