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.

Think an Outsourced Accounting Department is Too Expensive…THINK AGAIN

Growing companies always have big dreams. Part of those dreams is growth, success, and maybe some wealth as well. There are two kinds of business owners when it comes to their thoughts on their back office accounting: 1) owners who want to hire accountants before there is a significant need, and 2) owners who won’t hire until they are absolutely forced to do so. Rarely does a business hire individuals for their accounting needs at exactly the right time. How to solve this dilemma…outsource the accounting function and back of the house processes. Think about this cost breakdown, a CFO costs between $100,000-250,000 depending on the size of the Company and location (let’s assume its $150,000 for this example). An accountant to do the day to day work will cost $35,000-50,000 (let’s assume $40,000 for this example), your tax preparer another $2,000 and so on. If you follow that model and assumptions, the cost incurred by your company would be $192,000 plus employer taxes, plus benefits, plus 401K, plus the hardware necessary for the individual to do their work, plus increased office space required, plus, plus, plus. With all those pluses, your fees are sure to be close to $250,000 per year for those two employees. That’s a significant cost to incur when you’re still in the growth phase of your business.

On the opposite end of the spectrum, you can use an outsourced accounting department with experienced accountants and CFO types at a fraction of the cost (let’s assume $5,000 per month). If you compare that to the above scenario, it’s a $190,000 savings. Think of having all your back office, accounting and year tax needs taken care of each month for about the same price as that staff accountant. That also means no training, no benefits that need be paid, or extra costs incurred.

In the above example, we used $5,000 as a base amount, but generally such services start at $500 and go up depending on the size and complexity of your operations. In the end, it costs you not to consider having an outsourced accounting department.

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.

Ready Your Business for Investment

You had an idea, you started a business and put that idea into action, you looked for funding, and you found a potential investor that likes that idea.  The investor is ready to put money in and things are looking up.  Your business is about to get the money it needs to ramp up activity.  So what is the problem? Most startups strive so much for funding, they don’t necessarily think about the point at which someone says, “I love the idea and want to invest.”  It’s those magical words you've been waiting for, but now what?  Often those same words are just the beginning of the sentence which goes, “I love the idea and want to invest….so I will need to conduct my due diligence on your finances and records among other things.” Those other things include reviewing your burn rate, the runway you will need to get your product to market, etc.  All these items revolve around finance, accounting, and budgeting.  Remember, for a investor its all about the potential to make their investment back...times ten.

This is the point at which you start scrambling for the shoebox you stuffed with receipts, sift through drawers, print credit card statements, and find anything that resembles an invoice.  Then you figure out what is personal and what is business related.  Then you call a friend with “finance” experience and ask for help.  This is a dire situation to be in.  If you find yourself at this point, chances are that funding may be long-gone.  What does it say about your professionalism and your business savvy if you have to keep an investor waiting a week, a month, or even two days to get them information that you should have readily available.  We aren't talking about projections, we are talking about history.

The importance of keeping adequate books and records cannot be understated.  Having a professional and not a friend who "went to business school" is imperative in your growth and funding strategy.  When an investor asks for financial records, you should have it next day in their hands.  These financial records will also be the basis for your budget going forward.  Historical operating costs are a good starting point when estimating future burn rate, which will ultimately determine the runway your company has.  Remember, why would an investor put money in, knowing the company will run out of money before the intended goal is met.  Lining up your burn rate and development time line or your time to market, is critical for the success of your company.

If you are a founder of a startup, doing all the accounting and financial modeling can be slow and painstaking.  More importantly, it takes you away from what you are best at...developing your startup.  Contracting with a qualified accounting expert will expedite the accounting and finance process while freeing your time.

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.

