CFO Essentials - April 2012

April 2012

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

REGULATORY REPORTING____________________________________________________________

What Did You Say to Me?

RISKS____________________________________________________________

Cloud Computing is a Step Above “Go To My PC”

Essential BriefingsJOBS ACT EASES THE WAY FOR SMALL AND EMERGING COMPANIES

Contents

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ESSENTIAL BRIEFINGS2 JOBS ACT E ASES THE WAY FOR SMALL

AND EMERGING COMPANIESCongress passed a group of bills that has come to be known as the Jobs Act. The Jobs Act is intended to improve and streamline the process for small businesses to become public and attract investors, by reducing SEC registration and reporting requirements.

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REGULATORY REPORTING5 WHAT DID YOU SAY TO ME?

A standard for auditor communications to audit committees has been in place since 1988. The current standard has been in place since 2006. In December 2011, the Public Company Accounting Oversight Board (PCAOB) re-proposed a new standard for such communications.

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RISKS7 CLOUD COMPUTING IS A S TEP ABOVE “GO TO MY PC”

“Go to My PC” is a product that allows people to sign into their office PC from places besides the office, and is aggressively promoted in the media. This tool may sound like “wow” technology, hold the enthusiasm. In fact, it is the antithesis of what current technology is able to do for businesses.

April 2012

1 | SingerLewak April 2012

E S S E N T I A L B R I E F I N G S

JOBS ACT EASES THE WAY FOR SMALL AND EMERGING COMPANIESBY JIM PITRAT, CPA | PARTNERASSURANCE & [email protected] | 310.477.3924

Congress passed a group of bills that has come to be known as the Jobs Act. The Jobs Act is intend-ed to improve and streamline the process for small businesses to become public and attract inves-tors, by reducing SEC registra-tion and reporting requirements. It also creates the ability for

private enterprises to raise capital from certain private investors without having to register the se-curities under the Securities Act.

IPO ON-R AMP AND COMPL IANCE E ASING

The JOBS Act creates a new class

of Public company called the Emerging Growth Company, or “EGC.” An EGC is defined under the Act as one that has annual gross revenues of less than $1 billion during its most recent fiscal year. The company also re-tains its EGC status until the oc-currence of one of a four defined events (this period is called the “on-ramp period”). These events are as follows:

•The first year after the compa-ny achieves revenue exceeding $1 billion.

•The first year after the fifth an-niversary of a company’s initial public offering.

•The date that more than $1 billion of non-convertible debt

was issued (cumulative during the previous three-year period).

•The first year in which a com-pany becomes a large acceler-ated filer.

During the on-ramp period, the compliance requirements for the EGC are significantly reduced from existing requirements. These reductions to the current requirements include the follow-ing:

•An EGC could provide two years of audited financial state-ments in its initial registration statement when it files for its IPO, instead of three years cur-rently required.

− Important to remember is that the Act does not change the re-quirement that in an initial 10K following the IPO, three years of audited statements would be re-quired (this is unless the company is a smaller reporting company).

•An EGC would not need to provide selected financial data for periods prior to those audited in its IPO registration statement.

• In order to allow a company to

April 2012 SingerLewak | 2

The Jobs Act is intended to improve and streamline

the process for small businesses to become public and attract

investors, by reducing SEC registration and reporting

requirements

explore an IPO without expos-ing sensitive information, the entity’s pre-effective registration statement (and amendments) could be filed on a confidential basis. This allowance is provid-ed that the same materials are publicly filed no later than 21 days following the road show.

During the period in which an entity qualifies as an EGC, the Act reduces on-going compliance requirements after the public offering occurs. This easing of compliance requirements is de-signed to reduce compliance costs and make the process of main-taining compliance less restrictive to smaller companies. During the period that a company is an EGC, a company would get the following benefits:

•An EGC would not have to furnish an auditor’s report covering internal controls over financial reporting. This does not change the requirement that the EGC would still have

to provide management’s as-sessment of internal controls.

•An EGC would not have to comply with the provisions of the Dodd-Frank Act in respect of shareholder advisory votes concerning executive compen-sation..

•An EGC could adopt new or amended accounting standards as of the effective dates for Private companies.

•An EGC would not have to comply with any future PCAOB rules covering manda-tory auditor rotation, or modi-fications to the auditor’s report, if such rules are adopted.

