The Master of Accountancy (MAcc) Class of 2019 produced one of the highest pass rates of any MAcc class at Auburn University since 2005. The overall pass rate for each exam section was 94 percent compared to a national average of 54 percent.
The Auburn MAcc curriculum is designed to enable students to sit for all four parts of the CPA Exam before graduation. The 2019 results on the CPA Exam were exceptional with 95 percent on Financial (FAR), 94 percent on Audit (AUD), 92 percent on Regulation (REG), and 93 percent on Business Environment & Concepts (BEC), compared to the national percent passing rates of 44 percent, 55 percent, 59 percent, and 58 percent, respectively.
Since 2005, the Auburn MAcc program has included a reduced course load in the spring semester while completing the Becker CPA Review and sitting for all four parts of the exam prior to graduation. Auburn MAcc students have had tremendous results, with an average of 85 percent pass rates on all four parts over the past 15 years.
“The MAcc Class of 2019 has shown what can be achieved with hard work and dedication,” said Andee Hodo, director of Accounting Graduate and Online Programs. “In addition, the proven success of our MAcc students on the CPA Exam is due to both our outstanding faculty who provide our students with an excellent educational background and our exceptionally supportive employers, who hire our students and provide the Becker CPA Review course as an employee benefit.”
“We know that the MAcc Class of 2019 will be very successful as they begin their careers and will represent Auburn University and the Harbert College of Business well.”
You’ve started thinking about retirement and what you’re going to do with the business you’ve built. Do you want to give it to your children now, make it part of your estate, sell it to someone else entirely? What if you want to keep working for a while but let someone else deal with the biggest headaches?
Maybe you’re getting a divorce, and you need to know what the business is worth for the property settlement, whether or not you decide to sell. Or you want to buy out your business partner, or vice versa.
Maybe a bigger company is eyeing your business for acquisition. Or maybe you’ve realized that you’re going under and you want to get whatever you can first.
Or consider this. When the principal of a company dies, someone has to put a value on the estate.
The reason for selling is one of many factors that go into business valuation. Whatever the reason or the circumstances, accountants say, business owners should make sure their records and their operations are in order, and they should seek expert advice.
Also, begin working toward an exit strategy sooner rather than later.
All of the above situations require that a realistic, independent value be put on a company before a sale can be considered, says Ashley Taylor, senior manager with the Jackson Thornton Litigation and Valuation Group. Jackson Thornton CPAs & Advisors has offices in Alabama, Tennessee and Kansas.
“Get your financial information in order,” Taylor says. Advance preparation will save money in the long run when you turn everything over for a business valuation.
“If you can get your financial records in shape, it makes our jobs a lot easier. We usually like to look at tax returns and financial statements over the last five to seven years, depending on the industry. Being able to analyze those quickly and easily makes it a lot easier.
“If we’re given really sloppy data, it might take us a long time to get it to a point to where we can actually analyze it. We’ll just spend more time prepping the data than we would have, had we gotten good data to begin with.”
A potential buyer will demand all the records, including taxes, and will scrutinize everything, says Sue McGlynn, a CPA in the tax division of Warren Averett CPAs and Advisors. Warren Averett has offices in Alabama, Florida, Atlanta, Houston and the Cayman Islands. A buyer wants to determine cash flow after taxes and expenses. Nor is the sale the end of the owner’s involvement.
“I’m in there from almost beginning to end and even beyond, because I’m the one doing the tax return afterwards,” McGlynn says. “A business owner ought to know what the tax ramifications of the transaction are.”
Despite what one might see on the internet, there is no single formula to put a value on a business, the experts say. If the company’s regular accountant and attorney don’t already have expertise in valuation process and in the industry itself, the owner needs to find a consultant.
“Find people who know about your business, who know about your industry and understand taxation,” McGlynn says.
If your existing advisers can’t recommend one, ask potential consultants about their credentials. The American Institute of Certified Public Accountants and the National Association of Certified Valuators and Analysts are two of the major professional organizations that offer certifications in related specialties and maintain directories of members on their websites.
In preparing to sell, the owner also should consider the condition of the facilities and equipment necessary to the industry. Similar to a homeowner preparing to put a house on the market, the physical condition of a business and whether updates are needed will affect the price.
Any environmental or legal issues should be resolved if possible, as these also can lower the price.
How the business is managed also affects its value. There should be some sort of management structure even in small family operations.
“Say I’m the owner of the company,” Taylor says. “I know the ins and outs and hold all the client relationships. If I got hit by a bus tomorrow, what would happen to the company?”
Lyle Simons, corporate advisory consulting manager at Warren Averett, says basic issues such as who owns what should be clearly delineated. “Sometimes there can be some confusion as far as the legal structure of a company,” he says.
