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  • Giving Voice to Values: The ‘How’ of Business Ethics

    Division Career Tips, Company Culture, Executive Leadership, Team Building, Tomorrow's Talent December 12, 2018 Ethics can be an overused, buzzword in society today and we can become callused and non-responsive when we hear that term. Additionally, we can have a hard time knowing how to apply it in the various circumstances we face. By definition, ethics are the moral principles that govern a person’s behavior or the conducting of an activity. The word INTEGRITY is the quality of being honest and having strong moral principles. It is a trait that is also seen as being the same on the inside as shown on the outside. CHARACTER is the mental and moral qualities distinctive to an individual. To further delineate this, ethics is about integrity and integrity is about character. Character is the essence of who a person is and is more than talk; it is a choice to develop this principle. People can’t ultimately rise above severe problems in their character but the strong character in a person can usher in success. Consider using the terms character and integrity to keep this topic fresh and relevant to everyday actions. Furthermore, this topic should not be segmented by work, home or other areas. Integrity and character are who we are as a person and should be how we live in all areas of our life. Many employees in the realm of finance and accounting have been faced with situations where they were explicitly told or implicitly pressured to do something that contradicted their personal values. Dr. Mary Gentile, the creator, and director of Giving Voice to Values, after a career as a professor of ethics, chose to design a method of application, focusing on the implementation of ethics, so that decision making with integrity would become a habit. After years of lecturing, she determined that just teaching and talking about ethics was probably unethical, futile, and hypocritical as it just reiterated issues without helping individuals reach real solutions. She listed the following decades of scandals as historical references to the challenges we have faced: 1970’s – Defense Industry 1980’s – Insider Trading 1990’s – Dot-com Bubble 2000’s – Global Financial Crisis (Enron, WorldCom, Parmalat, Galleon Group) 2010’s – Wells Fargo, Volkswagen Discussion Groups From traditional teaching, she found that in discussion groups, thinking would become complicated and groups tend to focus on one- or two people’s voices who may not believe the most ethical path can be accomplished. She also discovered that almost all students had stories about being pressured to violate their own code of ethics, and, of these, none were from more troubled backgrounds, or had more organizational knowledge than others. The ones that succeeded were those who had made good choices and engaged in ethical practices earlier in their lives and careers. The writer thought leader, and leadership guru, John Maxwell purports that first, there needs to be a standard to follow and then the will to follow that standard. As for a standard, a common rule found in almost all cultures and religious organizations is to ‘do to others what you want to be done to you.’ This is commonly referred to as the Golden Rule. Golden Rule This Golden Rule is widely accepted, easily understood, mutually beneficial arrangement, and an internal compass for those times we need direction. If we contemplate how do we want to be treated and then, in turn, replicate that to others, usually we will be working a best-case scenario. Generally, we want to be valued, appreciated, trusted, respected, and understood. Moreover, we do not want others to take advantage of us. If we treat others this way, we will be walking in integrity, building good character, and making ethical decisions. The next step is the will to follow that standard or how to apply it. Dr. Gentile learned that rescuers from the Holocaust survived by having rehearsed ethical scenarios out loud with someone more senior than them at some point earlier in their life. They had identified behaviors that mattered to them, named them, and then voiced them to a leader. Behaviors and strategies enabled them to find better solutions to problems. Instead of teaching people (or ourselves) into thinking their way into a different way to act, we need to be acting to a different way of thinking. We need to rehearse these actions in the same way we may need to use it so that even if we temporarily stop or get distracted, we can still naturally move in the process. This is like an athlete who continually practices so they can be ready for in-game strategic plays, or a family who reviews emergency scenarios in their home so they will be able to act quickly in times of crisis. Successful outcomes to decision making during times of ethical crisis came down to being strategic and tactical, reframing the challenge and utilizing the tools already known. These tools can include, power, influence, negotiation skills, building coalitions, and applied education. Whereas the classroom lectures had taught models of reasoning, the alternate application of strategy allows for more practical implementation. Giving Voice to Value The basis of “Giving Voice to Value” is to create awareness, analysis and then continue this by a process with action. Case studies are intentionally short, based on people in all levels of the organizations, and from the protagonist view that has already decided on the ethical thing to do. The question asked is not WHAT is the right thing to do but HOW to get the right thing done. Answering the question “If the right thing to do is X, how can that get done?” This allows for creative thinking and problem-solving. Instead of the conversation being about the areas of ‘thou shalt not’, it’s about what we can do and how to go about that process. In doing this, we need to establish credibility based on the reality of the context and start from a position of respect. This is a nuanced, sophisticated and tactical approach which might include several different types of methods including: Writing a memo Asking questions Having someone talk for you to the decision-maker Making sure someone else is on the right committee or Building a distinct network over time Gentile states that the goal isn’t necessarily to change a person’s mind on what is or is not ethical but to give people the skills that they need to be who they already are at their best. Practice gives the opportunity to shape character and develop integrity. To reiterate, ethics is about integrity and integrity is about character. To make the best ethical decisions, we must practice good character and walk in integrity.

  • 3 Benefits Of Pairing With An Experienced Staffing Agency

    It’s no secret that employees can make or break a business. By pairing with an expert recruitment firm like BGSF, you can feel confident knowing your company’s future is in good hands. We go above and beyond to meet your company’s needs, from locating qualified candidates to providing premium on-site management.  Here are just a few of the many reasons to contact BGSF for your hiring needs: Save Time Think you’re saving a fortune by handling your hiring in-house? You may want to crunch those numbers again! When you add up the costs associated with reading resumes, screening potential candidates, and meeting for in-person interviews, you will likely find that hiring is costing you a bundle. If your budget is bending under the weight of your HR needs, you may want to consider pairing with an experienced staffing company to make the recruitment process more efficient. Expand Recruitment Tired of scraping the bottom of the barrel when it comes to staffing? If your last few new hires left something to be desired, you may be looking in the wrong place for employees. When you pair with an agency like BGSF, you can take advantage of our wider recruitment net while freeing up your HR team to focus on other tasks. Whether you need temporary workers for the holiday rush or full-time employees to grow your team long term, we can help you find the best people for the job. Screen Employees How well do you really know your staff? The fact is, many companies aren’t set up to review potential employees thoroughly. By pairing with a qualified staffing agency, you will gain access to their more sophisticated screening system. BGSF can make sure every each new employee is completely competent, from conducting effective interviews to performing drug and background checks,

  • What Lessons about Cybersecurity Can We Learn from Equifax?

