CPA firms and the services they provide continue to evolve as the profession responds to a changing business environment. Many are expanding into business advisory services. This can provide great opportunities for growth if
firms clearly grasp their professional independence requirements. Business advisory services by CPAs are, generally, any service offered to clients that resides outside of the accounting, attest, tax preparation, and tax planning functions. They vary
across many disciplines, and the services offered by one CPA may be different than those offered by others, depending on each CPA’s areas of expertise. For many closely held businesses, their adviser is an indispensable resource for the owner
when he or she is solving business problems or strategically planning for the future.
CFO Advisory Services
The most common CPA advisory service is the outsourced CFO. Many CPAs in public accounting have the expertise to do this type of service from years of experience working with businesses across many industries, in addition to the profession’s core
strengths in the accounting and tax functions. CFO advisory services may currently be provided by you, though not specifically labeled as “advisory.”
CFO advisory services are designed to support the business owner or CEO by focusing on maximizing cash flow, improving profitability, and optimizing the financial health of the organization. CPAs have the expertise to act as the subject matter expert
in all tax and financial matters and as a liaison between the company and its external auditors, retirement plan administrators, legal counsel, and bank relationships.
Many closely held businesses do not have an in-house CFO. They may have a controller or a high-end bookkeeper that addresses the balance sheet aspect of the CFO function, but these individuals typically do not bring strategic focus to the team. Controllers
and bookkeepers review financial history, whereas CFOs focus on future events.
CFO advisory services may include the following services, among others:
- Identifying policies for tax, regulatory, and financial compliance.
- Participating in forecasting and strategic planning by developing adjustable metrics and models.
- Assisting with structuring the accounting and finance departments, including the hiring process.
- Developing efficient workflow for accounting processes.
- Developing policies to strengthen the internal control environment.
- Executing month-end closes when internal staff is limited.
- Developing rolling cash flow forecasts and corresponding investment strategies.
- Creating a budgeting process and timeline.
- Developing cost-justification models for hiring and equipment purchases.
- Developing job-costing models.
- Assisting with all finance-related decisions, activities, and monitoring, including traditional debt (such as bank lines of credit, term loans, leasing arrangements, stock or corporate bonds, equity investments) and nontraditional arrangements (such
as angel financing).
- Assisting with evaluating mergers, acquisitions, reductions, spin-offs, moves, and leasing arrangements.
- Interacting with external auditors to satisfy compliance needs.
- Providing balance sheet services, such as cash management, receivables, and related issues.
Other Advisory Services
There are many service options available to promote beyond CFO services. Here are a few.
Business entity selection – Choosing the form of entity of a business (such as S corporation, C corporation, sole proprietor, etc.) is a crucial decision that can have long-standing tax implications. Considering recent tax reform, reduction
in the corporate tax rate, and a new 20 percent pass-through deduction, these services are needed now more than ever before.
Business succession planning – Coordinating the transition of an owner’s business to his successors is critical. It can help ensure a business’s continued success once the owner decides to remove himself or herself from day-to-day
operations. With a solid background in tax and other financial matters, CPAs providing this service can address the complex issues of business continuation and help the owner develop a strategically sound plan.
Retirement plan and planning – When preparing a client’s tax return, a CPA can see how much the client is contributing to, and the value of, retirement assets. There is an opportunity here to determine if clients are financially able
to retire and if they have enough assets to live in retirement. They may need guidance to navigate the myriad retirement plans a business may adopt. As a business grows, so may the complexity of the retirement plan needed for the company. The CPA
is likely to be the first adviser to see the need for a different retirement plan opportunity.
Estate planning – Effective estate planning facilitates the orderly transfer of assets to your client’s beneficiaries, provides security for the surviving spouse, and can reduce or eliminate the tax due on the transfer of a business
and other assets. Assisting a business owner with the complex process of getting their financial affairs in order is critical.
Financial planning – A properly structured financial plan enables clients to face any financial challenge that may present itself at each stage of their life. Helping clients assess their financial needs and develop strategies will enable
them to achieve their goals and strengthen their financial security.
Business valuations – Whether your client is selling a business or undergoing a difficult divorce, the amount attached to the value of the business is important. Providing a useful and objective valuation of any business in which they have
an interest might have important repercussions.
Risk management – When working with a client on accounting and tax services, the CPA can proactively initiate a review of both enterprise and personal risk management for business clients. The CPA can help identify the events that may affect
their clients, both internally and externally, assisting in analyzing the risks and developing a set of actions to mitigate those risks.
Independence and the Provision of Services
CPAs traditionally have a deep understanding of their clients, so they are often the logical source to provide other advisory services. While providing tax services does not require the CPA to be independent with respect to the client, most attest services
do require independence. Attest services are the audit, review, or compilation of the client’s financial statements. Audits and reviews require the CPA to be independent, not only in fact but also in appearance. That means another accountant
looking at the facts and circumstances of the situation must be able to come to the same conclusion that the CPA providing the service is independent with respect to the client. A CPA can compile a financial statement when not independent, but must
state his or her lack of independence in the report.
