Category: Assurance

Leveraging Audits for Strategic Growth in Companies

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February 25, 2025 | by Atherton & Associates, LLP

Leveraging Audits for Strategic Growth in Companies

I. Introduction

Audits have long been perceived primarily as a regulatory exercise or an obligation related to compliance. Yet, when approached strategically, an audit can yield powerful insights that go far beyond verifying numbers on financial statements. In fact, a thorough, well-planned audit can spotlight operational efficiencies, reinforce investor confidence, and prepare a company to capitalize on new opportunities for growth. Whether you’re eyeing expansion into new markets, preparing for a potential sale, or exploring new ways of financing, a robust auditing process ensures you can move forward with clarity and credibility.

II. The Strategic Value of Audits for Growing Companies

For organizations experiencing growth pressures or seeking to expand in the future, having regularly audited financials can be a game-changer. The transparency and credibility of audited statements often drive faster deal timelines and stronger valuations. Moreover, businesses that maintain audit-ready financials can act promptly when a compelling acquisition or partnership opportunity surfaces. Delays in getting finances in order, or the uncertainty surrounding unaudited numbers, can jeopardize a deal or reduce leverage in negotiations. This means regular audits aren’t just a “check-the-box” exercise; they are an insurance policy that ensures you’re ready to move swiftly when the unexpected but welcome knock comes at your door.

Another significant benefit stems from the oversight process itself. Experienced auditors scrutinize operational workflows, identify gaps in internal controls, and highlight areas where businesses may be vulnerable to risk. Consequently, the company can address these vulnerabilities proactively and emerge more resilient—better positioned not only to mitigate threats but also to optimize existing processes.

III. Key Considerations in Choosing the Right Audit Partner

Choosing your auditing partner is as vital as deciding to get audited in the first place. Different firms bring different strengths, and your choice should match your company’s future direction, not just its current needs.

Industry-specific know-how is one critical piece of this puzzle. Whether your focus is manufacturing, distribution, construction, agriculture, healthcare, or not-for-profit work, an auditor who navigates the particular nuances of your sector can provide more refined guidance on financial reporting, compliance, and evolving regulations. Similarly, if your company is expanding overseas or across various states, an audit firm equipped with a wide geographical reach can streamline processes, ensuring consistent service and advice.

While technical competence often stands out as a decisive factor, it’s equally important to find an audit team that fosters a collaborative and transparent relationship. An auditing process should spell a partnership—one that allows for open dialogue, iterative discussions, and clear, contextual feedback on what your financials and operational indicators reveal about your growth trajectory.

IV. Steps & Best Practices in Conducting a High-Value Audit

Crafting a productive audit experience involves careful planning and robust collaboration from the earliest stages. While each audit is unique, several foundational steps help ensure a smooth process.

  1. Planning & Preparation: It’s wise to set a roadmap for your audit engagement early, noting all deadlines and resources required. This planning stage clarifies who in your organization will be responsible for gathering key documents—from trial balances and general ledgers to relevant contracts and agreements. Preparing these materials upfront prevents last-minute scrambles and accelerates fieldwork.
  2. Fieldwork & Information Sharing: During fieldwork, auditors systematically review your financial statement areas, test internal controls, and reconcile data to confirm accuracy. Because some companies deal with sensitive or confidential information, be sure your chosen partner employs secure transmission methods that help protect data. Staying transparent and responsive to auditor questions will help avoid bottlenecks.
  3. Wrap-Up & Reporting: In many cases, auditors issue recommendations alongside your audited financials. This may include highlighting strengths in your processes, but more importantly addressing material weaknesses or significant deficiencies. It’s best practice to organize a management or board meeting to discuss these findings in depth, so you can make timely decisions on any suggested improvements.

V. Potential Gains Beyond Compliance

Beyond meeting regulatory obligations, there are strategic advantages to be gained from frequent audits. If your company is considering a merger or acquisition, having an updated record of audited financials strengthens your negotiating hand and lowers perceived risks from a buyer’s perspective. This often translates to more favorable valuations or terms in a deal. Additionally, the insights gleaned from an audit can function like a diagnostic check for your broader operations, flagging inefficiencies or strategic blind spots.

All these benefits add up to a stronger, more future-proof organization. By marking regular milestones for financial and operational transparency, you cultivate a discipline that permeates the entire enterprise, from cost management to revenue forecasting and contract negotiations.

