Diversity starts in the boardroom and the C-suite

Many companies will put diversity, equity, and inclusion (DEI) issues on their agendas for 2022. Increasingly, investors, lenders, customers, employees, and new recruits want to know the extent to which boards and management teams are diverse in terms of race, ethnicity, gender, and sexual identity. These groups increasingly recognize the quantitative and qualitative benefits that diversity offers.

In a corporate boardroom, diversity can enhance the audit committee’s ability to monitor financial reporting. Academic research has found that boards with diverse membership have better financial reporting quality and are more likely to hold management accountable after a poor financial performance. This concept also extends to private companies, where management teams with people from diverse backgrounds and/or functional areas expand their company’s abilities to respond to growth opportunities and potential threats.

On a broader level, getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. Plus, providing an equitable and inclusive workplace is good corporate citizenship.

How diverse, equitable, and inclusive is your workplace?

A company’s leadership sometimes perceives DEI issues differently than its frontline workers do. Assembling a formal DEI task force can help company leaders get a more objective picture of strengths and weaknesses in these areas.

One of the group’s first tasks should be creating a survey to distribute throughout your organization. Once the responses have been tallied, the task force should meet regularly to discuss the findings and, if necessary, take corrective actions.

Reporting hotlines can also provide insight into DEI issues. In some cases, management may be blind to harassment and discrimination that’s happening on the frontlines by co-workers, suppliers, and customers. Remember, some forms of harassment and discrimination can be subtle. Frank insights from rank-and-file employees, customers, and suppliers can be eye-opening — and discussions about real-life incidents can lead to awareness and change.

How effective is your DEI program?

Another critical task for the diversity-and-inclusion task force is developing a list of quantitative metrics — such as recruitment, retention, and pay rates for minorities and women — to help track progress over time. Historical results can be used to benchmark your company against competitors and establish goals for the future.

Your company can also make DEI surveys or focus groups part of its annual review process. To encourage participation in DEI initiatives, consider tying part of executive leadership bonuses to achieving quantifiable goals. Alternatively, if goals aren’t met, evaluate why and whether the program may need to be redesigned to be more effective.

Conducting DEI surveys creates an expectation that management intends to implement changes to become more diverse, equitable, and inclusive in its business practices. So, it’s important to communicate with employees about the company’s DEI initiatives. These communications should showcase the company’s strengths and the steps it has taken to improve weaknesses.

In addition to providing footnote disclosures in their financial statements, some companies issue separate DEI reports to highlight improvements made during the current year and other additional planned DEI initiatives.

The use of an outside consultant can make these reports more objective and professional. Plus, outsiders can conduct training programs for managers and employees, along with providing guidance on DEI best practices that have been successful at other companies.

Diversity counts

Building an effective DEI program doesn’t happen overnight. It takes time, attention, and a commitment from the company’s leadership. Contact me to discuss best practices and how your financial reporting process can be used to highlight your progress in these areas.

© 2021 Kraft CPAs PLLC

Generosity around the holidays can also reward the donor

The holiday season is here, and that might put you in the mood to donate to a charity or bestow gifts or assets to loved ones. Even though the act of giving is the ultimate reward, don’t overlook the tax rules designed to encourage charitable giving.

Donating to charities

In the past, taking the standard tax deduction meant losing out completely on possible deductions for charitable gift-giving. Under a temporary rule in effect for 2020 and 2021, taxpayers can claim a limited charitable deduction in addition to the standard deduction on their personal income tax returns. The deduction is for cash donations to public charities only and is limited to $300 for single filers or $600 for a married couple filing jointly.

What if you want to give gifts of investments to your favorite charities? There are a couple of points to consider.

First, don’t give away investments in taxable brokerage accounts that are worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then give the cash proceeds from the sale to charity.

The second point applies to securities that have appreciated in value — these should be donated directly to charity. That’s because if you itemize, donations of publicly traded shares owned for more than a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you avoid the capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing federal income tax. Keep in mind that your charitable deduction for donating appreciated stock will be limited to 30% of your adjusted gross income (20% if given to a private foundation).