Audit, Client, Consultant Relationship

At some point, most successful businesses or businesses with significant potential must go through an audit to verify historical activity and results for investors, shareholders, or potential buyers.   However, because so many businesses are stretched thin in terms of staffing and specialized expertise, audits sometime become significantly burdonsom on a Company. These scenarios often result in delayed completion of the audit, unnecessary difficulty in completing the audit, and impaired independence for the auditor.  Companies lacking bandwidth will have to find time to devote to an audit; and those lacking expertise will have difficulty in completing the work in acceptable ways.  Regardless, often times what happens is the auditor assists the client (adjusts balances, writes financial statemens, etc...) to the point where their independence is impaired.  If an auditors independence is impaired, they are precluded from issuing an opinion.  The burden of knowing if an auditors independence is impaired can't be on the auditor alone.  If a company's auditor is determined to be not independent at a later time, their audit report can be disqualified and the Company may be subject to re-audit at the companies expense.

To remedy these situations, wise executive teams hire expert consultants to assist in the audit preparation and oversight.  By hiring a qualified consultant, companies can negate bandwidth and expertise issues, that will in turn resolve most independence issues.

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.

Stock Options for Startups

Stock options have made a lot of people rich, and given a lot of people headaches.  In the startup community, stock options are necessary to attract talent, provide value, and retain critical human capital.  But there are more pitfalls in accounting for options than Minnesota has lakes. Accounting guidance states that stock options, whether issued in public or private companies, are valued at the grant date.  Calculating the fair value of an option for a public company is rather easy if you know what you’re doing, but private companies aren't so lucky.  In order to determine the fair value, one of the inputs you will need to know is the value of underlying stock on the grant date.  However, if there is no buying/selling in a freely trading market, how is one to know what the fair value is?  Here are a few suggestions to calculate the value of your startups common stock if you don't have a formal valuation done by an expert:

1. What is the per share value of the last sale to a third party.  When a willing third party buyer and willing seller exchange cash or other value for shares, the value of those shares can be considered fair value.
2. Use metrics within your industry.  Did two of your competitors just sell their companies for 2x top line revenue or 5x EBIDA.  If you have comparables that can be applied to your company that is also a good starting point.  Make sure to discount as appropriate for lack of marketability, etc.

The bottom line is when you start issuing options; contact a qualified accountant to assist you in stock option accounting.  Lawyers can draft option plans, and may be able to advise you on some tax issues, but accountants are needed to tell you how those options affect your company.  As a final word of wisdom, contact your accountant before issuing options, rather than after.  Suggestions on the strike price and potential dilution can significantly improve the functionality of those options without negatively impacting the company.

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.

Five Accounting Resolutions for 2013

Improving your company should be a constant effort.  Here are fie resolutions to make for 2013 to improve your company's accounting and business.

1. Outsource the work that doesn't benefit your top or bottom line – Business owners should not spend one, two, three or four or more hours a day doing administrative work that doesn't directly impact the company’s growth and future.  Business owners are the face of the company and shouldn't spend all their time behind a computer and a stack of paper.  Outsource the accounting work to a qualified accountant that can take over receivables, payables, and general oversight of the company’s accounting needs.  Use a payroll company that can also help you with HR related issues.  Don’t try to wear all the hats in the organization.
2. Review – Create a monthly or quarterly review process.  Review margins, receivables, payables, and cash forecasts.  Sometimes business owners aren't as profitable as they think they are.  You may get a great margin on a sale, but are you thinking about your overhead costs, how long the product sat on the shelf, etc?  Are your prices to low/high?  Your product/service may need price adjustments.  Reviewing these items regularly will ensure your company doesn't fall behind needlessly.
3. Automate – As your business expands, make sure that efficiencies are found where available.  Credit card processing, storing bank information for clients, or automating payments can assist in becoming more efficient.  Upgrading your accounting software or billing practices can also help.
4. Plan – Speak with your CPA a few times throughout the year not just at year end.   Planning with your CPA can help minimize taxes.  Planning expenditures, creating retirement plans, and taking advantage of certain deductions can all help minimize taxes.
5. Take action – Most resolutions never get off the ground.  Make a concerted effort to do at least one thing that will help your accounting in 2013.  The first step is usually the hardest!

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.