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Wednesday, May 29, 2024

The Changes in OC Accounting World

Navigating Cybersecurity Regulations

Like businesses around the globe, companies in Orange County are increasingly facing threats from hackers gaining access to customer information, taking down IT systems and often making demands for ransom payments.

In fact, according to a recent KPMG survey, 83% of companies suffered a cyberattack in the past year, and respondents said it took them an average of one month to fully contain the attack.

The challenge for executives is how to prepare now for this increasingly unexpected occurrence while awaiting final rules from the Securities and Exchange Commission (SEC) aimed at increasing cybersecurity preparedness and resilience.

Reassuring customers and ensuring ongoing stakeholder and investor trust is critical. With new cybersecurity reporting requirements for public companies expected this year, Orange County companies should prepare now by enhancing and standardizing risk management, strategy, governance and incident disclosures.

As a first step, management should evaluate the organization’s current situation, laying the groundwork for a strategy for enhancing the organization’s cyber maturity, including an understanding of how mature its cyber programs are in relation to peers.

Third-party assessments and attestations are tools for management and the board to understand the organization’s current cyber readiness and respond to stakeholder demand for transparency.

A cyber maturity assessment is a way for the financial reporting and internal controls function to get a clear, easily digestible view of the organization’s current cyber program benchmarked against other organizations of similar size and industry.

Next, management should map out a clear action plan for responding to a cyberattack, including defined responsibilities for the cybersecurity and risk management teams, management’s disclosure committee and the legal department to prepare and review disclosures.

As regulatory requirements around cybersecurity increase and threats from cybercriminals become more severe, management can lead the way through uncharted waters by bolstering cyber maturity ahead of coming regulations.

Clients Moving Confidently

As the threat of a possible recession hangs over Southern California much like the grey skies, many business owners and leadership teams are understandably worried about the future.

However, as a public accounting firm, Haskell & White has witnessed a reassuring trend amongst our clients—they are confidently moving forward with their strategic plans and adapting to change.

Even companies with IPO plans are staying the course, despite a decrease of over 40% in IPOs compared to the previous year.

Our experience shows that while entrepreneurs in industries such as assisted living homes, trucking, and janitorial services have roll-up strategies, few have come to fruition.

This observation is validated by Bloomberg Law, which reports that global quarterly deal volume in Q1 2023 was the third lowest in the past decade.

However, the biggest challenge for public accounting firms like ours is finding and recruiting top talent.

As universities see a decline in accounting program enrollment and partners retire, demand for services is increasing but finding skilled individuals is becoming more difficult.

At Haskell & White, our clients require highly technical skills, and we’re passionate about finding people who can rise to the challenge.

For organizations seeking the advice of accountants or a new compliance partner, we encourage business owners to start early, allowing sufficient time to find the right resource for their specific needs, especially in this impacted market.

For those considering a career in accounting, the current climate provides an excellent opportunity as growth opportunities are plentiful, and contributions to businesses are invaluable.

Being a trusted adviser in accounting, business strategy, entrepreneurship, and M&A is a significant privilege and responsibility. The public accounting industry offers individuals the chance to have a meaningful impact on the business.

Embracing Automation

Automation tools (think ChatGPT, custom bots) have revolutionized various industries, including accounting.

We’re seeing privately held businesses leverage automation to streamline accounting tasks, boost efficiency and drive future success.

By eliminating manual processes and focusing on value-added activities, automation is reshaping the accounting landscape for these businesses. The benefits we’re seeing when clients implement automation include:

• Increased Efficiency. Automation eliminates repetitive and time-consuming tasks like data entry, invoice processing and reconciliation. By leveraging technologies such as optical character recognition (OCR) and machine learning, businesses can automate data extraction and analysis, enabling real-time access to accurate financial information. This streamlined workflow enhances efficiency and overall productivity.

• Cost Savings. Automation reduces reliance on manual labor, resulting in significant cost savings. With reduced human error and improved accuracy, businesses can avoid financial discrepancies, costly errors, and compliance issues. Investing in automation tools ensures smarter financial decisions while minimizing the risk of losses.

