Many times we have been contacted by clients and potential clients inquiring about our firm performing an audit for them, and more importantly, what will it cost? Some of the first questions we ask are “who is asking for it” and “do you think you really need an audit”?
The answer depends on who will be using the financial statements and the needs of the creditors, investors or agencies. The major difference in the three types of financial statements is the assurance level. In all three levels, the reporting entity is primarily responsible for the financial statements.
The most basic level of service with respect to financial statements is the compiled financial statements. The CPA makes certain that the data received from the client are in the correct format and free of clerical errors. A report on the compiled financial statements is issued that states no assurance is expressed as to whether changes are necessary to be in conformity with generally accepted accounting principles.
The next level is the reviewed financial statements. In addition to evaluation of the format presentation of the data, the CPA is required to make inquiries of management, apply analytical procedures and obtain representations from management. The additional requirements allow the CPA to express limited assurance that he is not aware of any material modifications that should be made to the financial statements to be in conformity with generally accepted accounting principles.
The highest level of assurance is expressed on audited financial statements. Procedures in an audit include confirmation with outside parties, observation of inventories, and testing of selected transactions by examining supporting documents. Even though an audit is the CPA’s highest level of assurance that financial statements are free from material errors and fraud, it does not provide a guarantee of absolute assurance.
The costs involved for preparation of financial statement increases as the expression of assurance level on them increases. Governmental agencies may require from a small entity, say under $100,000 net worth, reviewed financial statements to apply for certain licenses. The cost for such a financial statement seems disproportionate as to the value of the entity. Make sure you know which one of the financial statements you really need because the cost difference can be astounding.
Referencing a recent article in Bloomberg.com, President Barack Obama and House Speaker John Boehner have a big job ahead of them in the coming weeks. They hope to come together in act of solidarity to work out an agreement to avert the so-called fiscal cliff which happens at the end of this year if no deal is struck.
Obama, claiming a mandate from voters after his Nov. 6 re- election, has called for an immediate tax-cut extension for people earning less than $250,000 and insisted that top earners pay more. Boehner has cited public support for the re- elected House Republican majority and said tax rates must not go up. While both said they were willing to compromise and act quickly, Obama and Boehner have offered no public concessions. Their differences may take weeks to reconcile.
Obama and Boehner will meet at the White House in the next few days, along with House Democratic Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.
If Congress does not act by the end of the year, $607 billion in automatic spending cuts and tax increases are scheduled to take effect starting in January. They stem from previous decisions by Congress, including from the deal last year to raise the federal debt ceiling and the 2010 extension of tax cuts.
In recent remarks, Obama and Boehner have left open the possibility of agreement on preserving current tax rates while limiting tax breaks for top earners to raise revenue. Such an approach, should it come to fruition, would let Obama claim the higher tax payments he seeks from the wealthy and allow Boehner to avoid the higher rates he calls unacceptable.
Since his re-election, Obama has repeated the outline he laid out during his re- election campaign for a “balanced” approach to cutting the deficit that would include higher taxes on the wealthiest and some spending cuts. Boehner has also outlined the Republican approach to the fiscal cliff: avoid tax rate increases and spending cuts while beginning a process to overhaul entitlement spending and the tax code.
The president wants to let George W. Bush-era tax cuts lapse on income of individuals above $200,000 and of married couples above $250,000. That would push the top tax rate to 39.6 percent from 35 percent. Boehner has emphasized opposition to higher tax rates, rather than talking about higher taxes or higher revenue. He has endorsed the idea of increasing government revenue through an overhaul of the tax code without saying explicitly whether he would support a tax increase or the elimination of tax breaks without a corresponding rate cut.
Obama’s plan to cap tax breaks, which has gotten no traction in Congress, would raise about $584 billion over a decade, compared with the more than $900 billion that would be generated from higher rates on income, capital gains, dividends and estates.