Whether a building is owned, rented, or owned by a related business needs to be considered. Part of a good management structure also includes not mixing personal business with company business.
Simons considers timing to be a crucial part of valuation process. “Quite often you find out that tomorrow isn’t the right day to sell,” he says.
Waiting to deal with issues such as updating equipment, resolving legal and accounting questions, and making other changes and improvements can pay off in the long run, according to Simons. General industry conditions also may dictate staying off the market until things are better.
The sales price is usually a multiple of revenue or income, taking all the variables into consideration.
“We get into the nitty gritty of who’s their competition, how much market share do they have? In what shape are your facilities and equipment? Do they need to be replaced soon?” says Taylor.
Comparable sales prices for similar businesses are important, and so are projections. Revenue forecasts should be based on what can be proven, not on how much money the owner wants to get out of the sale.
Says McGlynn, “Sometimes in those initial meetings, you’ll say, ‘Do you have a forecast? Do you have a budget?’ Sometimes they’ll say no. That is a factor in determining value, having some robust forecasts as to what you think your company is going to do.”
The price set by the owner should be “realistic and defensible,” according to Simons. Prior earnings and future contracts are some ways to support the asking price.
Once the price is set and the business owner has specified what deliverables will be included in the sale, the buyer signs a letter of intent. But that’s not the end of the deal, only the beginning of negotiations. The buyer will want to “look under the hood” and verify everything, says McGlynn.
Not everyone who goes through a valuation process actually wants to sell. They may be years away from retirement, or it may be that one principal in the company wants out but the others don’t. Whatever the reason, though, accountants say education, preparation and not being in a hurry are the keys to getting the right price.
Jane Nicholes is a Daphne-based freelancer for Business Alabama.
Every company needs a fraud response plan, says Kelly Todd, managing member and the member in charge of forensic investigations at Forensic Strategic Solutions LLC, of Birmingham.
“Occupation fraud” — committed against a company by its own officers, directors or employees — “is likely the largest and most prevalent threat,” according to a 2018 report compiled by the Association of Certified Fraud Examiners.
The ACFE also reports these statistics for U.S. fraud cases:
• Average loss — $100,000 • Median duration before detection — 16 months • Corruption — 30 percent of total cases • Means of detection — a tip, 37 percent of the time
Nonetheless, the percentage of cases referred for prosecution has dropped 16 percent in 10 years, most commonly because the victim organization feared bad publicity.
Accounting shenanigans that prop up securities was the biggest fraud category, reaching historic highs in 2018.
According to corpgov.law.harvard.edu, in 2018, “Securities class action filings involving accounting allegations remained at uncharacteristically high levels as the trend of core filings against larger defendant firms continued.
“There were 143 securities class actions involving accounting allegations (accounting case filings) during 2018, nearly 86 percent more than the historical average.”
The report also stated, “The number of accounting cases containing an allegation and announcement of internal control weaknesses exceeded the historical average for the sixth consecutive year.”
Given all of this, the accounting industry, specifically the auditing sector, is looking for ways to reform the auditing process, where independence from the company being audited and ethical conduct is paramount.
Clive Viegas Bennett, CEO of MGI Worldwide, writes in Accountancy Age, “The huge independence edifice is built on quicksand because the auditors are paid directly by the companies they audit.”
A prime example of the issues facing the auditing world is the case involving accounting firm PricewaterhouseCoopers, the Federal Insurance Deposit Corp. and what used to be Alabama’s third largest bank, Colonial.
Earlier this year, PricewaterhouseCoopers announced that it has settled with the FDIC for $335 million over its audits of Colonial Bank, which failed during a financial crisis. The suit was related to professional negligence claims brought by the FDIC against PwC coming out of the firm’s audit of Colonial. The FDIC sought to hold PwC liable for not detecting fraud during audits of Colonial Bank, and a federal judge said the accounting giant had not designed its audits to detect fraud. An Alabama federal district court had earlier awarded damages of $625 million to the FDIC.
“I consider auditor independence to be a misnomer,” says Todd DeZoort, professor of accounting in the Culverhouse College of Commerce and the University of Alabama’s Durr-Fillauer Chair in Business Ethics. “While some auditors should be careful to manage their financial and relational dependencies on a client, I believe auditor independence is impossible in our current system. My research indicates that stakeholders are interested in auditor reliability, which flows from auditor integrity, expertise, independence and pursuit of objectivity.”
DeZoort says a quality audit “should help a client clean up financial reporting and internal control problems that, if unaddressed, can be catastrophic to a company. The audit function is there to serve the public interest and protect very vulnerable stakeholders in a very complicated and high risk reporting environment.”