    Division American Partners, Donovan & Watkins, Extrinsic, LJ Kushner & Associates, Professional Division, Vision Technology Services, Zycron December 5, 2018 An Executive Brief from Stephen Webster, MRE’s Chief Technology Officer Even a casual observer of the morning news is aware of the dangers hackers pose to American businesses. As an executive, you may be called upon to make decisions about how to protect your company’s data even if technology issues don’t normally fall under your responsibilities or expertise. Don’t worry — you don’t have to be a technology expert to make informed decisions about data protection. While every company has different security needs, a few simple guidelines can help give you a framework for making good decisions. KNOW YOUR DATA The first step in protecting your data is to know what data you have that might be valuable to cyber-thieves. Do you have volumes of private customer data? Do you have proprietary information that competitors could use to gain an advantage? Are you storing confidential data critical to your business strategy? The more valuable the data, the more security it will need. In addition, it is imperative to have working back-ups of the company’s key data and systems in place. With the rise of Ransomware and Malware aimed at these components, a backup is critical for protection and recovery in the case of an attack. Companies with large amounts of proprietary data, intellectual property, or other mission-critical information will need to consider stronger measures to safeguard their data. The more valuable the data, the more capable the intruder coming after it is likely to be. Also, be aware of what data you are legally required to protect. Privacy laws can allow corporate officials to be held personally liable if they don’t take adequate measures to secure certain sensitive information about customers and employees. If you don’t know what you are required to protect, ask information security or a legal expert for help. Remember, ignorance is no defense from the law. Expert advice can help you avoid legal troubles while you handle the setbacks that result from your data being compromised by hackers. SET THE RIGHT BUDGET How much money you need to spend to protect your data is a function of the value of that data. Spending too little on security can leave you and your firm open to some nasty surprises as motivated thieves circumvent your countermeasures. At the same time, it is possible to overprotect data out of fear and waste resources that could be better spent elsewhere. You have to decide on the proper balance to meet the needs of your firm. As a rule of thumb, firms should spend 5 to 12 percent of revenue on IT infrastructure. About 10 to 20 percent of that should be dedicated to IT security infrastructure. For many firms, this amounts to a sizeable expenditure. In such cases, it is a good idea to talk to outside IT security specialists to help establish what security level you need and what options are available. IT security is a specialty skill that is outside the expertise of many good IT departments. Security specialists can advise you on what you need to protect you from the most likely threats faced by your sensitive data. They can also recommend options that return greater security at a greater value. PUT THE RIGHT PROCESSES IN PLACE The human element is the single greatest risk in IT security. Good security is often foiled by the bad behavior of employees. Workers use weak passwords, lose laptops, open suspicious e-mail attachments, and sometimes let strangers access systems without thinking of the consequences. Employees can also forget to log out of computers and leave passwords lying out in the open. Furthermore, employees often download unapproved software, which can be a pathway for attackers. Most security breaches ultimately lead back to negligent behaviors. The best solution for this giant security hole is to have good procedures with proper controls and regular training in their use. Don’t count on technology to protect you from bad habits. THINK LAYERS No security system is foolproof. The key is to put enough layers of defense in place to discourage hackers and cause them to look for easier prey. Too many companies make the mistake of building a strong outer shell that they think is impenetrable. Once an intruder breaches that shell, the entire corporate data infrastructure is open. Instead, you want layers within layers of security. This greatly increases the chances of a hacker becoming frustrated or detected before he or she can reach sensitive information. A good system should also leave an extensive audit trail. If nothing else, this gives the security experts a clear path to follow in the event of a breach to track down and patch the hole in the defenses. STAY CURRENT You can never let your guard down. Cutting-edge viruses are constantly being developed to enable new methods of bypassing a system’s security. It is vital to stay up to date on current cyber-security trends and technology to prevent and prepare for security breaches. In their effort to stay current, software companies are constantly releasing new patches for their applications. Delaying an update allows cyber-criminals more time to become familiar with the targeted system and puts your system at greater risk. For example, the recent WannaCry and Petya ransomware attacks could have been prevented through proper and timely patching of the Microsoft operating system. RECOVERY So what do you do if all of your security fails, and you wake up one morning to find your company has been breached and its data stolen? The first rule is to stay calm. Figure out exactly what has happened and make sure you understand all the facts. The worst thing you can do is overreact. Don’t shut down your entire network in a panic and stay offline until you feel safe. Determine what was taken and who will be affected by the stolen data. Then alert those people as soon as possible. Trying to hide a data breach that puts other people in jeopardy can damage your corporate image and reputation, which in the end may do more injury to the firm than the data breach. Alerting the right people includes alerting the authorities, such as the FBI. Every country has an organization that should be contacted as soon as you assess what has happened. They can help deal with the problem and possibly help track down the threat. In cases of a virus requesting payment, it is recommended to never pay the ransom. Don’t try to solve the problem on your own or waste time thinking about striking back or taking revenge. Many hacking attacks are undertaken by criminal organizations and even foreign governments who likely have more resources than you. The best advice is to focus on patching the holes and taking care of your customers. Let the proper authorities find the perpetrator and take appropriate legal action. A security breach will often require outside experts to help resolve all the problems. Not only do IT security professionals have the specialized knowledge needed to help, but they can also provide good advice that isn’t tainted by the emotional shock of the breach that is affecting inside personnel. Don’t be afraid to admit when you need help. PUBLIC RELATIONS If members of the public were affected by the breach, the right thing to do is let them know with a public announcement. Be clear about who is at risk and reassure them that you are taking measures to fix it. Put measures in place to help them recover. If personal credit information was taken, offer to pay for a year of credit monitoring or some other compensation. Not only is this the responsible thing to do, but it can also further protect your brand from credibility damage. At this point in the crisis, a good public relations department can be invaluable in crafting a message and creating a proper response plan. If your company doesn’t have a public relations department, consider hiring a reputable outside firm to assist you. CONCLUSION You don’t have to be a technology expert to make good management decisions in regards to guarding data as long as you remember a few simple guidelines. Make sure you understand what your valuable data is and to whom it has value. Invest properly in data security and consult experts when needed. Support the technology you purchase with good policies that are monitored for compliance and constantly reinforced through training. Be proactive in ensuring that your defenses are properly layered and employees informed. In the event you do get hacked, respond appropriately and transparently with help from the proper authorities. The biggest thing to remember is to make it as hard as possible for unauthorized users to access your valuable data. Hackers seek out the path of least resistance. You don’t have to make your network an impregnable fortress. You have to make it just hard enough to discourage intruders so they seek easier targets elsewhere. About the Author: Stephen Webster, Chief Technology Officer, MRE Consulting, Ltd. Stephen is a recognized expert at designing and implementing infrastructure solutions and services for Global Fortune 250 companies. He has provided expert commentary on topics ranging from data security to cloud computing and has been featured on Bauer Business Focus, NPR and CBS Radio.