VI. How Atherton & Associates LLP Can Help

Atherton & Associates LLP offers Assurance & Compliance Services that go beyond traditional audit functions. Our teams are immersed in industries ranging from manufacturing to agriculture to construction to not-for-profits. For each client, we tailor our process to your specific challenges and growth objectives. We also provide advisory support on emerging accounting standards and best practices, so you can adapt your processes in real time as your business evolves. If you’re looking to strengthen internal controls, navigate new revenue recognition rules, or expand your services, we have the expertise to guide you at every step. We believe that effective audits pave the way for better governance, higher profitability, and, ultimately, a more confident path to achieving your strategic goals.

VII. Conclusion

A well-executed audit sheds light on where your company stands and where it can go next. By revealing unknown risks, clarifying financial results, and sharpening operational discipline, audits help an enterprise become more transparent, agile, and growth-ready. And by partnering with an experienced and collaborative firm, you gain a trusted advisor who can guide you through the complexities of expansion, acquisitions, and future financing rounds. In this sense, audits stand out as far more than a box to check; they’re a cornerstone of a thoughtful, proactive growth strategy.

Contributing Experts

Loren Kuntz, Assurance Partner
Email: [email protected]
With nearly three decades of public accounting experience, Loren provides strategic oversight for Atherton & Associates LLP’s quality standards, offering expert counsel across sectors like manufacturing, wholesale distribution, healthcare, and beyond.

Marissa Williams, Assurance Partner
Email: [email protected]
Marissa brings deep expertise in financial statement audits, internal control improvements, and employee benefit plan audits, having led numerous engagements for businesses in manufacturing, construction, healthcare, and not-for-profit organizations.

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Mitigating liability as a 401(k) plan sponsor: your role as a fiduciary

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February 21, 2025 | by Atherton & Associates, LLP

Offering a 401(k) plan to your team is a meaningful way to invest in their future financial security. However, it also comes with a host of legal and administrative obligations. As a plan sponsor, you’re responsible for complying with regulations designed to protect your employees’ retirement savings and ensure prudent management of their investments.

Understanding these fiduciary duties can help you minimize liability, stay compliant, and safeguard your employees’ retirement assets.

The basics of fiduciary responsibility

The moment you establish a 401(k) plan, you assume fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA). This means you must act in the best interests of your employees and their beneficiaries. Failing to manage the plan prudently, comply with regulations, or address employees’ financial needs can expose you to significant liability.

Some plan sponsors mistakenly believe that hiring third-party service providers relieves them of all fiduciary duties. However, ERISA requires active oversight of these providers and careful decision-making on your part. Even if you delegate specific tasks, you retain ultimate responsibility for selecting and monitoring those service providers.

Fiduciary responsibility: what it means

ERISA broadly defines a fiduciary as anyone who exercises discretionary control or authority over the management or administration of a plan or its assets or who gives investment advice for a fee. This generally includes the plan sponsor, administrator, advisors, and investment managers. For the purposes of this article, we’re focusing on sponsors—the employers—and what you need to know to fulfill your responsibilities.

The plan administrator (sometimes the employer or a designated third party) oversees daily operations. This includes filing the necessary forms, providing timely participant notices, and maintaining plan records. Even if you outsource administration to a third party, you must ensure everything meets regulatory requirements. Inadequate oversight of plan operations could result in costly mistakes, including late filings, missing disclosures, and fines from government agencies.

Fiduciaries can also be “named” in the plan documents (such as the employer or investment manager) or “unnamed” by virtue of their actions (someone who effectively controls the plan’s decisions, even if not officially designated). Ultimately, if you or anyone in your organization has the power to influence the plan, that individual can be considered a fiduciary.

Core fiduciary duties under ERISA

Regardless of the number of fiduciaries involved, each must adhere to these key responsibilities:

  • Acting in the participants’ best interests

  • Performing duties prudently and with sufficient expertise

  • Following the plan documents and policies

  • Diversifying plan investments

  • Keeping plan expenses reasonable

At first glance, these requirements might seem vague. However, these rules have been in place long enough that there’s substantial guidance on how to interpret and apply them.

Common pitfalls and best practices for managing them

Even with diligent oversight, plan sponsors can face challenges that put compliance and employee retirement savings at risk. Below are some of the most frequent pitfalls sponsors encounter, along with best practices to address them effectively.

Insufficient oversight of service providers

Failing to properly monitor administrators, recordkeepers, or other third-party service providers can lead to regulatory violations or costly mistakes. Many sponsors assume that outsourcing absolves them of responsibility, but sponsors are required to oversee the performance of any providers they hire.