The Jobs Act also provides for reforms designed to make capital formation easier for EGCs. These reforms include the following:

•The Jobs Act requires the SEC to permit general solicitations in offerings to accredited inves-tors pursuant to Regulation D and to qualified institutional buyers under Rule 144A.

• Increases to $50 million from $5 million the amount of secu-rities that may be issued over a 12-month period.


During the period in which an entity

qualifies as an EGC, the Act reduces on-going compliance requirements after the public offering

occurs

Private entities would be allowed to raise capital

from a large pool of small investors without adding to the count of

shareholders that would trigger the requirement to

file with the SEC


• Increase the threshold that triggers SEC periodic reporting requirements to $10 million in assets and 2,000 shareholders, or 500 shareholders not quali-fying as accredited investors. (For banks, or bank holding companies, the trigger is 2,000 shareholders [whether accred-ited investors or not]).

PRIVATE COMPAN Y CAPI TAL R A ISING

Under the JOBS Act, Private entities would be allowed to raise capital from a large pool of small investors without adding to the count of shareholders that would trigger the requirement to file with the SEC. This has come to be referred to as “crowdfund-ing.” The crowdfunding section exempts crowdfunding offerings from registration requirements.

In order to qualify for the crowd-funding exemption, a Private company must meet the follow-ing restrictive requirements:

•Sales of securities over a 12-month period could not exceed $1 million.

•All sales must be through a reg-istered broker-dealer or funding portal.

•Financial statement require-ments are determined by fund-ing size as follows:

− For offerings of less than $100,000, the entity’s CEO would certify the company’s financial statements.

− For offerings between $100,000 and $500,000, the company’s financial statements would have to be reviewed by an independent auditor.

− For offerings in excess of $500,000, the company’s finan-cial statements would have to be audited.

•The crowdfunding provision limits the amount of securities sales to any individual. These limitations are as follows:

− A maximum of 2% of the inves-tor’s annual gross income for in-dividuals earning up to $40,000 a year

− A maximum of 5% for investors earning up to $100,000 a year

− A maximum of 10% for in-dividuals earning more than $100,000

If the president signs the JOBS Act, the SEC will be required to establish new or amended rules for EGCs and Securities Act registration exemptions for crowdfunding.

WHAT DID YOU SAY TO ME?BY STEVE GRIMAUD | PARTNER, ASSURANCE & [email protected] | 310.477.3924

A standard for auditor commu-nications to audit committees has been in place since 1988. The current standard has been in place since 2006. In Decem-ber 2011, the Public Company Accounting Oversight Board (PCAOB) re-proposed a new standard for such communica-tions.

Among other reasons given for proposed changes, PCAOB Release No. 2011-008 was issued to align auditor performance requirements with audit com-mittee communication require-ments laid out in risk assessment standards recently issued by the PCAOB.

Most of the current standard’s communications will still be required, but if approved the new standard will expand existing communications by requiring the auditor to:

• Inquire of the audit committee regarding their knowledge of any violations or possible viola-tions of laws or regulations, in addition to inquiries related to fraud, as well as knowledge of any complaints or concerns raised regarding financial re-porting matters

•Describe situations in which estimates supported by audit evidence compared to estimates included in the financial state-ments indicate a possible bias on the part of the company’s management

•Provide an expanded overview of the overall audit strategy including a discussion of the significant risks identified by the auditor

•Give updates regarding any sig-nificant changes to the planned audit strategy or significant risks initially identified

•Describe the basis for the auditor’s conclusions regard-ing the reasonableness of the company’s critical accounting estimates

•Communicate the reasons certain policies and practices are considered critical; and how

current and anticipated future events might affect the deter-mination of whether certain policies and practices are con-sidered critical

•Describe difficult or conten-tious matters for which the auditor consulted outside the engagement team and that the auditor reasonably determined are relevant to the audit com-mittee’s oversight

•Describe significant unusual transactions outside the nor-mal course of business and the auditor’s understanding of the business rationale for them

•Provide the basis for a deter-mination that uncorrected misstatements were immaterial including the qualitative factors considered

R E G U L AT O R Y R E P O R T I N G

REGULATORY REPORTING


Most of the current standard’s

communications will still be required, but if approved the new

standard will expand existing communications


•Communicate situations in which, as a result of the audi-tor’s procedures, the auditor identified a concern regarding management’s anticipated ap-plication of accounting pro-nouncements that have been issued but are not yet effective and might have a significant ef-fect on future financial report-ing