Donating from your IRA 

IRA owners and beneficiaries who have reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. (Get in touch with your KraftCPAs tax advisor if you’re interested in this type of gift.)

Gifting assets to family and other loved ones

The principles for tax-smart gifts to charities also apply to gifts to relatives, meaning that it is more advantageous to sell investments that are now worth less than you paid for them and then claim the resulting capital losses on your personal income tax return, rather than gifting the stock directly to loved ones. You can give the cash proceeds from the sale to your loved ones instead.

Likewise, you should give appreciated stock directly to those to whom you want to give gifts. You will avoid paying tax on the unrealized gain, and if they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.

In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer; so, if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.

Make gifts wisely

Whether you give to charity or loved ones this holiday season — or both — it’s important to understand the tax implications. For answers to your specific questions, reach out to me or any member of the KraftCPAs tax team.

© 2021 Kraft CPAs PLLC

Factor in taxes if you’re relocating to another state in retirement

It’s not uncommon to consider a move to another state during retirement – maybe to be closer to family, find more suitable weather, or maybe just a change of scenery. But before you put much thought into your out-of-state relocation, be sure to factor in state and local taxes. Establishing residency for state tax purposes may be more complicated than it seems.

What are all applicable taxes?

It may seem like a good option to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes, and estate taxes.

If the state you’re considering has an income tax, look at what types of income it taxes. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

Is there a state estate tax? 

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to — or in lieu of — an estate tax.

How do you establish domicile? 

If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states could claim that your estate owes income taxes and any state estate tax.

The more time that elapses after you change states and the more steps you take to establish a domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state include:

  • change your mailing address at the post office
  • change your address on passports, insurance policies, will or living trust documents, and other important paperwork
  • buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party)
  • register to vote, get a driver’s license, and register your vehicle in the new state
  • open and use bank accounts in the new state and close accounts in the old one

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. For the year of your move, you may need to file a part-year resident return in both states.  We can help file these returns.

Before deciding where you want to live in retirement, reach out to a KraftCPAs professional to weigh the pros and cons. It could help you avoid surprise tax issues later.

© 2021 Kraft CPAs PLLC

Spencer Mercer joins Kraft leadership team as new member

Spencer Mercer is the newest member at KraftCPAs PLLC, where he joins a team of 17 other partners at the 63-year-old firm.

Mercer, a native of Greeneville, Tenn., began his accounting career with Kraft at its Nashville offices in 2009, shortly after receiving his master’s degree in accounting at the University of Tennessee. He joined the firm’s Chattanooga team in early 2021 following Kraft’s acquisition of Matheney Stees & Associates the previous year.

Mercer works extensively in the construction and manufacturing/wholesale/distribution industries with a focus on tax planning, consulting, and compliance.

“Spencer filled a significant role with our Nashville team, and he’s continued to thrive in Chattanooga,” KraftCPAs chief manager Vic Alexander said. “We’re eager to gain Spencer’s input and ideas – not only for us as a firm, but also as a neighbor in the community.”

Mercer is a member of the Chattanooga Regional Manufacturers Association, Associated General Contractors of East Tennessee, Chattanooga Area Chamber, UT Chattanooga Accounting Advisory Board, Tennessee Society of Certified Public Accountants, and American Institute of Certified Public Accountants. He also has been active as a volunteer with Habitat for Humanity, the Special Olympics, and the Susan G. Komen Foundation. His spare time includes golf, hunting, fishing, and other outdoor activities.

Spencer’s new role as a member with the firm began on November 1.

Analytical procedures are a critical part of the audit process

During the pandemic, many audit procedures have been performed remotely, forcing auditors to rely more heavily on analytical procedures, such as trend, ratio, and regression analysis, than in the past. But so-called “analytics” isn’t a novel concept for auditors. They’ve been using analytics for decades to make audits more efficient and effective.

Audit analytics

The American Institute of Certified Public Accountants (AICPA) publishes guidance on using analytics during a financial statement audit. The auditing standards define analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.”

Auditors use analytics to understand or test financial statement relationships or balances. The type of procedures is customized, depending on the size and complexity of the company.