It’s important to establish a structured process for reviewing your service providers’ performance regularly. Schedule periodic evaluations to ensure they meet expectations and review contracts to confirm fees remain reasonable. Clear documentation of your oversight efforts will also demonstrate compliance during audits or regulatory reviews.

Recordkeeping Errors

Missing or inaccurate records—particularly for loans, hardship withdrawals, or contribution tracking—can lead to compliance issues and penalties. Poor documentation can also create unnecessary challenges during regulatory audits.

Maintain thorough, well-organized records for all aspects of plan administration, including meeting minutes, plan amendments, and loan documentation. Regularly audit your records to ensure they are complete and up to date. Use automated systems where possible to reduce manual errors and ensure consistency.

Misunderstood compensation definitions

Plan sponsors often miscalculate contributions due to unclear or incorrect definitions of compensation, such as excluding bonuses or overtime from eligible earnings.

Work with payroll and HR teams to clarify how compensation is defined in your plan documents and ensure systems are aligned to calculate contributions correctly. When necessary, consult experts to confirm compliance with IRS rules. Regular audits of payroll processes can help identify and address potential issues early.

Nondiscrimination testing failures

Plans that disproportionately benefit highly compensated employees may fail nondiscrimination tests, leading to penalties or required corrective contributions. Low participation rates among rank-and-file employees often exacerbate this issue.

Encourage broader employee participation by offering education sessions about the plan’s benefits, emphasizing matching contributions, or introducing automatic enrollment features. These steps can help create a more balanced plan and reduce the risk of failing nondiscrimination tests.

Delayed contributions

Delays in depositing employee deferrals can result in penalties from the Department of Labor (DOL), including the requirement to compensate participants for lost earnings. Even minor delays can trigger scrutiny.

Synchronize your payroll systems with the plan’s records to ensure timely deposits of employee contributions. Set up automated processes wherever possible to minimize delays. Conduct regular checks to verify contributions are being deposited within the required timeframes.

Audits, compliance, and regulatory changes

Plans with more than 100 participants typically undergo an external audit each year, which scrutinizes financial reporting and compliance practices.

The participant count is now based on the number of participants with account balances rather than just those who are “eligible.” This change took effect for the 2024 plan year and is intended to reduce the burden on plans where many workers may be eligible to participate but don’t maintain an active balance.

Even if an audit is not mandated, performing occasional internal or external reviews can reveal issues such as improper fees or administrative oversights before they become major problems.

Preparing for DOL or IRS Examinations

Regulatory agencies often look for missing documentation, incorrect plan definitions, and oversight failures when they conduct an examination. Plans that have kept comprehensive records, acted promptly to fix issues, and documented each important decision tend to fare better in these reviews. The DOL and IRS also encourage sponsors to self-correct or voluntarily disclose errors to secure more lenient treatment and reduced penalties.

Voluntary correction programs and self-reporting

Errors can and do happen, particularly if you manage a large plan or rely on multiple service providers. Both the IRS and the DOL have established programs allowing plan sponsors to report and fix mistakes before they escalate, typically resulting in reduced fees or no penalty at all. Proactive reviews—ideally yearly or semi-annually—are often the easiest way to catch potential issues. Self-correction not only saves money but also demonstrates your intention to prioritize the plan’s health and function.

Staying compliant

Sponsoring a 401(k) plan is both a valuable benefit for your employees and a serious legal and ethical responsibility. While these duties can feel daunting, the good news is that you don’t have to manage them alone.

Outsourcing key responsibilities to professionals can significantly reduce your burden. These experts bring the necessary expertise to handle the complexities of investment decisions, plan administration, and compliance. However, it’s important to remember that outsourcing doesn’t absolve you of all liability; you retain the responsibility to select and monitor these professionals carefully.

By staying informed, establishing strong internal controls, and relying on seasoned experts where appropriate, you can meet your fiduciary obligations with confidence while safeguarding your employees’ retirement savings.

This article is for informational purposes only and should not be considered legal advice. If you have specific questions or concerns about your 401(k) plan, consult with a qualified professional to ensure compliance and protect your organization and your employees.

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Understanding the Impact of ASU 2020-07 on Contributions of Nonfinancial Assets

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February 18, 2025 | by Atherton & Associates, LLP

The Financial Accounting Standards Board (FASB) has introduced Accounting Standards Update (ASU) 2020-07, focusing on the presentation and disclosure requirements for contributed nonfinancial assets by Not-for-Profit entities. This update aims at increasing the transparency and clarity of nonfinancial contributions, also known as gifts-in-kind.