  • 5 Ways To Avoid High Turnover Rates

    There’s nothing worse than losing one of your top employees to another position…unless it’s losing all the money you invested in him or her as well. The fact is that turnover costs employers big bucks in hiring and training costs and can even harm a business’s overall reputation, should productivity suffer during the transition. Here are a few of BGSF expert tips to avoid a high turnover rate and keep your employees happier in the long term: 1. Talk to Current Employees Want to reduce turnover rates at your company? Don’t wait until the exit interview to ask employees what they think! By conducting regular employee interviews and surveys, you can identify problems early on, when there’s still time to make changes, and boost overall retention for your business. Just remember to follow through on your promises; if you say you’re going to offer healthcare benefits by the end of the year, create an action plan to ensure it happens. Otherwise, you’ll have an even bigger turnover problem come December! 2. Offer Incentives Speaking of healthcare, offering employee benefits is one of the best ways to reduce turnover. If you can’t afford large incentives, like medical insurance and paid vacation time, consider offering a smaller reward to show your workers they’re appreciated. Hand out gift cards as thanks for a job well done, or schedule a company-wide lunch at the end of a big project. In the end, recognition will go a long way toward showing your employees they aren’t just paid help but members of a valued team. 3. Pay Employees Appropriately Of course, a gift card now and then isn’t enough to keep employees in their chairs, good retention rates also depend on your ability to pay employees solid wages. Even people who love their jobs want to receive fair compensation, and underpaid employees are likely to go to the competition. 4. Give Workers Chances to Grow Would you stay at a job where you had no chance of advancing to bigger and better things? Doubtful! To keep your best workers on staff, make sure you offer plenty of room for growth. Invest in your own people and reap the rewards in improved retention. 5. Work with a Top Staffing Company Are you overwhelmed by the prospect of finding and retaining top employees? Working with an expert recruitment company like BGSF helps ensure you find the best candidates the first time around. Along with helping you write clear and accurate job descriptions, our staffing experts will take the time to conduct background checks and ensure prospective employees meld well with the whole team.

  • The Deliberation and Decision Making That Goes Into Promoting Someone From Temp To Hired

    Just as one bad apple can turn a whole barrel rotten, one bad employee can have a negative effect on your entire staff. With temporary employment, business owners have the chance to try out workers before risking their company’s welfare in the long term. Along with its expert hiring services, BGSF specializes in helping businesses decide whether their temp employees should be brought on as full-time staff. Here are some signs that your new temp isn’t a bad apple but the right hire for your business: They demonstrate an interest in the company. That temp worker sure makes great coffee, but should you hire him full time? One of the best ways to predict whether someone would be a good permanent employee is to assess his level of interest in the company. If someone is truly excited about joining the team, he will likely take the time to visit the company website and inquire about current and future projects. And it’s only logical that someone who wants to be there is going to work harder so he can stay around! They volunteer for projects. Trying to decide between two equally qualified temp employees? Offer the full-time position to the one who volunteers for extra work. Not only does a willingness to take on new projects demonstrate teamwork skills and a good work ethic, but it also shows evidence of flexibility. This trait may prove valuable when you need someone to take on new roles down the line. They get along with the group. Of course, it’s not enough for temp workers to possess skill and enthusiasm; to ensure maximum productivity for your business, you should also promote employees who get along well with the group. While a little disagreement is healthy in the workplace, employees who belittle or alienate their colleagues will wind up harming your business in the long run. Choose workers who get along well with the others and see productivity and performance rise.

  • Warehouse Preparation Tips For The Holidays

    The holiday season means gift buying, eggnog imbibing… and a seriously busy time for retail businesses. Because of the increased workload, companies need to boost efficiency among their warehouse staff or risk losing potential sales opportunities to the competition. Here are some expert tips to keep your warehouse running smoothly through the holiday season and beyond: Staff Up Before the Big Season While most retailers increase sales staff before the holidays, they may not think to do the same with their warehouse crews. However, the fact is that adding seasonal employees to the warehouse floor can help make the holiday season go considerably smoother. A great way to get a feel for how many workers you’re likely to need this December is to take a look at last year’s sales figures. Update Your Layout Although your current warehouse layout might be fine for the off-season, a poorly organized setup can spell disaster during the holiday months. At BGSF, we recommend increasing the receiving area as well as creating a designated space for packaging. Preparing your warehouse for an influx of products can help you avoid complications come December; making necessary repairs and adding resources like storage trailers and racks for example. Prep Your Returns’ Process The holidays aren’t just the season for gift-giving, but also for returning ill-chosen gifts for cash. Yes, when it comes to the retail industry, returns are an unpleasant fact of life. However, optimizing your warehouse returns’ processes can save you valuable man-hours during this crazy time of the year. By including return address labels in the original packaging materials, you can help ensure that rejected goods wind up in the right place. Just make sure to discuss any policy changes with your customer service and marketing teams ahead of time to ensure everyone is on the same page!