Five steps

When performing analytics, auditors generally follow this five-step process:

  1. Form an independent expectation based on the company and its industry
  2. Identify differences between expected and reported amounts
  3. Brainstorm all possible causes for the discrepancy
  4. Determine the most probable cause(s) for the discrepancy
  5. Evaluate discrepancies to determine the nature and extent of any additional auditing procedures

Any discrepancy is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If the difference is greater than the threshold, additional procedures may be needed.

A closer look

Additional investigation is required for significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values. For differences above the threshold, the auditor will likely inquire about the reason.

Many discrepancies have “plausible” explanations, usually related to unusual transactions or events or accounting or business changes. Plausible explanations typically require corroborating audit evidence. For example, if a manufacturer’s gross margin seems off, the accounting department might explain that its supplier increased the price of raw materials. To corroborate that explanation, the auditor might confirm the price increase with its top supplier.

In some cases, a discrepancy may warrant more in-depth testing. Other times, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to determine the scope of the misstatement.

Creating a paper trail

Auditors document analytical procedures in audit work papers. These are the files the auditor creates to support their audit conclusions. In general, work papers document the procedures applied, tests performed, information obtained, and conclusions reached in the audit.

For each analytical procedure performed during the audit, the work papers will explain the factors considered when developing the expectation and how the expectation compares to the recorded amounts or ratios developed from recorded amounts. The auditor also must document the results of any additional auditing procedures — such as management inquiry, research, and testing — performed in response to significant unexpected discrepancies.

Help us help you

Analytical procedures can help make your audit less time-consuming and more effective at detecting errors and omissions. You can facilitate these procedures by forewarning your auditors about any recent changes to the company’s operations, accounting methods, or market conditions. This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the balance reported in prior periods.

In addition, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations, and compile supporting documents before the start of audit fieldwork. Contact a member of your KraftCPAs audit team for more information.

© 2021

KraftCPAs among ‘Best Accounting Firms to Work For’ in U.S.

KraftCPAs is one of the “Best Accounting Firms to Work For” based on an annual survey by Accounting Today.

The listing recognizes the 100 best places of employment in the accounting industry determined after a two-part survey process. The first part (worth about 25% of the firm’s ranking) evaluates each entry’s policies, practices, philosophy, systems, and demographics; the second is based on results of employee surveys that measure their overall workplace experience (worth about 75% of the ranking).

The 2021 listing is Kraft’s eighth since the survey began 13 years ago.

“It’s a priority to provide an enjoyable and productive experience for our team,” KraftCPAs chief manager Vic Alexander said. “Our philosophy has always been that if we take care of our people, then they’ll take care of our clients.”

Best Companies Group calculated the results and determined the final list. Almost 250 firms from across the United States entered this year’s survey.

Know where you stand with QuickBooks powerful Reports Center

Users of QuickBooks already know how it’s transformed their daily bookkeeping practices. Users can create sales forms like invoices quickly and find them when they need them. Customer and vendor records are organized and stored neatly for fast retrieval. And it’s easy to accept online payments, track inventory, and record billable time.

But if you’re not using QuickBooks’ built-in reports, you’re missing out on one of the software’s most powerful components. While you can look at lists of invoices, sales receipts, and payments, you can’t see in a few seconds who owes you money and how late they are in paying, for example. You’re not able to get an instant overview of who you owe. You can’t call up a customer’s history instantly, and it will take an enormous amount of time to see which of your items and services are selling and which aren’t.

These are just a few of the insights you get from using QuickBooks reports. Beyond learning about your company’s past and present financial states, you can make better business decisions that will improve your future.

Before you start

QuickBooks’ reports are exceptionally customizable, as you’ll see. But before you start creating them, you should see what your general report options are. Open the Edit menu and select Preferences, then Company Preferences (which only administrators can modify).

You’ll see that you can control your reports’ general settings. For example, some reports can be created on the basis of either Accrual or Cash. You can designate your preference here. Do you want the aging process to begin on the due date or transaction date? How much information should appear when Items or Accounts are displayed? What additional data should appear on your report pages (Report Title, Date Prepared, Report Basis, etc.)? You can specify your own Format or just accept the Default.