• Improved Data Accuracy and Compliance. Automation ensures consistency and compliance by cross-verifying data, reconciling accounts, and generating error-free reports. This provides businesses with reliable financial information, enhancing decision-making capabilities and regulatory compliance. Smooth audits and avoiding penalties become achievable.

• Strategic Decision-Making. Automation frees up more time for CFOs, controllers and business owners to focus on strategic activities. With routine tasks automated, they can focus on analyzing financial data, identifying trends, and gaining valuable insights for business growth. Faster data processing empowers businesses to make informed decisions promptly.

• Scalability and Adaptability. Automation offers scalability and adaptability in managing accounting tasks. As businesses grow, automation easily handles increased data volumes, reducing the need for additional resources. Integration with existing accounting systems ensures seamless transitions and minimal disruptions to workflows.

As technology advances, automation becomes essential for businesses aiming to remain competitive and thrive in the digital era.

The CPA Pipeline Problem

Our accounting profession is grappling with a severe talent shortage that presents a significant challenge for CPA firms, companies and the broader economy. Each year, fewer accountants enter the profession while more CPAs near retirement.

The number of U.S. students completing undergraduate degrees in accounting has declined nearly 9% from 2012, according to the American Institute of Certified Public Accountants (AICPA). On the other end of the pipeline, approximately 75% of AICPA members were eligible to retire as of 2020.

Yet, the overall demand for CPAs has steadily increased due to more complex accounting and auditing standards, increased regulatory scrutiny, and ever-evolving changes to the tax code.

With fewer qualified professionals available, CPA firms face challenges in meeting increased client demands amidst already compressed regulatory timelines. This results in extreme workloads, heightened stress, and often burnout for existing and aspiring CPAs.

The shortage has led to intense competition for top talent and driven up recruitment costs and salaries. It also directly affects companies that rely on CPA firms for critical financial and compliance functions, which can hinder timely decision-making, compromise financial integrity and pose risks to overall business operations.

This matter is top of mind for the profession. Last month, the AICPA released its Pipeline Acceleration Plan to identify the underlying issues leading to the talent shortage in hopes of stemming the tide. In the meantime, CPA firms and companies can manage through this shortage by considering alternative talent solutions.

AuditClub is transforming how accounting and auditing solutions are delivered. Backed by a licensed accountancy corporation, AuditClub offers on-demand and fractional access to onshore talent that provides AICPA and PCAOB audit and assurance solutions to top 10, regional and local CPA firms and companies via its week-to-week subscription membership model.

IRS Begins Auditing ERC Tax Credit Claims

Many Orange County-based businesses filed for Employee Retention Credits (ERC) and received thousands to millions of dollars.

Some of those credits were justified but many used dubious “ERC Mills” and may, in fact, not qualify even though they filed and received money from the government. Auditors are now targeting companies that made fraudulent ERC claims, leaving businesses that may have filed with a questionable provider at risk of tax penalties.

IRS officials have warned business owners repeatedly about the pop-up ERC promoters, listing them atop the 2023 Dirty Dozen.

Auditors are ramping up enforcement and have begun targeting businesses that may have improperly claimed ERC, sending IDRs (Information Document Requests) to businesses with unsubstantiated claims.

Many companies have already been audited for ERC, and a new IRS warning cautions employers to take extra care when vetting companies that promote the credit.

Companies that filed with an ERC mill usually do not have documentation substantiating their claim, putting them at risk of tax penalties.

Business owners who may have filed through a questionable tax credit provider are now double-checking their ERC claims with experienced and trusted firms while there is still time to make corrections.

ERC Filing Review is for any business owner uncertain about the validity of their Employee Retention Credit claim. ERC Review is a proactive measure that reveals any potential red flags in your ERC claim.

Even if you’re confident your business truly qualified for ERC, you need to have specific documentation in case of an IRS ERC audit.