  • Are You Hiring The Right Candidate?

    Do your staffing skills leave something to be desired? If your last few hires haven’t been quite up to the task, consider contacting BGSF for assistance. The source for trusted recruiting, we specialize in helping businesses find great candidates while avoiding all the biggest staffing pitfalls. Here are five things to watch out for when hiring for your next open position: Awkward Body Language No one’s claiming that every new hire needs the grace and poise of a prima ballerina. However, awkward body language can be a sign that a candidate lacks the confidence needed to succeed in a new position. Additionally, avoiding eye contact can indicate that an applicant lied about something on his or her application and may be unable to do the job in question. Lack of Questions Employers love to ask if the interviewee has questions for them, and with good reason. The savvy job candidate does his homework before applying for a position, researching basic product and service offerings and new developments at the company. Turn the tables on your potential hire to see if he or she is up to the task. Rudeness Is your prospective employee a true team player? While most applicants are wise enough to turn on the charm with the hiring manager, they may be less careful with receptionists and other colleagues. Job candidates who treat lower-level workers with disrespect will likely demonstrate the same behavior with your customers and clients down the line. Gaps in a Resume There are plenty of good reasons to take time off from work. However, repeated or prolonged resume gaps could indicate a problem with a candidate’s performance or work ethic. Ask about blank spots in a candidate’s career history to make sure the issue isn’t one that will affect your business in the months and years to come. Flaky Communication Unless you operate a monastery, where workers take frequent vows of silence, a good employee is also a good communicator. Before agreeing to hire a candidate, assess their written and oral communication skills. A worker who cannot write a coherent thank you email after that interview may not serve your company’s needs for the long haul.

  • A Skills-Based Resume – Is It Right For You?

    When was the last time you took a good, hard look at your resume? If it’s been a while, your format of choice may be sabotaging your job search. Also known as a functional resume, a skills-based resume highlights skills and accomplishments rather than particular jobs. Instead of listing positions chronologically, candidates set each skill as its own heading and detail their experience in that area. Here are a few reasons a skills-based resume may be right for you. You Have Limited Employment Experience Skills-based CVs are often effective for young job seekers and those with limited work histories. As a new graduate, you are unlikely to have a long resume of past positions. One of the benefits of a functional resume is that you can highlight talents and abilities honed through internships, college courses, and temp assignments. For best results, don’t be afraid to add skills garnered in volunteer work. You’re Reentering the Workforce Are you re-entering the workforce after a lag? Whether you were away on maternity leave, raising children, or caring for a relative during a health crisis, a skill-based resume can be beneficial for those who’ve spent time performing unpaid labor. To show you are eager to learn, be sure to highlight any continuing education courses or independent study you engaged in while unemployed. You’re Making a Career Switch Few of us know exactly what we want to do with our lives when we first enter the workforce. If you are attempting to change careers, a skills-based resume may help you land your next position. While your previous jobs may not sound relevant, the odds are good that skills learned in past positions can help you succeed in your new line of work.

  • How to Identify Work Conflicts At The Source Of The Issue

    No workplace is entirely free from conflict and while respectful disagreements can help generate creative ideas, some forms of conflict are far less productive. When employee interactions become aggressive, or workers become resentful, businesses tend to suffer dips in both productivity and performance. Here are some tips to help managers identify workplace problems at the source and increase staff satisfaction long term: Keep an Eye Out for Organizational Issues Unless you work with a staff of freelancers, some of your employees most likely report to other members of your team. Unfortunately, organizational issues often arise out of these workplace inequalities. Employees who feel bullied or badgered by their supervisors are far more likely to leave you for the competition, companies should pay close attention to organizational conflicts and make sure all workers are treated with the respect they deserve. Express Your Appreciation When was the last time you told your employees they’re appreciated? Your team doesn’t need constant back-patting, but a lack of gratitude to staff can be a serious problem in the workplace. Workers who don’t feel the love are more likely to jump ship, it’s important that managers take the time to recognize a job well done. Therefore, you should identify those teammates who are truly exceptional and provide them with opportunities for climbing the corporate ladder. Spot Overworked Employees Everyone’s been in the position of having too much on their plate. And while it is natural for employees to endure the occasional busy spell, prolonged periods of overwork can lead to a seriously dissatisfied staff. To keep your employees happy and loyal, take time to sit down with them on a regular basis. Encourage them to be honest about their experiences and admit if their workloads have grown out of hand recently. After all, you don’t want the quality of your products to suffer because your team is overburdened. Finding the cause of problems in your office takes some effort. A balance is needed in being a micro-manager and in being a good leader. You don’t want your employees thinking that you are watching them all day, but you also don’t want your employees to think you are ignoring them. It’s impossible to avoid all conflict in the workplace, but showing that you are aware of them and want to help your employees will go a long way in the eyes of your staff.