Note that Statement of Cash Flows is an advanced report, one we don’t recommend you try to modify or analyze on your own. We can help with that when the report is needed, which is usually monthly or quarterly.

When you’re done here, click OK.

Learn what’s there

The best way to familiarize yourself with the reports that QuickBooks offers is to open the Reports menu and click Report Center. The content here is divided by type (Customers & Receivables, Sales, Purchases, etc.). Click around these lists and use the icons in each box to Run the current report, get more Info on it, mark it as one of your Favorites, or view a Help file. You can choose the date range before you run it with your company’s own data.

Customizing your content

We mentioned before how customizable QuickBooks’ reports are. Customization options vary from report to report, but we’ll look at one example here. You’re likely to want to run Sales by Item Detail frequently to see what your most popular items are as well as what’s not doing so well. Find it in the Report Center by clicking the Sales tab, selecting it, and clicking Run. If you don’t have a lot of data in QuickBooks yet, open one of the sample files that came with the software (File | Open Previous Company).

With the report open, click Customize Report in the upper left corner and see that there are four tabs here. Click on each to see what your options are.

  • Display. Includes options like Report Date Range and Columns.
  • Filters. What cross-section of your QuickBooks data do you want to see? Choose a filter, and the middle column will change to reflect your options there. You can add and remove as many filters as you’d like.
  • Header/Footer. If you want to change the settings you established in Company Preferences, you can do so here.
  • Fonts & Numbers. Contains display options.

When you’ve finished customizing your report, click OK to create it. Your modified report format will not be saved unless you click Memorize and give it a name.

You can customize and run many QuickBooks reports yourself, or reach out to a KraftCPAs QuickBooks Professional for help understanding how QuickBooks reports can help you make better business decisions.

© 2021

Tennessee Jobs Tax Credit can be boon for businesses

The State of Tennessee offers lucrative tax credits for companies across the state, but many businesses fail to cash in on these opportunities.

One of the most common tax credits in Tennessee is the Jobs Tax Credit (JTC), which is a credit of $4,500 per new job made available for “qualified business enterprises” that add a certain amount of new full-time employees.

The credit is limited to 50% of the company’s current franchise and excise (F&E) tax liability. Any credit amount not utilized in the current year can be carried forward for 15 years.

Requirements

Qualified business enterprise: A “qualified business enterprise” is a business that is engaged in manufacturing, warehousing, distribution, processing, research and development, computer services, call centers, data centers, headquarters facilities, convention/trade show facilities, or aircraft repair service facilities in Tennessee. Businesses that promote high-skill, high-wage jobs in high-technology areas can also qualify for this credit.

Capital investment: To qualify for the JTC, the company must make a capital investment of $500,000 in real or tangible property in Tennessee.

Business plan: Companies must submit a business plan to the Department of Revenue before claiming the credit.

Full-time jobs: Each of the company’s new positions must be a “full-time job,” which is defined as a permanent position providing at least 37 1/2 hours of work per week, for at least 12 consecutive months. And the employee must receive the minimum healthcare benefits.

The counties in Tennessee are divided into one of four incentive tiers based on the economic conditions of the area. Tiers are updated annually, most recently July 1, 2021. The number of jobs and the time frame in which they must be created are determined by each county’s tier classification. The tiers are:

  • Tier 1 & 2: 25 net new full-time positions within a 36-month period
  • Tier 3: 20 net new full-time positions within a 60-month period
  • Tier 4: 10 net new full-time positions within a 60-month period

Expanded credit

An expanded credit is available for qualifying businesses located in “economically distressed” counties categorized as Tier 2, Tier 3, or Tier 4.

Based on the assigned tier of the county, the additional credit is allowed on an annual basis for the following time frames:

Tier 2: Additional three years at $4,500 per year with no carry forward

Tier 3 & 4: Additional five years at $4,500 per year with no carry forward

The expanded credit can be used to offset 100% of the taxpayer’s F&E tax liability for that year. This portion of the credit does not carry forward beyond the year in which the credit originated.

