Where the financial year started after April 2008 the parameters increased to, annual turnover less than 6.5 million pounds, balance sheet total less than 3.26 million pounds and average number of employees less than 50.

Medium sized companies may also submit abbreviated accounts and the parameters to be classified as a medium sized company are significantly higher than those for a small company. For example for financial years starting from April 2008 two of the three qualifying conditions for a medium sized company to be satisfied were increased to sales turnover of under 25.9 million pounds, balance sheet total under 12.9 million pounds and average number of employees less than 250.

When a small company satisfies the audit exemption parameters it can maintain that audit exemption for a full financial year afterwards even if the parameters were exceed in that following financial year.

There are benefits in submitting abbreviated accounts as simpler and easier accounting records can be maintained reducing time spent on accountancy work. In addition although potential suppliers and financial institutions may require details of the year end financial accounts it is acceptable not to publish full details.

The main differences that can be produced under the banner of abbreviated accounts basically mean that a small company does not have to include a full balance sheet, profit and loss account or directors report which would normally be required by Companies House.

The small company is still required to submit a shortened balance sheet together with notes that explain the year end balances shown in the balance sheet. Under the audit exemption rules the year end accounts for a small company do not have to include an auditors report. When an auditor has prepared the accounts and submits a special audit report that report should state that in the auditors opinion the abbreviated accounts are being submitted in accordance with the appropriate section of the Companies Act.

Small companies must include a statement in the balance sheet that the year end accounts have been prepared in accordance with the special provisions contained in Part V11 of the Companies Act 1985. For financial periods starting after 5 April 2008 the accounts must be prepared in accordance with the Companies Act 2006 and include a statement that the special provisions applicable to small companies have been adopted

The statements to accompany the balance sheet of a small company submitting abbreviated audit exempt accounts are that:

The company was entitled to audit exemption for the financial year under the relevant section of the Companies Act 2006.

The shareholders have not required the company to obtain an audit.

The company directors acknowledge their responsibility for preparing accounts that comply with section 221 of the Companies Act 2006.

The company directors acknowledge their responsibility for preparing accounts which give a true and fair view of the state of affairs of the company and the profit and loss for the year.

The accounts have been prepared in accordance with the special provisions of the Companies Act relating to small companies

The rules on audit exemption apply not only to the year end accounts supplied to companies house but also those supplied to HMRC. This enables the small company to submit the short version of the corporation tax return, CT600, with the abbreviated accounts for tax purposes.

Terry Cartwright is a qualified accountant in the UK and producing Accounting and Audit Exemption packages for small limited companies in accordance with Companies House submission requirements.

“The Exempt Organizations Division of the IRS had posted on the IRS web site a controversial document setting forth the Service’s view on what constitutes good governance practices for tax-exempt entities. Included in the document was the suggestion that audit firms be rotated on a regular basis, with five years as the suggested term. The Institute protested the inclusion of this item in face-to-face meetings and in writing. Last month, the IRS dropped the document from its website, explaining that the new Form 990 sets forth the IRS’ current position on good governance practices which do not include the five-year rotation suggestion. ”

This is another sad example of a professional organization placing the good of its members over the public interest. The Institute has a long history of this type of advocacy. Why would the IRS recommended a five year audit rotation as a good governance practice for non profit organizations?

Audit rotation is designed to overcome two problems that can occur if an organization hires the same audit firm year in and year out. The first problem is that there is a tendency for audit firms to get too cozy with the management of the organizations they are assigned to audit. Personal and professional ties can easily impede auditor independence. Secondly, audit rotation provides the opportunity for the organization to be examined with a fresh pair of eyes.

This second issue is subtle. Accountants are creatures of habit and checklists. Things are done the same way as they were last year and often in a very mechanical and non critical manner. Many audit procedures and tests are numbingly mechanical and clerical and it is very easy to not view the audit process from a sufficiently critical and analytical point of view. Sometimes the most glaring internal control weaknesses can be overlooked simply because the auditors were not looking at the big picture but only concentrating on the minutia. A change in auditors guarantees that the organization in its entirety will get a fresh look and glaring internal control problems that may have been overlooked by the prior auditor may get picked up by the new one.

Of course CPA firms with long standing engagements with non profit organizations do not want to give up them up for obvious financial reasons. So these firms use their professional association, the Institute, to advocate against the obvious good governance practice that is clearly in the public interest. Such cynicism is sadly the rule not the exception for most professional organizations.

The IRS also should share some of the blame for caving into the audit firms on this issue. But it probably was not the IRS staff that caved but the higher ups who were pressured from the Bush administration. Whenever there is a divergence between private sector interests and the public interest you can pretty much count on the Bush administration siding with the private interests.