  • Sales & Use Tax Compliance Tips

    Division Accounting and Finance, BGSF, Career Tips July 10, 2018 With an estimated 7,500 state and local taxing jurisdictions and the complexity of state and local sales and use tax laws and regulations in these different jurisdictions, ensuring that your company is in compliance with these laws and regulations can be a difficult task. Recent research suggests that there may be as much as $26 billion in uncollected sales & use tax from e-commerce transactions alone. In an attempt to recover some of this uncollected sales & use tax, state and local taxing jurisdictions are increasing compliance activities and attempting to expand what constitutes business presence in their jurisdictions. In this increased compliance environment, companies need to be proactive rather than reactive in the area of sales and use tax compliance. The time to prepare for a sales & use tax audit is before an audit assignment is received. To prepare for a sales and use tax audit, companies need to conduct a thorough assessment of their business activities to determine in which taxing jurisdictions they have a compliance responsibility. Once that has been determined, the company needs to establish policies and procedures to ensure that they are in compliance with all applicable laws and regulations in those jurisdictions where a sales and use tax filing responsibility exists. To ensure compliance and reduce audit exposure, it is important for companies to maintain and leverage sales & use tax domain expertise, whether in-house or through a third-party professional services provider. Following is a list of best practices that can be adopted to ensure adequate sales and use tax compliance and minimize potential adverse audit assessments. Sales & Use Tax Best Practices Be proactive rather than reactive in sales & use tax compliance Perform nexus study to determine in which jurisdictions registration is required Review business activities to determine the taxability of products and services in applicable jurisdictions Register to collect and remit sales & use tax in all applicable jurisdictions Automate workflow from taxability determination to tax remittance to ensure timely and accurate compliance Automate tax rate updates to ensure accurate tax calculations Document exempt sales and maintain exemption certificate documentation Research all tax notices and audit findings to confirm the validity Stay current on laws and regulations