What it means to be independent with respect to clients is detailed in the standards of the AICPA and Public Company Accounting Oversight Board. In general terms, a CPA in public practice must not have a financial or other stake in a client, nor may they
act in the capacity of management, to be considered independent. Most public accountants adhere to those standards when providing services to clients, but it is difficult to overcome the “management” role when providing some advisory services.
The role of the adviser, after all, is either to replace a key part of management that a client may be missing, to mentor management when they are making key decisions with respect to their company, or to help with making key financial decisions.
CPAs must consider the limitations on their ability to provide attest services now and in the future when deciding on whether to accept an advisory role. In most cases, a CPA must only be independent during the period of time they are providing attest
services to that particular client; however, the CPA must evaluate past advisory services and their impact on the attest period. For example, if a CPA participated in the design and implementation of the client’s internal control structure currently
in place, that CPA’s independence may be impaired, depending on their involvement in the process to design and implement internal controls. The same may be true of setting up a business plan or preparing a company valuation.
A CPA adviser can avoid independence issues by limiting his or her role to only providing guidance and recommendations. This would mean avoiding anything that can be construed as a management role. To maintain independence, the CPA must take the steps
that include the following, though these suggestions are not a complete list since each situation faced will be different:
- Avoid taking responsibility for the review and supervision of client personnel. Someone with the ability and experience at the client must be willing and able to take that role.
- All work performed by the adviser should be documented, reviewed, and supervised by management, with the ability and willingness to take that responsibility.
- Avoid certain services, such as the design and implementation of internal controls.
- Avoid preparing business valuations for potential clients.
- Remove yourself as an adviser prior to the period you would be asked to provide attest services.
Under certain circumstances, if one individual in a firm is perceived as lacking independence with respect to an attest client, the lack of independence can be overcome by that individual leaving the attest engagement and having a full review of the engagement
performed by another individual who is independent of the person lacking independence. The key to maintaining independence and the perception of independence is to clearly define the adviser’s role (what will and won’t be done) and management’s
responsibility for the adviser in an engagement letter signed by both the adviser and the client.
A letter outlining any and all services a CPA will provide to a client is either required or strongly encouraged. This includes advisory services. Advisory services may be nonattest, but they are still covered by AICPA professional standards. Under AICPA
consulting and ethics standards, a CPA is required to establish an understanding of the services to be provided. Though those standards may not require an engagement letter, it is strongly recommended. An engagement letter is a good way to formalize
service expectations in writing. The understanding between the adviser and the client must include, in clear language, the following:
- The objectives and nature of the overall service
- Scope of services, including limitations or constraints
- A detailed description of the relationship with the client
- The roles, responsibilities, and tasks to be performed by the adviser, including a list of what the adviser won’t do
- The roles, responsibilities, and tasks to be performed by the client, including responsibility for directing the tasks performed by the adviser
- The approach to providing the services, including how the status of the tasks will be conveyed
- The period of time covered by the engagement letter
- The fee arrangement with the client
Use of an engagement letter helps the adviser avoid any misunderstandings about roles and responsibilities, and therefore helps to limit any legal ramifications to the adviser should a problem or issue arise during the engagement. The adviser must be
clear and concise when outlining roles and responsibilities to avoid any misunderstandings. It is also critical that the adviser not deviate from the outline without either amending or reissuing the engagement letter. Performing services not outlined
in the engagement letter, or providing services that the adviser specifically said in the letter that he or she would not provide, may expose the adviser to risk or legal ramifications if there is a dispute about services. AICPA consulting standards
also state that an engagement needs to have an established term not to exceed one year. An adviser can continue providing services after one year, but the written understanding with the client must be redone each year. Finally, advisers should limit
themselves to providing guidance and recommendations while avoiding statements like “directing.” Also, clearly state in the engagement letter and other communications with the client that all of the services are to advise the client and
are under the supervision of the client.
The Advisory Services Team
If your CPA practice is considering expanding its advisory services team, ideally you would look to include the strategic thinkers among the staff in your firm. They should have experience in both the accounting and tax environments, as many services
stem from this core work. Advisory services generally should not be done by lower-level staff. However, any exposure you can give lower-level staff to these services will enhance their abilities as they progress. For business advisory services, your
client is relying on you for expertise that they may not possess in order to manage their business opportunities.
Loretta M. Tubiello-Harr, CPA, ABV, CVA, is principal of Tubiello-Harr & Associates LLC in Coopersburg. She can be reached at email@example.com.
Kim A. Vandergrift, CPA, is a senior manager at Tubiello-Harr & Associates LLC. She can be reached at firstname.lastname@example.org.