Choosing a CPA Firm for Reg A+ and Title III Regulation Crowdfunding

In these early days of Regulation A + (Reg A+, raises up to $50 Million) and Title III Regulation Crowdfunding (Reg CF, raises up to $1 Million), one of the hardest things to do as a potential issuer utilizing equity crowdfunding is to vet the service providers you want to work with.

Choosing the people your company works with, the people that give you advice, the people you trust is one of the most important things to do as a business.  Bad advice can set you back years, while good advice can accelerate you forward.

Often we get the questions:

How do we (the issuer) choose a CPA firm for equity crowdfunding?

…and

Why should I choose you over another firm?

Both great questions!  Let’s cover both types of equity crowdfunding as they will dictate different responses.

Regulation Crowdfunding (Raises up to $1M) have less regulation.  The financial statement reviews required can be performed by almost any CPA firm so long as they are registered to sign attestation reports in the state where you as the business owner are located.  Many firms only provide tax services and are specifically precluded from doing this work. However, for Reg CF, firms don’t have to be PCAOB registered, but they still must be registered with state(s).  One of the common issues that has come up, is CPA firms are issuing reports for issuers that are not in their home state.  If the CPA firm is not registered in the issuers’ home state or have practice privilege there, (every state is different) then the opinion can be deemed invalid and your campaign could flop before it starts.

For Reg A+, you should use a PCAOB registered firm (although not required in certain circumstances) in the chance you want to, or someday may want to be listed on a public stock exchange. All the same rules apply as Reg CF, make sure you use a CPA firm that can work in your home state.

So what sets CPA firms apart? You can see from the initial 100 filings for Reg CF companies and from review of many of the Reg A+ filings, some financial statements are better than others.  Whereas financial statements are ultimately the responsibility of issuer management, CPA firms should be making sure they go out nice, neat and clean with all required information (a requirement of the opinion they issue).  It is apparent (very obviously to people who know) that some firms are swimming in waters that are too deep for them.  They just don’t know the requirements and maybe shouldn’t be doing the work in the first place.  That is a significant issuer for an issuer as the issuer is ultimately responsible for everything.  

However, the real difference maker is if the CPA firm makes Reg A+ and Reg CF an emphasis in their practice.  CPA’s should be well connected to marketing firms, portals, SEC attorneys’, all of whom are in the equity crowdfunding space.  If they aren’t connected, THAT is the difference. 

Navigating Auditing Standards, Without the Headache

If you thought the process of navigating auditing standards was a painful process, you are not alone. The PCAOB has started taking steps towards re-organizing auditing standards, aiming to make navigating standards a less painful process and more in line with the workings of an audit. So what does this mean for auditors and their clients? Currently the list of standards and related interpretations is nearly as large as a menu from the Cheesecake Factory, exceeding 2,000 pages when printed. That’s a lot of information to take in and consider. The current proposed changes would re-organize the standards into a four-digit numbering system designed to follow the workings of an audit. Under the proposal, standards would be grouped by the following categories: General auditing standards, audit procedures, auditor reporting’s, matters related to secures laws, and other. The difference lies in removal of interpretations from the system. Interpretations will not be removed all together, but simply contain a link to the relocated interpretation in an effort to “trim the fat” off the current standards.

The proposed changes, if implemented, would result in a much more efficient and painless experience for both auditor and potentially the client as well. I think we can all raise a glass to those improvements.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Prepare your Financial Information to go Public

If you are thinking about taking your company public in the coming years, you should start preparing far in advance. Why?

As part of going public you will be subject to putting at least two years worth of books and records together in accordance with US Generally Accepted Accounting Principles (”GAAP”).  That information must be audited before being submitted to the SEC and available for public observation.

Any auditor will tell you it’s much easier to audit a company when you only have to audit the previous year.  Any time the audit period extends two to three years back there are various issues that are generally encountered, including: 1) missing records, 2) turnover in employees, 3) regulatory filings that will require amendment (think taxes), and the list goes on.

If you contemplating going public in the future, start a conversation with all the stakeholders that will be needed: your management team, board of directors, legal, financial consultant, and auditors.  Having these groups on the same page will ensure that everyone is working as a team to an end goal.  Being proactive in your approach will have better results than if you are reactive.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Accounting for Software Development

There are two types of software that are developed for a business: 1) internal-use software, and 2) software developed to be sold, leased or marketed (“software to be sold”).   The accounting and capitalization requirements for these two different types of software is very different.  Here is a high-level comparison of how each type of software is capitalized. For internal use software, there are three stages defined by accounting guidance: 1) preliminary project phase (i.e. planning, evaluating alternatives, conceptual formation); 2) application development (i.e. design, coding, integration with hardware), and; 3) Post implementation phase (i.e. testing, maintenance).   The capitalization of costs should start after the preliminary project phase, and is contingent on management committing to funding the continued development of the software, and the completion of the project being probable.  Costs should cease to be capitalized after the project is substantially finished (generally, close to the start of the post implementation phase).  All costs outside of this capitalization window should be expensed as incurred.  The costs qualifying for capitalization are also restricted, but that is a whole blog unto itself.

For software to be sold to third parties, the accounting guidelines are completely different.  Accounting guidance requires that costs associated with the development of software to be sold are charged to expense as incurred, until the point in which technological feasibility has been established.  Technological feasibility is established once an entity has completed planning, designing, coding, and testing the software to ensure that the software will work for its intended function.   As a general guideline, sometimes technological feasibility is considered established once software enters beta testing.   Capitalization must cease when the software is ready for general release to customers.  Accordingly, the window for capitalization is extremely small, and often, startup companies expense all costs during development.

Based on the above highlights, internal-use software generally carries a higher asset value on the balance sheet of companies than software to be sold (assuming the costs incurred to develop both are the same).

If your startup is developing software, it would be wise to contact an accounting consultant with software accounting experience to review which category your software falls into and what costs qualify for capitalization, if any.   In addition have your CTO track and document the progress of the project.  The accountant will need to line up expenses with the progress of the project to correctly account for the software.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.

Should I care about my firms PCAOB inspection report?

To audit public companies our Firm must be registered with the Public Company Accounting Oversight Board (“PCAOB”), the watchdog of the public accounting industry. For us smaller firms, the PCAOB is required to inspect our audit work papers at least once every three years. Believe us, these inspections are not very easy as the inspectors critically analyze and challenging key areas of the audit work papers. The process is time consuming and stressful. At the end of the process, a report is issued identifying their findings. The report is available to the public through the PCAOB’s website. Although the PCAOB members have repeatedly stated that the inspection reports are not designed or intended to rate accounting firms according to a scorecard. We at dbbmckennon believe that at times these reports can provide a rough bearing as to the quality of your independent auditor, especially for the small/medium firms. You can find your firms inspection report here. The most important area of the report is section A “Review of Audit Engagements”. Within the section, the PCAOB highlights areas in which they have identified audit deficiencies. Meaning areas in which the firm did not adequately document their audit procedures. Generally, a firm might expect to get one or two comments regarding its work papers. Anything in excess of this might be a cause for concern.

Being a member of the PCAOB is a privilege not a right. The PCAOB has the power to rescind a firm’s registration within the PCAOB. Upon rescinding, all of the firm’s audit reports will be deemed invalid, thus requiring the company’s financial reports to be re-audited by a new firm.  For an example of an action against a firm, see the disciplinary release on Moore & Associates.

The answer to our questions is YES!  At dbbmckennon we pride ourselves on the timeliness and quality of services we provide.  If you have any questions regarding your firm’s report or the inspection process and how it might impact you, feel free to contact us.