  • Matching Internal Controls to Real Life Change

    Division Accounting and Finance, Executive Leadership, Information Technology June 21, 2018 Auditing Transition Adjustments Obtaining an understanding of a company’s selection and application of accounting principles is part of the auditor’s procedures to identify and evaluate risks of material misstatement under PCAOB standards. Additionally, the auditor is required to evaluate a change in accounting principle to determine whether the method of accounting for the effect of a change in accounting principle is in conformity with generally accepted accounting principles and whether the disclosures related to the accounting change are adequate. The new revenue standard provides two transition options for applying the new standard (full or modified retrospective application). A full retrospective application requires the recasting of prior year financial statements as if the new standard had been applied in those years. In contrast, a modified retrospective application requires disclosure of the effect on each financial statement line item in the period of application, and explanations of significant changes between the reported results under the new standard and those that would have been reported under current accounting principles. Under either option, the company recognizes the cumulative effect of adopting the new standard against opening equity of the earliest period of application. The new revenue standard also provides optional practical expedients that may be applied during the transition. The standard requires the practical expedients to be consistently applied and disclosed in the financial statements. It is important for auditors to identify and assess the risks of material misstatement associated with the company’s transition adjustments and design and implement audit responses that address those assessed risks. Specific considerations in assessing and responding to the risks of material misstatement of the transition adjustments include, among others, (a) internal control over financial reporting, (b) data that may not have been audited previously, (c) opportunities for committing and concealing fraud, and (d) prior-period misstatements identified in the current period’s audit. Internal controls over the transition adjustments will generally be relevant to the audit, including in selecting controls to test in an audit of financial statements (if the auditor plans to rely on such 1.12 18 controls) or an audit of internal control over financial reporting. As described in Practice Alert No. 11, auditors are cautioned that controls must be tested directly to obtain evidence about its effectiveness; an auditor cannot merely infer that control is effective because no misstatements were detected by substantive procedures. This applies to the evaluation of evidence about the effectiveness of internal controls over the transition adjustments. Auditing transition adjustments involves obtaining company-produced information (e.g., standalone selling prices of the distinct goods or services underlying each performance obligation). As is the case generally with company-produced information, the auditor should perform procedures to evaluate whether the information produced by the company is sufficient and appropriate for purposes of the audit. In situations where management has asserted in the financial statements that the company’s transition adjustments are immaterial, it is important for auditors to perform procedures to test the accuracy of management’s assertions. The transition adjustments could pose new or heightened fraud risks. For example, a company could improperly identify performance obligations or improperly allocate transaction prices to performance obligations to defer revenue in order to recognize that revenue in subsequent periods. Auditors should evaluate whether the information gathered in obtaining an understanding of the company’s transition adjustments indicates that one or more fraud risk factors are present and should be taken into account in identifying and assessing fraud risks. When auditing the company’s transition adjustments, the auditor may identify a misstatement of revenue reported in prior-period financial statements. The auditor should perform procedures described in AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report, to determine whether or not the financial statements and auditor’s report should be revised as a consequence of the misstatement. Considering Internal Control over Financial Reporting PCAOB standards require the auditor to obtain a sufficient understanding of each component of internal control over financial reporting to (a) identify the types of potential misstatements, (b) assess the factors that affect the risks of material misstatement, and (c) design further audit procedures. Changes to company processes for the implementation of the new revenue standard can affect one or more components of internal control. For 19 relating to this principle is management evaluating competence across the organization and in outsourced service providers and acting as necessary to address any shortcomings identified. In addition, new or modified processes and systems to gather contract data, develop new estimates, and support new financial statement disclosures can affect the auditor’s risk assessment. Performing walkthroughs can help the auditor understand the flow of transactions, evaluate the design of controls relevant to the audit, and determine whether those controls have been implemented. In an audit of internal control, walkthroughs can also be an effective way to further understand the likely sources of potential misstatements and select controls to test. Internal Control-Related Considerations The following discussion highlights certain internal control-related considerations that may be relevant to auditing the implementation of the new revenue standard in audits of internal control over financial reporting and audits of financial statements. – Information system and manual controls. The auditor should obtain an understanding of the information system relevant to financial reporting, including, among other things, (a) the related business processes; (b) the related accounting records and supporting information used to initiate, authorize, process, and record transactions; and (c) how the information system captures events and conditions, other than transactions, that are significant to the financial statements. As discussed in Practice Alert No. 11, how a company uses or modifies its information systems (e.g., upon implementation of the new revenue standard) can affect internal controls and, in turn, the auditor’s evaluation of those controls. The auditor should obtain an understanding of, among other things: • The extent of manual controls and automated controls related to revenue used by the company, including the information technology general controls (“ITGCs”) that are important to the effective operation of the automated controls; and • the specific risks to a company’s internal control resulting from information technology. During the transition to the new revenue standard, some companies might utilize spreadsheets and other short-term manual processes until automated processes and controls are implemented. These short-term manual processes may present different or greater risks of material misstatement than automated processes subject to effective ITGCs. – Management review controls. Some companies may design and implement management review controls over revenue as part of their implementation of the new revenue standard. When testing management review controls, PCAOB standards require the auditor to perform procedures to obtain evidence about how those controls are designed and operate to prevent or detect misstatements. Practice Alert No. 11 described considerations for evaluating the precision of management review controls and identifies factors, such as the level of aggregation and the criteria for investigation, that can affect the level of precision of an entity-level control. 