In any event the IRS had the right idea to begin with. Non profits should rotate their audit firms on a regular basis.

Michael Sack Elmaleh is a Certified Public Accountant and Certified Valuation Analyst. His book, “Financial Accounting: A Mercifully Brief Introduction”, has received wide critical acclaim. He has nearly 30 years of accounting and 10 years of teaching experience.His web site is understand-accounting.net

The Implications for Appraisers

Appraisers are now required to operate under quite a few important professional accountabilities. In varying federal tax matters, highly inaccurate appraisals would be subject to substantial monetary penalties, in some cases, forfeiting of 125 percent of the appraiser’s fee. Appraisers need to be aware of the declarations and announcements of the IRS disciplinary office, which has significantly enhanced standards of appraiser conduct, and to bar from appearing before the IRS those appraisers who fail to adhere to the set standards.

The investigative process can result in an appraiser being placed on the disqualification list. As such they can not reapply to the Office of Professional Responsibility for recertification to practice for five years. However, even if they are granted the authority to practice in five years, they are still unable to submit large appraisals to the IRS for another three years due to the qualified appraiser requirement of not being on the disqualified list for the three years prior to the appraisal being performed.

I believe that the appraisal industry, tax advisors and taxpayers should expect the regulatory regime over valuation work to continue to expand in the near future.

The Implication for Taxpayers
The new regulations have outcomes not only for the appraisers but for the taxpayers and their advisers as well those who hire appraisers in connection with planning transactions and filing returns.

The taxpayers and their advisors now need to put in extra effort to select an appraiser who is knowledgeable and experienced enough to steer clear of any violation of Section 6695A or Section 6701 or any other ethical norm. This is necessary because once an appraiser is disqualified all appraisals previously prepared by the appraiser (whether they gave rise to the disqualification or not) become disqualified in the eyes of the IRS. In other words, the appraiser’s work will not be accepted by the IRS as a result of the disqualification. Consequently, it becomes important for taxpayer to select an appraiser based on the quality of work performed, the background and experience of the appraiser so they do not run into problems at a later date. The cliche “you get what you pay for” seems to come to mind when I read through this provision.

Considerations for Survival

It is clear that appraisers need to be extra cautious and avoid all temptation to fall into the net of penalties cast by the PPA. In the light of this new law it is necessary to collect and organize all case information strictly based on facts. Appraisers must focus on arriving at their conclusions via a reasonable, objective path in accordance with the valuation standards. Other factors to consider and integrate into the valuation process include the following:

1. Don’t be an advocate for the client’s position.
2. Don’t value an entity or asset that is outside your area of expertise or authority.
3. Disclose all known, relevant facts in your report
4. Obtain a representation letter from your client on key issues/assumptions.
5. If you feel pressure or are being influenced to arrive at a preconceived value or result, do not take the engagement, or remove yourself from it.
6. Use an appropriate, extensive information gathering process.

One way to move a long way down the road of avoiding be captured in the net of penalties cast by PPA is to have an organized manner in which to collect information, data and facts surrounding the case. By using a detailed process you will gain the ability to create a fact specific and fact supported conclusion based specifically on the information related to the client and case at hand.

We use a secure, automated web-based interview questionnaire. This tool has an initial base of 105 questions in multiple categories. All questions are editable and additional questions may be added as needed. We can modify the questionnaire so it is specific to a client, to allow for unique questionnaires for each client.

We have found that the use of a questionnaire process such as this provides all of the initial information prior to the site tour and management interview to allow for a highly focused and more productive site tour and management interview process.

No matter what interview or questionnaire tools you decide to use by considering the following factors (which are included in the automated web-based interview questionnaire) you will be in a much better position to support your conclusions and in developing an appropriate value based on the specific facts in a case.

1. Basic information such as valuation date, purpose, intended use, valuation date and standard of value as well as a list of data requested for the valuation.
2. Entity information as to capital and legal structure such as, C-Corporation, S-Corporation, Partnership, Proprietorship, LLC, LLP, FLP.
3. Company history including,(a) product lines/services, (b) customers, (c) locations, (d) marketing activities, (e) distribution methods, (f) employees, (g) acquisitions, and (h) ownership.

Other categories include questions related to:

1. Prior transactions,
2. Products or services,
3. Customers,
4. Competition,
5. Suppliers,
6. Operations,
7. Intangibles,
8. Sales,
9. Marketing,
10. Management,
11. Industry,
12. Economy,
13. Financial information
14. Related party information
15. Company expectations and
16. Litigation & claims.