Nonfinancial assets are essentially assets that aren’t financial, including land, buildings, equipment, materials, supplies, intangible assets, and specialized volunteer services. Unconditional promises to give nonfinancial assets, such as offering free use of buildings or facilities over a period, also fall under ASU 2020-07.

ASU 2020-07 brings forth several new requirements for the presentation and disclosure of nonfinancial contributions in an organization’s financial statements.

Firstly, gifts-in-kind must now be presented as a separate line item in the statement of activities, distinguishing them from contributions of cash and other financial assets. In addition, the financial statements must disaggregate the contributed nonfinancial assets by category, providing a clearer view of the types of nonfinancial contributions received. For instance, a donated building and pro bono legal services should be separately disclosed.

The disclosure requirements under ASU 2020-07 are equally comprehensive. Organizations are required to provide qualitative information regarding whether the nonfinancial contributions were monetized or utilized during the reporting period, and which activities or programs benefitted from them. They should also disclose their policy, if any, about whether to monetize or utilize the contributed nonfinancial assets. Furthermore, a description of the valuation methods and inputs used to arrive at fair value must be disclosed, along with any donor-imposed restrictions and the concepts of the principal market for arriving at a fair value measurement.

The introduction of ASU 2020-07 requires organizations to revisit their policies and procedures to ensure compliance. It would be beneficial to establish procedures and controls for tracking and categorizing contributions and to consider thresholds for disclosure items based on the organization’s size and the materiality of the contributions.

To facilitate the implementation, organizations could leverage their general ledger system to create separate accounts for tracking contributed nonfinancial assets. This approach allows for flexibility in reporting and can be instrumental in further disaggregating contribution revenue by types of in-kind contribution revenue.

Notably, ASU 2020-07 does not alter existing standards for the valuation and recognition of contributed nonfinancial assets nor does it change the criteria for recording contributed services. However, the introduction of this standard calls for a fresh look at existing gifts-in-kind valuation techniques and internal control systems to ensure they align with the new requirements.

In conclusion, ASU 2020-07 is a significant development for Not-for-Profit entities, requiring them to enhance transparency in their financial statements. With careful planning and the right approach, organizations can smoothly transition to the new standard while enhancing their financial reporting process. As always, professional advice should be sought to navigate these changes effectively. 

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Navigating the Lease Accounting Landscape: A Guide to ASC 842

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November 26, 2024 | by Atherton & Associates, LLP

Introduction

The landscape of lease accounting has undergone a significant transformation with the introduction of Accounting Standards Codification (ASC) 842. This new standard represents a pivotal shift in how leases are accounted for and reported, aiming to enhance transparency and comparability across financial statements. Navigating these changes can be challenging for businesses of all sizes, but understanding the key provisions of ASC 842 is essential in today’s financial environment.

Lease accounting standards have evolved over the years to address the complexities and nuances of leasing transactions. ASC 842, in particular, plays a crucial role in reflecting the true financial obligations of lessees on their balance sheets. The significance of this standard cannot be overstated, as it impacts financial reporting, compliance requirements, and stakeholder perceptions.

Background: The Evolution of Lease Accounting

Lease accounting has historically been a complex area of financial reporting, with standards evolving to keep pace with the changing nature of business transactions. The previous standard, ASC 840, had several limitations that led to significant off-balance-sheet financing. Under ASC 840, operating leases were not recorded on the balance sheet, allowing companies to exclude substantial liabilities from their financial statements. This practice resulted in a lack of transparency and made it difficult for investors and stakeholders to accurately assess a company’s financial position.

The limitations of ASC 840 highlighted the need for change. Critics pointed out that off-balance-sheet financing distorted financial ratios and comparability between companies. To address these concerns and align U.S. standards with international practices, the Financial Accounting Standards Board (FASB) introduced ASC 842.

ASC 842 aims to bring most leases onto the balance sheet, providing a clearer picture of a company’s financial obligations. By requiring lessees to recognize right-of-use assets and lease liabilities, the new standard enhances transparency and promotes consistency in financial reporting across industries.

Understanding ASC 842: Key Provisions

1. Lease Definition and Scope

One of the foundational changes introduced by ASC 842 is the new definition of a lease. Under this standard, a lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

To meet this definition, a contract must involve an identifiable asset and grant the lessee the right to obtain substantially all of the economic benefits from its use. Additionally, the lessee must have the right to direct the use of the asset during the lease term.

2. Lease Classification

ASC 842 introduces a dual classification model for leases: finance leases and operating leases. The classification depends on whether the lease transfers substantially all the risks and rewards of ownership to the lessee.