1.14 20 When selecting and testing management review controls over revenue, it is important for auditors to consider the impact of the new revenue standard on management review controls that rely on expectations based on historical operations or trends. Further, controls over the accuracy and completeness of the information used to perform the management review control can affect the control’s operating effectiveness. – Reviews of interim financial information. The auditor’s understanding of internal control is also important when performing a review of interim financial information. The auditor should have sufficient knowledge of the company’s business and its internal control as they relate to the preparation of both annual and interim financial information to: Identify the types of potential material misstatements in the interim financial information and consider the likelihood of their occurrence; and Select the inquiries and analytical procedures that will provide the auditor with a basis for communicating whether he or she is aware of any material modifications that should be made to the interim financial information for it to conform with generally accepted accounting principles. The auditor should perform procedures to update his or her knowledge of the company’s business and its internal control during the interim review to (a) aid in the determination of the inquiries to be made and the analytical procedures to be performed and (b) identify particular events, transactions, or assertions to which the inquiries may be directed or analytical procedures applied. Such procedures should include, among other things, inquiries of management about changes to the company’s business activities, and the nature and extent of changes to internal control. Identifying and Assessing Fraud Risks The auditor should presume that there is a fraud risk involving improper revenue recognition and evaluate which types of revenue, revenue transactions, or assertions may give rise to such risks. Auditors should perform substantive procedures, including tests of details that are specifically responsive to the assessed fraud risks. As discussed in Practice Alert No. 12, performing such procedures involves (a) considering the ways management could intentionally misstate revenue and related accounts and how they might conceal such misstatements, and (b) designing audit procedures directed toward detecting intentional misstatements. Identifying specific fraud risks arising from the implementation of the new revenue standard involves having a sufficient understanding of the standard as well as the company’s processes, systems, and controls over its implementation of the standard. Fraud risks may exist at various levels and in different areas of a company. PCAOB standards require auditors to make certain fraud-related inquiries of management, the audit committee (or the equivalent), and others within the company. Key engagement team members, including the engagement partner, should brainstorm about how and where they believe the company’s revenue and related accounts might be susceptible to fraud. They should also discuss how management could perpetrate and conceal fraud, including by omitting or presenting incomplete or inaccurate disclosures. Brainstorming also includes discussing factors that might (a) create incentives or pressures for management and others to commit fraud, (b) provide the opportunity for management to perpetrate fraud, and (c) indicate a culture or environment that enables management to rationalize committing fraud. One potential incentive for fraud arises when new accounting requirements affect a company’s reported financial performance. When combined with excessive pressure to meet expectations of third parties or targets set by the board of directors or management, this could create the motivation to misstate revenue to achieve these expectations. For example, management could establish incorrect accounting policies and practices that achieve revenue targets when the correct application of the new revenue standard would result in revenue below expectations. Opportunities for fraud in implementing the new revenue standard may arise in the development of significant new accounting estimates or due to control deficiencies that might result from changes made to systems, processes, and controls to implement the new standard. For example, companies may be required to develop estimates for variable consideration and standalone selling prices, which might involve subjective judgments or uncertainties that are difficult to corroborate. Risk Factors Certain risk factors may reflect attitudes or rationalizations by board members, management, or employees that lead them to engage in or justify fraudulent financial reporting, and may not be susceptible to observation by the auditor. Nevertheless, an auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. Examples of risk factors that might arise in connection with implementation of the new revenue standard are (a) non-financial management’s excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates, and (b) attempts by management to justify marginal or inappropriate accounting on the basis of materiality. The auditor’s identification of fraud risks should also include the risk of management override of controls. Controls over management override are important to effective internal control over financial reporting for all companies and may be particularly important at smaller companies because of the increased involvement of senior management in performing controls and in the period-end financial reporting process. Furthermore, the auditor should emphasize to all engagement team members the need to maintain a questioning mind throughout the audit and to exercise professional skepticism in gathering and 1.16 22 evaluating evidence. Practice Alert No. 10 identifies a number of threats to professional skepticism inherent in the audit environment. Auditors should be mindful that circumstances related to the implementation of the new revenue standard may increase such threats in some audits. Circumstances, where a company is late in implementing the new revenue standard, might create incentives and pressures on the auditor that could inhibit the exercise of professional skepticism and allow unconscious bias to prevail. Incentives and pressures may arise, for example, to avoid significant conflicts with management or provide an unqualified audit opinion prior to obtaining sufficient appropriate audit evidence. In addition, the implementation of the new revenue standard could heighten scheduling and workload demands, putting pressure on partners and other engagement team members to complete their assignments too quickly. This might lead auditors to seek audit evidence that is easy to obtain but may not be sufficient and appropriate, to obtain less evidence than is necessary, or to give undue weight to confirming evidence without adequately considering contrary evidence. As discussed in Practice Alert No. 12, auditors who merely identify revenue as having a general risk of improper revenue recognition without attempting to assess ways in which revenue could be intentionally misstated may find it difficult to develop meaningful responses to the identified fraud risks. Conclusion Because of the nature and importance of the matters covered in this practice alert, it is particularly important for the engagement partner and senior engagement team members to focus on these areas and for engagement quality reviewers to keep these matters in mind when conducting their engagement quality reviews. Auditing firms may find this practice alert helpful in determining whether additional training of their personnel, revisions to their methodologies or implementation thereof or other steps are needed to assure that PCAOB standards are followed . Auditors and auditing firms might also find certain matters discussed in this practice alert to be relevant to their preparations for auditing the application of new accounting standards on leases and credit losses. The PCAOB will continue to monitor auditing of revenue as part of its ongoing oversight activities.