Most Middle Tennessee counties — Cheatham, Davidson, Dickson, Maury, Montgomery, Robertson, Rutherford, Sumner, Williamson, and Wilson — are classified as Tier 1. Click here to see the full map of Tennessee counties.

If you’d like to discuss your company’s potential to take advantage of the JTC or other tax credits, please reach out to a KraftCPAs professional.

© 2021

How to protect your data in QuickBooks

After the unprecedented year we’ve just experienced, the last thing you need is to have your accounting data compromised or stolen. It would be impossible to reconstruct your QuickBooks file from scratch, and you can’t afford to have a hacker steal any of your funds.

There are multiple steps you can take to protect yourself from threats, both internal and external. QuickBooks itself offers some safeguards. Strong company policies can also help safeguard against data theft or destruction. And some of your security guidelines should just come from using common sense.

Here’s a look at what you can do.

Keep your systems safe

There are countless ways you can protect your data by maintaining the integrity of the computer that’s running QuickBooks. Some involve the same steps you would take to safeguard all the applications and information you have stored there. You should have reputable antivirus/anti-malware software installed. Use strong passwords. Keep up with system updates.

Updates and backup

QuickBooks’ own updates are critical, too. You can start these manually, but we recommend setting up automatic updates. Open the Help menu and click on Update QuickBooks Desktop. Click the Options tab to access this tool.

Frequent, safely stored backups are another essential element of overall data security. If your system is compromised by an intruder, you’ll need to be able to restore your most recent QuickBooks file when it’s safe again. Go to File | Back Up Company to set up either a local or an online backup. Use one of these tools at the end of any day you’ve entered anything on QuickBooks. We can help you with backup if you’re not sure how to do it.

Networks and smartphones

If you have multiple PCs that run on a network, it’s important to maintain that system’s health, too, since an intrusion at one workstation can affect everyone. You can do this by:

  • Discouraging employees from browsing the web excessively and downloading unnecessary software.
  • Encouraging responsible handling of emails (no clicking on unknown attachments, no personal email on work computers, etc.)
  • Installing network monitoring software or hiring a managed IT service that only charges when you need them.

Do your employees have company-issued smartphones? Make sure their security systems are sound. Set policies to protect them. For example, tell employees they should never use them on a public wi-fi network or install personal apps on them.

Internal fraud possible

No business owners anticipate that their own employees would steal from them. But it happens, and it can do tremendous financial damage. Minimize your chances of being victimized by limiting the access that employees have to sensitive information.

Go to Company | Set Up Users and Passwords, then click Set Up Users. You should be listed there as the Admin. Click Add User and supply a username and password. If you’re not sure how many users are supported on your license or need to add more, contact us. Click Next and then click the button in front of Selected areas of QuickBooks. Click Next again. On the next several screens, you’ll designate that user’s access in areas including Purchases and Accounts Payable and Checking and Credit Cards. When you come to the end of the wizard, click Finish.

You might consider running a background check when you hire someone who will have access to QuickBooks. It’s become a more common business practice.

QuickBooks provides additional tools that can be helpful in tracking down suspicious activity. You can view the Audit Trail, for one. Go to Reports | Accountant & Taxes | Audit Trail. This report displays a comprehensive list of transactions that have been entered and/or modified.

There are other reports that may be helpful, like Missing Checks, Voided/Deleted Transactions, and Purchases By Vendor.

A never-ending process

It’s so easy to get caught up in the daily work of running your business that you forget to take the steps required to keep your QuickBooks data — and all your computer hardware and software — safe. We get that.

Further, you might think that you’re an unlikely target because you’re a small business. Hackers count on you thinking that, though the reality is that you don’t have to be a big corporation to be the victim of cybercrime. Whether or not criminals get access to your funds, they can do a lot of damage that will end up costing you more time and money than you might think.

It’s important to stay vigilant. Security should be considered whenever you deal with financial transactions – especially where the internet is involved. If we can be of assistance as you set up safeguards and company policies, let us know. As always, reach out to KraftCPAs for answers to any questions you might have about QuickBooks operations.