A lease is classified as a finance lease if it meets any of the following criteria:

  • There is a transfer of ownership of the underlying asset to the lessee by the end of the lease term.
  • The lease contains a purchase option that the lessee is reasonably certain to exercise.
  • The lease term is for a major part of the remaining economic life of the underlying asset.
  • The present value of the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
  • The underlying asset is specialized and has no alternative use to the lessor at the end of the lease term.

Leases that do not meet these criteria are classified as operating leases. This classification affects how leases are recognized in the income statement and balance sheet, influencing financial ratios and profitability metrics.

3. Recognition and Initial Measurement

Under ASC 842, lessees are required to recognize a right-of-use (ROU) asset and a lease liability on their balance sheets for all leases exceeding 12 months. This marks a significant departure from previous standards, where operating leases were often kept off the balance sheet.

The ROU asset is measured at the amount of the lease liability, adjusted for any lease payments made at or before the commencement date, less any lease incentives received, and adding any initial direct costs incurred by the lessee.

4. Determining the Lease Term and Discount Rate

Accurately determining the lease term and discount rate is crucial for calculating the present value of lease payments.

The lease term includes:

  • The noncancellable period of the lease.
  • Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option.
  • Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

The discount rate used is generally the lessee’s incremental borrowing rate—the rate at which the lessee could borrow funds to purchase a similar asset under similar terms. If the rate implicit in the lease is readily determinable, it should be used instead.

5. Subsequent Measurement and Lease Modifications

After initial recognition, the lease liability is measured using the effective interest method. This method amortizes the liability over the lease term, recognizing interest expense in the income statement.

The ROU asset is amortized differently depending on the lease classification:

  • Finance leases: The ROU asset is amortized on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset.
  • Operating leases: A single lease expense is recognized over the lease term, combining the interest on the lease liability and the amortization of the ROU asset.

6. Enhanced Disclosure Requirements

ASC 842 mandates enhanced disclosures to provide stakeholders with comprehensive information about an entity’s leasing activities. The disclosures aim to highlight the amount, timing, and uncertainty of cash flows arising from leases.

Qualitative disclosures include descriptions of the following:

  • The nature of leasing activities.
  • Significant judgments and assumptions made in applying the standard.
  • Variable lease payments and options.

Quantitative disclosures encompass:

  • Lease cost components, such as operating lease cost, finance lease cost, and variable lease cost.
  • A maturity analysis of lease liabilities, showing undiscounted cash flows for each of the next five years and a total thereafter.
  • Supplemental cash flow information related to leases.

Impact on Businesses and Financial Reporting

The implementation of ASC 842 has far-reaching effects on businesses:

  • Changes in balance sheet presentation: Recognizing ROU assets and lease liabilities increases both assets and liabilities, affecting the company’s financial position.
  • Impact on financial ratios and covenants: Financial metrics such as debt-to-equity ratio and return on assets may change, potentially affecting loan covenants and investor perceptions.
  • Effects on stakeholder perception and investor relations: Greater transparency can influence how investors, creditors, and rating agencies evaluate the company.
  • Tax considerations: While ASC 842 changes the accounting treatment of leases, it does not alter their tax treatment. Companies must reconcile differences between book and tax reporting.

Conclusion

The adoption of ASC 842 marks a significant shift in lease accounting, bringing greater transparency and comparability to financial reporting. While the changes present challenges, they also offer opportunities for businesses to improve their financial insights and stakeholder communications.

Proactive planning and execution are key to a successful transition. By embracing the new standard and leveraging expert assistance, companies can enhance their compliance efforts and strengthen their financial foundations.

 

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California Charitable Organization Audit Requirements

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February 06, 2024 | by Atherton & Associates, LLP

Did you know that charitable organizations with gross revenues of $2 million or more must have audited financial statements prepared by an independent CPA? The $2 million threshold excludes grants received from governmental entities.  Understanding the intricate details of audit requirements for nonprofit organizations is crucial to maintain transparency and uphold financial integrity. At Atherton & Associates, we’re committed to helping nonprofits navigate these complexities and ensure compliance with laws and regulations like the Nonprofit Integrity Act of 2004. If your organization falls within the $2 million revenue category excluding governmental grants, it’s essential to have your financial statements audited by an independent CPA. For any questions or if you’d like to discuss the audit requirements and how they apply to your organization, don’t hesitate to reach out to our office. Our expert advisors are always here to assist you. Please call us at 209-577-4800.

Nonprofit Integrity Act of 2004

California Charity Laws & Regulations

National Council of Nonprofits / California Audit Requirements

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