OC at Forefront of Technology, Hybrid Work

Accounting and advisory firms, like many other businesses in Orange County and around the country, are facing challenges from rapidly changing cost structures driven by inflation and from post-pandemic shifts in how and where people work.

However, by embracing innovation in this new environment, firms are well positioned to navigate these challenges and deliver exceptional value to clients.

To control costs and stay ahead of the curve, we have strategically leveraged our investments in technology, embraced the hybrid work environment and boldly experimented with new approaches to work itself. Here are a few ways we’re doing this:

• By harnessing the power of technology, we optimize our operations and increase efficiency, thereby mitigating the impact of rising costs such as labor, real estate and software.

• Hybrid work offers a strategic advantage in controlling costs, enhancing productivity and employee satisfaction while keeping client service at the forefront. This approach provides a flexible environment where we can discover better ways to serve our clients—in person and virtually.

By exploring new approaches to work, we’ve been able to address some of the challenges associated with hybrid work. Implementing intentional strategies to foster a dynamic work culture that attracts and retains top talent includes creating meaningful opportunities for in-person connections, knowledge sharing, relationship building and nurturing a sense of community among team members and clients.

Orange County is renowned for its embrace of innovation. Although there has been a decline in M&A activity, the region’s innovative companies continue to attract fresh capital investments and successfully execute growth strategies.

Despite the recent fluctuations and uncertainties, it’s clear our entrepreneurial spirit remains vibrant in Orange County, instilling optimism for the future for our employees, clients and business community.

ERC on the IRS’ Dirty Dozen List

The Employee Retention Credit (ERC) is a hot-topic discussion with our clients and has made its way to the top of the IRS’ “Dirty Dozen” list of tax scams.

The ERC is a refundable payroll tax credit offered to businesses that continued paying employees during the pandemic even though they were suffering from a government-ordered suspension of operations or a period of significant decline in gross receipts.

At the federal level, the IRS has issued several warnings to business owners to be weary of aggressive credit companies offering improper advice on eligibility and even urges the community to report tax-related illegal activities relating to ERC claims.

At the state level, among all the negative ERC press, there is one piece of good news we should be thankful for, at least for California taxpayers.

In February, the Franchise Tax Board reconsidered its position and stated that the ERC refunds, in no part, are considered taxable.

If your tax preparer included the refund in income or reduced your wage deduction in the year you qualified for the ERC credit on your California tax return, then you should amend the return and claim your refund.

To qualify for the ERC, a business generally had to have either a full or partial suspension of its business operations due to governmental orders limiting commerce, travel, group meetings or experience a decline in gross receipts in a calendar quarter of at least 50% (2020) or 20% (2021) compared to the same calendar quarter in 2019.

Many businesses that did not qualify for the ERC vis-à-vis a significant decline in gross receipts or a full or partial suspension of operations found themselves subject to aggressive marketing campaigns by service providers using wording like “it’s easier than you think” and “most businesses qualify.”

The IRS has repeatedly issued warnings to taxpayers over the past year not to fall prey to these service providers’ false claims. Qualification for the ERC is very fact-specific and can be complex.

There are many quality service providers in this market, and business leaders should be sure to work with a provider that is knowledgeable about the rules and familiar with the IRS audit process in the event an audit occurs.

According to Withum’s COVID-19 Financial Assistance Services Leader, Matthew Walsh,

“Withum has started to see a noticeable uptick in the amount of IRS enforcement actions around the ERC over the past nine months. These IRS audits are exhaustive and cover all the issues around eligibility and the calculation of the ERC.

We also recommend that all businesses who claimed the ERC ensure their records are in order because the IRS is running ERC audits on a tight schedule and expects the documentation to be available when the audit begins.”

It is important to note that the IRS’s approach to handling examinations can vary based on the agent and circumstances and that an ERC audit can expose you to other areas of tax examinations.

If you are concerned about your situation or facing an ERC audit, it is advised that you seek help from a qualified tax professional to ensure proper reporting.

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