•Provide results of the audi-tors evaluation of the financial statements presentation in conformity with the applicable financial reporting framework including consideration of the form, arrangement and con-tent, encompassing terminol-ogy used, amount of detail given, classification of items and the bases of amounts set forth

•Describe conditions and events that indicate there could be substantial doubt about the company’s ability to continue

as a going concern for a reason-able period of time along with information that mitigated the auditor’s doubt or, if not mitigated, any effects on the financial statements, disclosures and auditor’s report

The re-proposed standard would require communications to the full audit committee prior to issuance of the auditor’s report. The PCAOB anticipates that the new proposed standard and related amendments will be effec-tive, subject to SEC approval, for audits with fiscal years beginning on or after December 15, 2012.

The re-proposed standard would require communications to the full audit committee

prior to issuance of the auditor’s report

CLOUD COMPUTING IS A STEP ABOVE“GO TO MY PC”BY BOB GREEN, CPA.CITP | PARTNER, SINGERLEWAK & SINGERLEWAK [email protected]

“Go to My PC” is a product that allows people to sign into their office PC from places besides the office, and is aggressively pro-moted in the media. This tool may sound like “wow” technol-ogy, hold the enthusiasm. In fact, it is the antithesis of what current technology is able to do for busi-nesses.

The product I’m referring to is still used in many businesses even though it has become outdated. To illustrate, consider what this technology represents... then we’ll look at Cloud Computing, and how it differs:

“My company is not in the IT business but you wouldn’t know it. We actually manufacture shiny widgets for aerospace. With grow-ing competition, globalization of our offices, and tightened govern-mental budgets and compliance regulations, our profits are lower on every sale. This is compounded by the growth of our IT spending, year over year. It seems that IT is the one department that is immune from cost cutting. It also seems to

be an ever-growing fixture in our organization, enabled by the fact that they are not shy about telling us that they are the keepers of all our secrets. My company is spend-ing too much time on maintaining and growing an infrastructure of IT staff and everything that comes with it. From a security perspec-tive, I find it odd that to do my work I have to be tethered by internet to my desktop at the office. This means that my PC has to stay on all night. Where is the security in that?”

Does this scenario sound familiar to you? Should businesses really be perpetuating outdated tech-nology that assumes the comfort of having all your eggs in one “on a desk” basket called “my PC”?

So, unless you’re in the IT busi-ness, maybe it’s time to consider getting out of the IT business?

“Wow! We all just received bigger bonuses this year. Our CFO told us that even though we’re compet-ing with international companies

in the aerospace widget business, our profits have grown this year as we’ve streamlined our processes and improved our governmental com-pliance. We accomplished this in large part due to our cross-depart-ment teams working collaboratively to improve our business. In the course of doing so, we adopted some very prudent technology practices and adopted a wider use of Cloud Computing. Our IT department is less than half the size of what it was last year, and our on-going cost of IT and software maintenance is one-third of what it was last year. What I particularly appreciate is that I’m no longer interrupted by our IT folks doing upgrades to the servers, software or my desktop when I am trying to get my work done. Now I can focus more on my work, worry less about when the next interruption will happen. I love using the Internet to run software that works in my browser and feels like Google, Amazon and other familiar tools that I run on my tablet when I’m away from the office. Recently I was work-ing at home using our new Cloud Computing software tools, and

R I S K S

RISKS


my computer hard drive crashed. Everything was lost except the work I was doing at the time of the crash because the data wasn’t stored on my machine. Everything was there, just as I left it. When I started again from my son’s PC I was able to pick up right where I left off.”

This can be your business. A business with a bottom line that has improved changes to process and technology. Migration to this kind of business model isn’t simple and it isn’t always a happy process; but it is a growing trend among businesses everywhere as improvement, control and better profitability become increasingly important.

Let’s look at facts that help dem-onstrate why Cloud Computing has enabled businesses to become better at what they do and be more profitable at the same time:

1. Businesses that focus more on what they do best are usually better than their competitors.

2. People are connected to the internet all the time, and as a result the lines between being connected to work and to personal matters seem to be blurred. Cloud Computing seamlessly fulfills this need.

3. IT spending comprises costly hardware, vendor products and services, and most im-portantly, IT personnel. As most of these expenditures become more costly, they also involve headaches that im-pact all areas of the business, and thereby take a business’ focus off of its core raison-d’etre.