  • Matching Internal Controls

    Division Accounting and Finance, BGSF, Executive Leadership June 21, 2018 Auditing Transition Adjustments Obtaining an understanding of a company’s selection and application of accounting principles is part of the auditor’s procedures to identify and evaluate risks of material misstatement under PCAOB standards. Additionally, the auditor is required to evaluate a change in accounting principle to determine whether the method of accounting for the effect of a change in accounting principle is in conformity with generally accepted accounting principles and whether the disclosures related to the accounting change are adequate. The new revenue standard provides two transition options for applying the new standard (full or modified retrospective application). A full retrospective application requires the recasting of prior year financial statements as if the new standard had been applied in those years. In contrast, a modified retrospective application requires disclosure of the effect on each financial statement line item in the period of application, and explanations of significant changes between the reported results under the new standard and those that would have been reported under current accounting principles. Under either option, the company recognizes the cumulative effect of adopting the new standard against opening equity of the earliest period of application. The new revenue standard also provides optional practical expedients that may be applied during the transition. The standard requires the practical expedients to be consistently applied and disclosed in the financial statements. It is important for auditors to identify and assess the risks of material misstatement associated with the company’s transition adjustments and design and implement audit responses that address those assessed risks. Specific considerations in assessing and responding to the risks of material misstatement of the transition adjustments include, among others, (a) internal control over financial reporting, (b) data that may not have been audited previously, (c) opportunities for committing and concealing fraud, and (d) prior-period misstatements identified in the current period’s audit. Internal controls over the transition adjustments will generally be relevant to the audit, including in selecting controls to test in an audit of financial statements (if the auditor plans to rely on such 1.12 18 controls) or an audit of internal control over financial reporting. As described in Practice Alert No. 11, auditors are cautioned that a control must be tested directly to obtain evidence about its effectiveness; an auditor cannot merely infer that a control is effective because no misstatements were detected by substantive procedures. This applies to evaluating evidence about the effectiveness of internal controls over the transition adjustments. Auditing transition adjustments involves obtaining company-produced information (e.g., standalone selling prices of the distinct goods or services underlying each performance obligation). As is the case generally with company-produced information, the auditor should perform procedures to evaluate whether the information produced by the company is sufficient and appropriate for purposes of the audit. In situations where management has asserted in the financial statements that the company’s transition adjustments are immaterial, it is important for auditors to perform procedures to test the accuracy of management’s assertions. The transition adjustments could pose new or heightened fraud risks. For example, a company could improperly identify performance obligations or improperly allocate transaction prices to performance obligations to defer revenue in order to recognize that revenue in subsequent periods. Auditors should evaluate whether the information gathered in obtaining an understanding of the company’s transition adjustments indicates that one or more fraud risk factors are present and should be taken into account in identifying and assessing fraud risks. When auditing the company’s transition adjustments, the auditor may identify a misstatement of revenue reported in prior-period financial statements. The auditor should perform procedures described in AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report, to determine whether or not the financial statements and auditor’s report should be revised as a consequence of the misstatement. Considering Internal Control over Financial Reporting PCAOB standards require the auditor to obtain a sufficient understanding of each component of internal control over financial reporting to (a) identify the types of potential misstatements, (b) assess the factors that affect the risks of material misstatement, and (c) design further audit procedures. Changes to company processes for the implementation of the new revenue standard can affect one or more components of internal control. For 19 relating to this principle is management evaluating competence across the organization and in outsourced service providers and acting as necessary to address any shortcomings identified. In addition, new or modified processes and systems to gather contract data, develop new estimates, and support new financial statement disclosures can affect the auditor’s risk assessment. Performing walkthroughs can help the auditor understand the flow of transactions, evaluate the design of controls relevant to the audit, and determine whether those controls have been implemented. In an audit of internal control, walkthroughs can also be an effective way to further understand the likely sources of potential misstatements and select controls to test. Internal control-related considerations The following discussion highlights certain internal control-related considerations that may be relevant to auditing the implementation of the new revenue standard in audits of internal control over financial reporting and audits of financial statements. – Information system and manual controls. The auditor should obtain an understanding of the information system relevant to financial reporting, including, among other things, (a) the related business processes; (b) the related accounting records and supporting information used to initiate, authorize, process, and record transactions; and (c) how the information system captures events and conditions, other than transactions, that are significant to the financial statements. As discussed in Practice Alert No. 11, how a company uses or modifies its information systems (e.g., upon implementation of the new revenue standard) can affect internal controls and, in turn, the auditor’s evaluation of those controls. The auditor should obtain an understanding of, among other things: • The extent of manual controls and automated controls related to revenue used by the company, including the information technology general controls (“ITGCs”) that are important to the effective operation of the automated controls; and • The specific risks to a company’s internal control resulting from information technology. During the transition to the new revenue standard, some companies might utilize spreadsheets and other short-term manual processes until automated processes and controls are implemented. These short-term manual processes may present different or greater risks of material misstatement than automated processes subject to effective ITGCs. – Management review controls. Some companies may design and implement management review controls over revenue as part of their implementation of the new revenue standard. When testing management review controls, PCAOB standards require the auditor to perform procedures to obtain evidence about how those controls are designed and operate to prevent or detect misstatements. Practice Alert No. 11 described considerations for evaluating the precision of management review controls and identifies factors, such as the level of aggregation and the criteria for investigation, that can affect the level of precision of an entity-level control. 1.14 20 When selecting and testing management review controls over revenue, it is important for auditors to consider the impact of the new revenue standard on management review controls that rely on expectations based on historical operations or trends. Further, controls over the accuracy and completeness of the information used to perform the management review control can affect the control’s operating effectiveness. – Reviews of interim financial information. The auditor’s understanding of internal control is also important when performing a review of interim financial information. The auditor should have sufficient knowledge of the company’s business and its internal control as they relate to the preparation of both annual and interim financial information to: Identify the types of potential material misstatements in the interim financial information and consider the likelihood of their occurrence; and Select the inquiries and analytical procedures that will provide the auditor with a basis for communicating whether he or she is aware of any material modifications that should be made to the interim financial information for it to conform with generally accepted accounting principles. The auditor should perform procedures to update his or her knowledge of the company’s business and its internal control during the interim review to (a) aid in the determination of the inquiries to be made and the analytical procedures to be performed and (b) identify particular events, transactions, or assertions to which the inquiries may be directed or analytical procedures applied. Such procedures should include, among other things, inquiries of management about changes to the company’s business activities, and the nature and extent of changes to internal control. Identifying and Assessing Fraud Risks The auditor should presume that there is a fraud risk involving improper revenue recognition and evaluate which types of revenue, revenue transactions, or assertions may give rise to such risks. Auditors should perform substantive procedures, including tests of details that are specifically responsive to the assessed fraud risks. As discussed in Practice Alert No. 12, performing such procedures involves (a) considering the ways management could intentionally misstate revenue and related accounts and how they might conceal such misstatements, and (b) designing audit procedures directed toward detecting intentional misstatements. Identifying specific fraud risks arising from the implementation of the new revenue standard involves having a sufficient understanding of the standard as well as the company’s processes, systems, and controls over its implementation of the standard. Fraud risks may exist at various levels and in different areas of a company. PCAOB standards require auditors to make certain fraud-related inquiries of management, the audit committee (or the equivalent), and others within the company. Key engagement team members, including the engagement partner, should brainstorm about how and where they believe the company’s revenue and related accounts might be susceptible to fraud. They should also discuss how management could perpetrate and conceal fraud, including by omitting or presenting incomplete or inaccurate disclosures. Brainstorming also includes discussing factors that might (a) create incentives or pressures for management and others to commit fraud, (b) provide the opportunity for management to perpetrate fraud, and (c) indicate a culture or environment that enables management to rationalize committing fraud. One potential incentive for fraud arises when new accounting requirements affect a company’s reported financial performance. When combined with excessive pressure to meet expectations of third parties or targets set by the board of directors or management, this could create the motivation to misstate revenue to achieve these expectations. For example, management could establish incorrect accounting policies and practices that achieve revenue targets when the correct application of the new revenue standard would result in revenue below expectations. Opportunities for fraud in implementing the new revenue standard may arise in the development of significant new accounting estimates or due to control deficiencies that might result from changes made to systems, processes, and controls to implement the new standard. For example, companies may be required to develop estimates for variable consideration and standalone selling prices, which might involve subjective judgments or uncertainties that are difficult to corroborate. Risk Factors Certain risk factors may reflect attitudes or rationalizations by board members, management, or employees that lead them to engage in or justify fraudulent financial reporting, and may not be susceptible to observation by the auditor. Nevertheless, an auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. Examples of risk factors that might arise in connection with implementation of the new revenue standard are (a) non-financial management’s excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates, and (b) attempts by management to justify marginal or inappropriate accounting on the basis of materiality. The auditor’s identification of fraud risks should also include the risk of management override of controls. Controls over management override are important to effective internal control over financial reporting for all companies and may be particularly important at smaller companies because of the increased involvement of senior management in performing controls and in the period-end financial reporting process. Furthermore, the auditor should emphasize to all engagement team members the need to maintain a questioning mind throughout the audit and to exercise professional skepticism in gathering and 1.16 22 evaluating evidence. Practice Alert No. 10 identifies a number of threats to professional skepticism inherent in the audit environment. Auditors should be mindful that circumstances related to the implementation of the new revenue standard may increase such threats in some audits. Circumstances, where a company is late in implementing the new revenue standard, might create incentives and pressures on the auditor that could inhibit the exercise of professional skepticism and allow unconscious bias to prevail. Incentives and pressures may arise, for example, to avoid significant conflicts with management or provide an unqualified audit opinion prior to obtaining sufficient appropriate audit evidence. In addition, the implementation of the new revenue standard could heighten scheduling and workload demands, putting pressure on partners and other engagement team members to complete their assignments too quickly. This might lead auditors to seek audit evidence that is easy to obtain but may not be sufficient and appropriate, to obtain less evidence than is necessary, or to give undue weight to confirming evidence without adequately considering contrary evidence. As discussed in Practice Alert No. 12, auditors who merely identify revenue as having a general risk of improper revenue recognition without attempting to assess ways in which revenue could be intentionally misstated may find it difficult to develop meaningful responses to the identified fraud risks. Conclusion Because of the nature and importance of the matters covered in this practice alert, it is particularly important for the engagement partner and senior engagement team members to focus on these areas and for engagement quality reviewers to keep these matters in mind when conducting their engagement quality reviews. Auditing firms may find this practice alert helpful in determining whether additional training of their personnel, revisions to their methodologies or implementation thereof or other steps are needed to assure that PCAOB standards are followed. Auditors and auditing firms might also find certain matters discussed in this practice alert to be relevant to their preparations for auditing the application of new accounting standards on leases and credit losses. The PCAOB will continue to monitor auditing of revenue as part of its ongoing oversight activities.

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