By focusing your data collection efforts in a detailed organized fashion and constructing your conclusions in a reasonable, objective fashion while satisfying the requirements of the established valuation standards, you will find that you will substantially reduce your exposure to the penalty provisions and the teeth of the Pension Protection Act.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP – author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

The Backdrop

The Congress and IRS, to safeguard the U.S. tax system and force taxpayers to straighten up, have introduced new rules and restrictions that impact lawyers and accountants as well as taxpayers. The Pension Protection Act (PPA) of 2006 establishes severe penalties for unethical conduct on the part of accountants involved in federal tax information consultancy to private firms.

Previously, the government’s targets for tax abuse were various corporate transactions. But now it has trained its guns on the venerable charitable contribution deduction as well. The act attempts to prevent overvaluing the property given to charity to take advantage of the fair market value deduction. According to Section 170(f)(16)(B), Congress has invited the IRS to stop the deduction completely. In the middle of the gun battle are the appraisers who opine for the taxpayers about the values of property that they give to charity.

Qualified appraisers
PPA also requires that appraisals need to be prepared by qualified appraisers.1 A qualified appraiser is defined in the Act to mean a person who has earned an appraisal designation from a recognized professional organization or has met minimum education and experience requirements established by the Treasury Secretary through regulations. An appraiser will not be treated as a qualified appraiser unless the appraiser demonstrates verifiable education and experience for valuing the type of property subject to the appraisal. Also, the appraiser must not have been prohibited from practicing before the IRS at any time during a three-year period prior to the date of the appraisal.

To sum it up, it is now required that an appraiser valuing property for charitable deduction must be trained and experienced and a vague representation by the appraiser will no longer suffice.

Appraisal Impact on Charitable Contributions
PPA has led to an increase in mandatory requirements for appraisals and appraisers to meet Internal Revenue Code Section 170, which covers charitable requirements.

It is now required that all claimed deductions in excess of $5,000 must be accompanied by a “qualified appraisal.” The regulations have duly defined the terms “qualified appraisal” and “qualified appraiser.”

All appraisals to qualify must fully comply with Uniform Standards of Professional Appraisal Practice (USPAP). Those that do not fully comply but are “consistent with the substance and principles of USPAP also satisfy this requirement.

Qualified Appraiser:

According to the Act for a person to be a “qualified appraiser” must meet 5 requirements as laid down in the code. According to these requirements, an appraiser must:

1. Have earned an appraisal designation from a recognized professional appraiser organization
2. Demonstrate “verifiable education and experience” in valuing the type of property subject to the appraisal
3. Regularly performs appraisals for compensation
4. Not appear on the IRS’s disqualification list at anytime during the three years prior to the date of appraisal
5. Meet other requirements [to be] prescribed by Secretary

However there is an exception available to taxpayers when the appraiser fails to meet the Act’s rigorous requirements. The denial of the deduction is inapplicable “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.”

Further, Notice 2006-96 states that the designation must be “awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed.” Additionally, the Notice notes that alternative education and experience requirements are met if the appraiser has done each of the following:

1. Successfully completed college or professional level course work that is relevant to the property being valued.
2. Gained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued.
3. Fully described his or her relevant education and experience in the appraisal.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP – author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the Pension Protection Act visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

New Appraiser Penalty

The new regulations have started to have a unsettling effect on the appraisers, primarily because it raises many questions, including what kind of tax (gift and estate tax, income tax, or both) is affected, and who may be hit by penalties.

Further, PPA added the new Section 6695A to the Internal Revenue Code. Section 6695A includes new penalties, which are pertinent to appraisers of property for income and transfer tax purposes.

New penalties are applicable to appraisals provided in connection with returns or claims for refunds filed after August 17, 2006. Penalties are applied when the appraised value of property deviates from the correct value by certain set percentages as follows:

“Substantial Misvaluation” (income tax environment): 150 percent or more off of actual value.
“Gross Misvaluation” (income or transfer tax environment): 200 percent or more off of actual value in an income tax case or 40 percent or less in a transfer tax case.

Appraiser penalty applies for appraisals prepared for returns or submissions filed after the date of enactment.

Amount of Penalty
Rather than the aiding and abetting penalty under section 6701 (generally limited to $1,000), appraisers are now subject to a penalty equal to over $1,000 or 10 percent of the underpayment attributable to the valuation misstatement, up to a maximum of 125 percent of the appraisal preparation fee (gross income) received by the appraiser.

Levying new penalties requires certain criteria to be fulfilled, including:

1. Appraiser must prepare an appraisal only in connection with a return or a claim for a refund.
2. Appraiser needs to know that the appraisal will be used for the above mentioned purpose.
3. Appraisal must result in a substantial valuation misstatement or gross valuation misstatement.

Misvaluation thresholds have been lowered, and also apply to estate and gift tax appraisals.

