By Lora L. Bahrey-Ament, CPA, and Kevin Wilkes, JD
As COVID-19 vaccinations continue to roll out, many employers are pondering an imminent return to the physical office. Still, businesses are not blind. They experienced first-hand the benefits of a remote work environment, such as increased employee productivity and reduced office rent and utilities costs. Many employees appreciate the time saved from foregoing a daily commute and the increased flexibility afforded by remote work. It is adding up that remote work may be less “temporary” than we initially expected. Once the pandemic is under control, remote work will likely continue at higher levels than before the pandemic. This article discusses several remote work issues that are unique to the accounting industry.
Travel restrictions and the need for social distancing required both the auditors and the audited to adopt new methods of conducting examinations. Traditionally, audit fieldwork involved a team of auditors spending weeks onsite at the client’s premises in a conference room. Due to technological advances, accounting firms gradually expanded the use of remote audit procedures, incrementally transitioning to virtual audits. Below are challenges auditors may face conducting a virtual audit, new risks audited organizations could encounter, and potential measures to mitigate related risks.
- Internal controls testing – Auditing standards require auditors to understand how employees process transactions, necessitating tests to determine whether controls are adequately designed and effective. With increased remote work, the audited organization’s control environment and risk may have changed from prior periods. New controls may be electronic, presenting an increased risk to cybersecurity. As a result, an organization’s information technology department should develop, and continually evaluate, new controls to deter such risk, and auditors should evaluate such measures (or lack thereof).
- Inventory observations – Auditors are often onsite at facilities to observe physical inventory counting procedures and compare independent test counts to the organization’s accounting records. The pandemic has prevented both external auditors and personnel from conducting physical counts. If inventory is a significant balance in the financial statements and an inventory observation cannot be completed, there could be a scope limitation on the completion of the audit. Depending on the facts, use of video or other virtual technology might be acceptable in completing a remote inventory observation. Focusing a warehouse security camera on a specific area or item is another possible solution. If a virtual observation is conducted, it is important that the inventory is observed in real-time rather than via prerecorded count.
- Lack of in-person interaction – To assess fraud risk, auditors are trained to observe body language and the dynamics between coworkers as they interview personnel. If in-person interviews are not possible, using a virtual meeting platform is a potential alternative. Virtual interactions with the client’s personnel must be scheduled in advance, so remote work reduces the opportunity to ask questions or uncover issues through spontaneous interaction. It is imperative for the lead auditor to prepare a complete list of questions and concerns so all items can be addressed via scheduled meetings.
- Access to the required documentation – A client’s nondigital documentation may not be immediately accessible. Explain to management the need for electronic copies of documentation and request information in advance to allow time for scanning. Maintain current document requests, with clear deadlines for receipt. Retain all requests in a single document and share this with management daily or as deemed necessary. In addition, audit documentation previously accessible onsite should be provided to auditors electronically via secure email, portal, or another shared platform. Using a secure platform ensures access is limited to select employees and the audit team, keeping sensitive information out of the wrong hands.
- Team communication – When the audit team is not in a centralized location, it is more difficult for team members to share knowledge and stay updated on progress with respect to the overall audit. This means an individual team member may be unaware of information important to her scope area on the audit if the information is learned through testing or audit functions outside her scope area. Setting up regular team calls in advance of and during fieldwork to share progress and emerging findings can promote collaboration and mitigate this risk.
- Remote coaching of team members – If in-person coaching is not possible, pre-fieldwork coaching through video calls may facilitate effective instruction. Screensharing tools within these platforms can help assist with the training process. The team leader should schedule virtual meetings with each team member in advance of fieldwork to walk-through their scope area and the testing to be performed.
- Noncompliance with stimulus regulations – During the pandemic, many organizations experienced a significant impact on operations, leading to decreased revenue. Numerous businesses applied for and received funding from an array of federal sources. Remote work coupled with evolving regulatory guidance as to how federal aid must be used creates a heightened risk that these funds could be mismanaged, leading to potential noncompliance. In addition, there is increased susceptibility to fraud if proper controls and monitoring are not in place. Auditors should consider these issues when determining the scope and testing procedures.
State Tax Issues Related to Remote Work
Due to the pandemic, millions of employees are telecommuting. If an employee works from home in a state that differs from the state where the employee had worked for the employer before the pandemic, the employer should consider several tax issues.
- State tax liabilities and filing requirements – Many states assert that an employee working from home within the state subjects an employer to tax in the state (i.e., creates “nexus” with the state), even if the employer otherwise lacks a physical presence in the state (such as owning property or operating a facility in the state). Once a business has nexus with a state, it may be obligated to pay state franchise, income, or other business taxes, collect and remit sales tax on taxable sales, self-assess use tax on taxable purchases, remit payroll taxes, and comply with other reporting requirements.
Many states issued guidance providing for nexus relief in response to the increase in telecommuting caused by COVID-19. Approaches to nexus relief vary by state. Pennsylvania issued guidance indicating that telecommuting employees residing in Pennsylvania will not alone cause a business to have corporate income tax nexus or sales and use tax nexus with Pennsylvania. While some states follow Pennsylvania’s approach, employers with telecommuting employees should carefully analyze nexus on a state-by-state basis. For example, certain states apply nexus relief only to corporate income tax or franchise tax while others have not published guidance (in such instance, the state’s general nexus requirements presumably control).