DeZoort teaches a seven-step fraud risk management model that includes fraud risk governance, fraud risk assessment, prevention, investigation, reporting, mediation and, last but not least, detection, which is where Todd and her troops come in.
Forensic accounting, according to DeZoort, is more focused on risk assessment and investigation, while fraud prevention is the responsibility of management and internal auditing.
In her work as a forensic accountant and fraud examiner, Todd works closely with defense and plaintiff attorneys, audit committees, corporate boards and government inspector generals. Her experience in litigation consulting includes services in civil proceedings, including the calculation of economic damages in a broad range of personal and corporate disputes. Todd has testified as an expert witness in federal and state courts.
“I think one of the things that is important to keep in mind,” Todd says, “is while, yes, every company should have a fraud response plan, there really is a dividing line between companies based on their size and what they are capable of from a resource standpoint. You are going to tend to see response plans and protective detection and that sort of thing in a much larger company, because they have the resources to do it.”
Todd points out that fraud is not something that happens every day. “It is not a normal occurrence in a business.”
And while much of today’s corporate fraud may be linked to technology, technology is “having a huge and growing impact on auditing and fraud examination,” says DeZoort. “For example, we are seeing a surge in the use of artificial intelligence in both auditing and fraud examination, allowing advanced data analytics involving 100 percent of transactions rather than just traditional random samples.
“We see anti-fraud professionals conducting more advanced quantitative and qualitative data analytics with technology, including data mining, digital analysis and linguistic text analysis.”
“When we go in, or a business suspects that there is a problem, one of the first things we want to do generally is ask for mirror images of the computers,” Todd says. “So if the business doesn’t realize, or hasn’t thought through how they are going to respond to the event, how they handle the evidence, or potentially the event, they may not even recognize what could potentially be evidence, that if handled improperly, by the wrong people or just handled improperly in general, could render that potential evidence useless in a court of law.”
She says handling electronic information, handling employees and suspects can be tricky for a company if there is no plan. “And a lot of times when there is no one suspected, they may have no idea who may be involved. And so it is just thinking through those initial steps in how to deal with something that a business is not accustomed to dealing with on a daily basis,” Todd says.
Todd says her firm has been using data analytics or data mining for 20 years. “Now, artificial intelligence is really changing the landscape as far as the ability to proactively look for fraud, or just patterns of wrongdoing. I think it is going to change the accounting profession. What it is not going to do, though, is once the patterns are identified, it is not going to be able to go and investigate the fraud, and it is not going to be able to develop the evidence and interviews. While it may change the initial detection, it is not going to change the investigative part of it.”
Todd says it is important to separate prevention and detection from investigation. “Detection could happen internally in a company. But from our standpoint, because we are outside, we are typically called in when a company believes it has a problem, or they may have detected something, but they don’t have the resources to actually investigate and develop the evidence to take it to law enforcement.
“Fraud, for us, is really about looking for the footprint of the beast. Fraud leaves a pattern, leaves trends in the data, or in the financial statements or in any various financial reports. And so what we are doing, we are going in and, based on what the company may believe has happened, we work under what is known as the fraud theory approach. We form a hypothesis based on what we believe may have happened, and then we test that hypothesis through document review, collection of electronic evidence, accounting transactions, that sort of thing, and then interviewing. And we generally go from the general to the specific. As we are making our way through our investigation, we start with the big picture, and follow that trail to more specific information and eventually work our way into some kind of solution, depending on what the client is looking for. If it is looking for a confession from the suspect, then the specific is going into seeking a confession through an interview.”
Todd says there is often an “aha” moment in the investigation — wheninvestigators are following one path “and all of a sudden something unleashes, and we are ‘Oh my gosh, you are not going to believe this. It is this person as opposed to that person.’”
Todd says a high percentage of fraud cases settle out of court or in guilty pleas. Forensic accountants are sometimes called the “detectives of the accounting world,” and Todd says there are some key things to look for when questioning people involved in suspected company fraud.
“Forever, people thought it was about body language,” Todd says, “and while body language is important, it is only one of many ways to tell if someone is being deceptive with you. The more things that are happening across various channels if you will, speech, a tone of voice and the jittery body language, the more of those that are happening at one time, the more likely it is that the person is being deceptive. The key is to be able to identify their baseline, what is normal for that person.”
Todd says, “If you think fraud is not going to happen, you are wrong because it is, but when it does, do not take matters into your own hands, and be certain to put together a team of experts that know what they are doing.”
Bill Gerdes and Art Meripol are freelance contributors to Business Alabama. Gerdes is based in Hoover and Meripol in Birmingham.