4. IT is among the most ill-managed areas of most busi-nesses. This is because most CFOs and CEOs are not IT

wizards.5. Cloud computing - particu-

larly in the form of Software as a Service (SaaS) which is software delivered by a pub-lisher via the internet brows-er, is becoming wide-spread, and represents a way to make businesses less dependent on IT, and more focused on its core mission.

6. Using SaaS solutions allows CFOs to budget for the use of technology as they do for rent or electricity. This is be-cause SaaS is paid for based on how much of it a busi-ness uses, similar to a utility. This falls under an operating expense, or “OpEx”.

7. True SaaS products include software upgrades and main-tenance in the fixed monthly or annual fees they charge.

8. Security is always a concern. In most cases, having em-ployees work from a SaaS environment is safer than the security provided by in-house networks and labor-heavy IT


This tool may sound like “wow” technology, hold the enthusiasm. In fact,

it is the antithesis of what current technology is able

to do for businesses.

departments. It only takes one rogue internal IT staff to delete all of a business’ con-fidential data, trade secrets, and financial and personnel records.

9. CEOs and CFOs of growing businesses really don’t like to be held hostage by anyone, but frequently they feel this way by their IT leaders. SaaS products can be managed by business managers that over-see their use in a company, rather than the IT depart-ment.

10. Technology should be seen as a way to enable employees to do their work more ef-fectively. True SaaS products are often the most advanced in terms of functionality and beneficial processes for the tasks that they are intended to handle.

11. It is proven that SaaS prod-ucts deliver large company-level process and functional-ity such as financial reporting

and customer marketing at a fraction of what it would cost to implement and support similar technology in-house on in-house servers.

HOW DO BUSINESSES MOVE INTO THE CLOUD?

We are often asked how a busi-ness should move to the Cloud. One bite at a time is often the best way, kind of like the “ele-phant-eating” scenario we’ve all heard. We recommend you start with an assessment of what busi-ness processes you most need to manage your business and then determine if there are options available in the SaaS market-place to help you accomplish these processes. Then you should determine if the SaaS options can provide greater functional-ity and benefit, regardless of the technology, in comparison to your existing computing tools. Additionally you should consider the cost of switching to a SaaS solution as it compares to keeping

your existing solution. After all of this if you determine that SaaS provides the better options, you may find it is a good time to dip your toes into the Cloud world, and migrate to a SaaS solution.

All in all, the security of repu-table SaaS products is more often far stronger than the security of software and information that you host in your server rooms.

As you consider how you can im-prove your business’ efficiencies, effectiveness and bottom line, consider how Cloud Comput-ing and in particular, SaaS, can help you get there sooner, more securely, and more sustainably. Cloud is real, it’s popular with employees and it reduces your risk profile in many ways. Most importantly, it allows a business to think more about its mission, and less about IT.


W W W.SINGERLE WAK .COM | 877.754.4557

JIM PI TR AT [email protected] | 310.477.3924

GALE MOORE [email protected] | 949.261.8600

SUZIE DOR AN [email protected] | 310.477.3924

HARMEE T SINGH [email protected] | 310.477.3924

ELBERTA NIZ ZOLI [email protected] | 310.477.3924

STE VE LEE [email protected] | 949.261.8600

DAN HUNTER [email protected] | 408.294.3924

STE VE GRIMAUD [email protected] | 408.294.3924

DAVID KR A JANOWSKI [email protected] | 949.261.8600

SingerLewak is a leading regional accounting services firm in California with offices in Los Angeles, Orange County, Woodland Hills, Monterey Park, San Diego, Silicon Valley and San Francisco. Serving California since 1959, SingerLewak has established a reputation for excellence as professionals with unparalleled expertise in the Accounting and Management Consulting industry. Providing the services of a large firm with a blended environment of practices, industry specializations and particular attention to hands-on service, SingerLewak continues to demonstrate leadership and industry growth year-over-year. Our client relationship approach and industry excellence is renowned.

We are nationally recognized as active community and professional services partners, working among many sectors of the business world. Our core services deliver results whether it’s auditing, accounting, entrepreneurial business services, tax preparation, business manage-ment, SEC filings, transactions, enterprise risk manage-ment, forensic accounting, business valuation, litigation support, or consulting.

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CFO Essentials - April 2012