- Income tax apportionment – While nexus determines whether a state can impose tax, apportionment determines the amount of income subject to tax in a jurisdiction. Some states consider the amount of payroll paid to employees within the state relative to the employer’s total payroll in determining the amount of business income subject to tax in the state. For such states, the presence of telecommuting employees in a new jurisdiction may impact the apportionment formula. In addition, a business that establishes nexus in a new state where its sales volume is high may incur a significant new tax liability if the state uses a single sales factor formula to apportion income to the state (i.e., the state apportions income by dividing the taxpayer’s in-state sales by its sales everywhere, multiplying the result by total apportionable income).
- Payroll withholding and income sourcing – In response to COVID-19, many states, including Pennsylvania, issued guidance on employee wages and income tax withholding earned by telecommuting employees. Under Pennsylvania’s guidance, wages earned by employees who normally work in Pennsylvania who are working from home outside Pennsylvania because of the COVID-19 are considered earned in Pennsylvania. Wages earned by Pennsylvania residents who typically work in another state, but are working from home in Pennsylvania, are considered earned in the other state. This guidance is effective until June 30, 2021, or 90 days after the end of Pennsylvania's officially declared emergency, whichever is earlier. As conditions normalize, employers should continue to monitor employee work locations and payroll withholding tax guidance on a state-by-state basis.
- Sales tax – Prior to the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair Inc., sales and use tax nexus depended on a company’s physical presence in the state, which could be established through renting or leasing office space, in-state stores, an independent contractor or employee working in the state, or an array of other in-state operations. The Wayfair decision modified the long-standing physical presence nexus standard, holding that nexus with a state could also be established due to in-state sales volume, opening the possibility for states to impose sales and use tax collection and remittance responsibilities on remote sellers based solely on their economic activity in a state. For most states post-Wayfair, a sales tax nexus “safe harbor” exists for small sellers whose remote sales do not exceed certain dollar or volume threshold established by the state, often $100,000 and 200 transactions. Businesses experiencing an increase in online sales due to the pandemic and changing economy should carefully track sales to determine whether economic nexus thresholds in new states are exceeded.
The shift toward telecommuting during the pandemic returned the physical presence nexus test to the forefront. Businesses should be aware that telecommuting employees can impact sales and use tax reporting obligations. In some states, a single employee working in the state triggers sales and use tax reporting obligations for an employer, even if the employer otherwise lacks a physical presence in the state. State guidance on sales and use tax nexus for employees working remotely during the pandemic varies. A few states, such as Pennsylvania, issued guidance temporarily waiving sales and use tax consequences of workers telecommuting due to the pandemic, but most states have not addressed the issue.
In a state that considers the presence of an employee sufficient to establish nexus, the fact that a taxpayer’s activity is below economic nexus thresholds based on sales volume and number of transactions is irrelevant. Physical presence is sufficient to establish nexus, requiring the business to register and collect applicable sales and use taxes. Businesses should consider the possibility they have unexpected sales and use tax reporting obligations in states from which employees are newly telecommuting. This consideration is particularly important for small to medium-size companies whose physical footprint absent telecommuting is otherwise limited, and whose sales in most states do not exceed economic nexus thresholds. Because sales and use tax guidance on pandemic-related telecommuting is inconsistent and subject to change, it is important for businesses to continue monitoring developments in this area.
Client Services and Other Industry Issues
Even before the dramatic changes caused by the pandemic, many CPAs recognized the industry was experiencing a shift as new technology emerged. Most public accounting firms already used virtual meeting platforms and electronic information-sharing portals. A paperless work environment was already the norm. As pandemic-related shutdowns required employees to work remotely, accounting firms that embraced technological advances found it easier to adapt, maintain productivity, and meet deadlines. Firms that were slower to adopt technological changes found it more difficult.
Clients expect their CPAs to have technologies that can be used to facilitate secure transmission of data, real-time communication, and a collaborative virtual environment that could serve as a substitute for in-person meetings. Amid the pandemic, videoconferencing replaced most face-to-face meetings and information was exchanged via online portals or other secure means. Accounting firms and businesses that, to the fullest extent possible, leveraged tools like Microsoft Teams to collaborate in real-time with clients and team members found it easier to deliver excellent service. Effective virtual collaboration also reduced, if not eliminated, hiccups associated with version control of deliverables and miscommunication.
Once the pandemic subsides, some predict adaptations made, especially increased use of technologies to work more efficiently and service clients remotely, will continue. A remote environment reduces office space, cuts costs related to maintaining office space, and frees employees from spending time stuck in traffic during a daily commute. Expectations regarding work flexibility are changing as the technology evolves, and CPA firms should continue leveraging technology to enhance remote workers’ productivity, increase profitability, improve service quality, and retain top talent.
Lora L. Bahrey-Ament, CPA, is a tax manager with Louis Plung & Company in Pittsburgh. She can be reached at firstname.lastname@example.org.
Kevin Wilkes, JD, is a principal for Louis Plung & Company in Pittsburgh. He can be reached at email@example.com.
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