A substantial valuation misstatement arises if the value is 150 percent of the correct value. For example, if an income tax charitable deduction of $90,000 is claimed by a tax payee, based on an appraisal of a painting that the payee donates to a museum, and the correct value of the painting is later determined to be only $30,000, penalties would be enacted upon the appraiser section 6695A. In the case of estate or gift tax, a substantial misstatement occurs if the value exceeds the correct value by 65 percent or more. For example, if an appraiser applies a 45 percent discount for a going business with an underlying value of $100,000 for a value of $55,000. If the IRS and court determine that the discount should have only been 15 percent, the correct value would be $85,000. The appraised value is only 64.7 percent (i.e., less than 65 percent) of the “correct” value. As a result, a 20 percent substantial-understatement penalty would be levied on the appraiser’s fee.

A gross valuation misstatement occurs if the value exceeds the correct value by 200 percent or more. In the case of gift or estate tax, a gross valuation misstatement occurs if the value used is 40 percent or more of the correct value.

As penalties under section 6695A are far more severe than prior to PPA, appraisers may be more conservative and might be forced to choose to restructure or raise their fees; although as described above, the more gross income an appraiser derives from an appraisal, the larger the potential penalty. For example, an appraiser prepares an appraisal which he knows will be used to support an income tax deduction for a charitable contribution of the subject property. He charges $6,000 as the appraisal preparation fee. He values the property at $1 million, resulting in an income tax benefit from the deduction of $300,000. The correct value is $600,000, resulting in an income tax benefit from the deduction of $180,000. The appraiser is subject to penalty in this case as the claimed value of $1 million is more than 150 percent of the correct value of $600,000 (i.e., $900,000). According to PPA guidelines, appraiser’s penalty in this case is $7,500 (125 percent of the $6,000 fee), because this is less than 10 percent of the tax underpayment (10 percent of 120,000, or $12,000).

The new penalties imposed under section 6695A create a non-uniform field for appraisers engaged by taxpayers and appraisers engaged by the IRS. Taxpayer appraisers are likely to be under the scanner of PPA and face penalties if their appraisals are later rejected. On the other hand, IRS appraisers face no similar penalties no matter how far their appraisals are from the values finally determined for tax purposes.

The penalty will not apply if the appraiser establishes to the satisfaction of the IRS that the value established in the appraisal was more likely than not the proper value. However, given the magnitude of the trigger point percentages, it would be unlikely to prove a “more likely than not” standard when the magnitude of difference is 40 percent or 200 percent.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP – author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

As most companies typically conduct annual or bi-annual reviews of processes and procedures, in order to remain compliant, and hire internal auditors to do so, there are times when a government agency will come to audit things themselves. These are stressful times and choosing the right Internal Auditor can save thousands in fine and penalties.

There are several factors that should be determined before choosing an Internal Auditor. First, you must know the role of an Internal Auditor to be able to match your compliance strategy with the proper education, experience and know-how to effectively get the job done. Acting as a go-between for government compliance offices and providing a service to your company, the internal auditor must be aware of the latest in compliance governance. Therefore, when you choose an internal auditor, it is your job, that is, you’re responsible for the auditor you choose, to make sure the credentials are relentlessly checked. Including the human resource department, the chief financial officer(s) as well as others who make high-level decisions for the company are good ideas, too.

In order to enhance internal controls and to remain compliant with government standards, experience has to be the number one criteria when choosing someone who will have access to all intellectual and physical property records as well as delicate financial information. When choosing an Internal Auditor, you should check references, licensing information, and review previous audit information available. The Institute of Internal Auditors is a professional organization aimed at providing guidance, certification and educational research to it’s over 130,000 members. This organization serves as a clearinghouse for checking licensing and references.

Secondly, keeping in mind your companies business needs, the internal auditor should specialize in the type of auditing you require. For example, if it is quality management auditing, then the internal auditor should have the capability to grasp and understand fully your company’s business, quality controls and standard operating procedures. This should be proven by a consistent track record of QMS audits. If it is risk management or financial analysis that is required, then, along with being bonded individually as well as within his/her own auditing company, the internal auditor must be completely impartial and objective. This ensures that, while no personal interest is involved, the end result will be to make recommendations, share downfalls and places where compliance must be tightened to ensure your organization will pass any type of auditing test.

As reported by NASDAQ, only half of all companies listed on the exchange actually have in place internal auditor functions. This is a dangerous lack of practice and could cost so much in fines and penalties, that an internal audit can look like the cost for a weekend drive to your mother’s house. Sarbanes-Oxley requires the Internal Audit function exists in companies that have $250,000 in assets or more. It would be a horrible thing if a Cynthia Cooper wanna-be blew your company apart simply because you didn’t hire an Internal Auditor.

Kevin Dark’s new website will tell you more about internal audit and SOX compliance.