Some Democrats may however insist on higher tax rates. Representative Sander Levin, the top Democrat on the House Ways and Means Committee, has said talk of limits on tax breaks was little more than “glittering generalities” that doesn’t reflect that the biggest breaks, including the mortgage interest deduction, are tax policies and not loopholes. Republicans have said that any additional tax revenue should come through a restructured tax code and from so-called dynamic scoring that relies on revenue from macroeconomic changes generated by the tax overhaul itself.
When pressed by reporters recently, Boehner reiterated his previous statements and said he wanted to preserve flexibility for negotiations with Obama on a deal to avert the fiscal cliff and reduce the federal budget deficit.
The blueprint for a deal to avoid a fiscal nightmare early next year may be found in the failed debt negotiations between Obama and Boehner in mid-2011. The contours of that plan included revenue increases, spending cuts and changes to lower the long-term costs of entitlement programs. Before the talks collapsed, Boehner was willing to accept $800 billion in revenue increases and Obama was ready to settle for $1.2 trillion.
Part of their negotiations on a $4 trillion deficit-cutting plan included a gradual increase in the Medicare eligibility age to 67 and an alternative yardstick for calculating inflation that would reduce annual Social Security cost-of-living adjustments and raise taxes by slowing the annual adjustments in tax bracket thresholds.
Regardless of where the negotiations begin and end, the citizens of this great country need to stand up and have their voices heard. We cannot rely on the leaders of each party to interpret the results of the recent election to benefit their position. I encourage each of us to take the time to contact our respective Senators Harry Reid and Dean Heller and Representatives Shelley Berkley, Mark Amodei and Joe Heck to let them know the importance of resolving this crisis. I know they appreciate hearing from their constituents and letters, phone calls and e-mails (the preferred method I believe) are the best way to let them know that we care and want some action.
Widely publicized in the professional literature but unnoticed by the mainstream press is the 3.8 percent Medicare contribution tax imposed on the investment income of individuals by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, informally referred to as Obamacare. That means in 2013 your net investment income could be subject to an additional 3.8 percent tax. This could have a substantial impact if you have income above certain thresholds.
This Act taxes net investment income which includes taxable interest, dividends, annuities, royalties, and rents and other income attributable to passive activity (business activity in which you do not materially participate). Also taxed are capital gains from the sale of investment property such as stocks and bonds including the taxable gain on the sale of a residence.
Deductions that are properly allocable to the investment income or gain are allowed as a reduction of the taxable amount. Keeping track of the investments basis (cost), interest on loans used to purchase the investments, commissions, investment counsel, and other expenses become even more crucial. The rules as to what indirect expenses are allowable against gross income from investments have not been finalized yet.
This tax applies to the lesser of net investment income or adjusted gross income plus foreign earned income above these threshold amounts:
Certain trusts are also subject to this tax, but the income thresholds are lower.
Adjusted gross income may exceed net investment income unless the taxpayer has large deductions for alimony, IRA or SEP plans, self-employed health insurance, deductible self-employment taxes or other adjustments to total income.
Most distributions from retirement plans are excepted from this Medicare contribution tax. Income from a trade or business, investment income emanating from that trade or business, or certain gains from selling an interest in a trade or business are excludable.
The tax does not apply to business entities (such as corporations and limited liability companies) and charitable trusts that are tax exempt
Taxpayers who may be subject to the tax may wish to consider accelerating the receipt of investment income into the current 2012 year. Executors and trustees may want to consider how to best balance the tax consequences between their entities and beneficiaries. Individuals may want to increase their contributions to qualified retirement plans to both help stay below the threshold and reduce investment income since retirement income is excepted from this tax.
A recent Harvard Business Review article, What You Can Learn From Family Business, compared the performance of similar sized family businesses to traditional public companies with some interesting results.
Seven key difference were identified:
We’ve all seen that many of the businesses that have survived this recession have done so because they have strong balance sheets. Strong in that they are holding significant amounts of cash and little debt. Family run businesses seek to be self-sufficient and not beholden to lenders. They take the long view of protecting family wealth. So, they may not be the innovative risk takers and therefore miss some opportunities; however, they are the backbone of business that provides stability in this ever volatile world.