© 2021

KraftCPAs again placed among area’s best places to work

KraftCPAs has again been chosen as one of the Best Places to Work in Middle Tennessee, an annual survey commissioned by the Nashville Business Journal.

The annual list measures 10 categories, including team effectiveness, trust in senior leadership, and manager effectiveness. Responses from each question on each completed survey are compiled and evaluated by Quantum Workplace.

KraftCPAs has been chosen for the NBJ more than 10 times, most recently in 2020.

“Amid the ongoing pandemic, last year saw many companies sending employees home to work, working different shifts to facilitate social distancing and generally operating under never-before-done-this-way circumstances,” the NBJ said in a release announcing the list. “The companies on this year’s list powered through, keeping their employees happy and their bottom line strong.”

KraftCPAs was among 10 companies and firms chosen in the “large” category.

Click here for the full list.

© 2021

Sustainable credibility plays key role in internal audit’s value

For internal auditors, knowing how the audited organization (i.e., board members, audit committee members, management) defines value is one of the most important, yet most challenging, aspects of the profession.

Auditors routinely issue reports that include findings and recommendations related to user provisioning, formalized policies and procedures, undocumented reviews, and outdated system patches. These are relevant internal control issues that need to be corrected but are commonplace and not shocking to audit committees. Recently, KraftCPAs presented an audit report that addressed a programming error in the company’s three-way match process. The error would allow a payment to be processed when there was a significant difference between the purchase order price and invoice price. During the presentation, the audit committee chair asked, “How did you find that?” with a sense of amazement. This is when you know you have provided value as an auditor.

Value is different for everyone and can change based on circumstances. Accordingly, there isn’t an instruction manual that can be followed to ensure that your internal audit function is delivering value. However, the Institute of Internal Auditors (IIA) provides a framework that can set a foundation for credibility and provide the conditions necessary to deliver value to the organization.

Credibility bridges the gap between those moments of value-added amazement and keeps your internal audit function relevant. The IIA’s Quality Assurance and Improvement Program (QAIP) is the framework that helps build and maintain that credibility.

The IIA’s International Standards for the Professional Practice of Internal Auditing (the Standards) establishes a road map for what the internal audit function should do. The QAIP, which is required by the Standards, is an ongoing program that provides a structure to increase the quality and value of internal audit services.  It includes an assessment of the efficiency and effectiveness of the Internal Audit function, along with compliance with the Standards. It also provides the information needed for improvement and gives the best opportunity to deliver value.

For most, when a defined set of standards developed by a recognized professional organization are followed, credibility is immediately established. Credibility is further reinforced if the organization is assessed by a third party and found to be compliant with those standards.

All internal audit organizations should have a QAIP, but it’s required for organizations that use the phrase “… conforms with the International Standards for the Professional Practice of Internal Auditing” in their audit reports or other information describing their audit services.

The Standards establish how the internal audit activity should be structured. They also establish the activities that should be performed in three core components: governance, professional practices, and communication. Activities from these core components are assessed as part of the QAIP. QAIP assessments consist of three elements as well: ongoing monitoring, periodic self-assessments, and external assessments.

Sustainability for the QAIP is obtained by developing processes and templates that are repeatable and enforce compliance with the Standards.

One component of a QAIP that seems to be the most daunting and keeps internal audit functions from fully complying with the Standards is the required assessment by an independent third party every five years. Yes, even auditors try to avoid being audited. This fear comes from a lack of preparation. There is no secret to how the external assessors will perform their assessment. In fact, the QAIP provides the framework to prepare an internal audit organization through a self-assessment using the guidance used by external assessors.

Beyond the structure provided by the QAIP, relationship building is the most important factor in an internal audit function’s quest for delivering value. Having the right relationships and aligning audit activities with the strategic goals of the organization can lead to those value-added moments. This is the only way value can truly be understood. Relationships can be built and maintained through annual risk assessments, seeking management feedback, communicating the results of audit activities, and offering to help.

Many years ago, KraftCPAs inherited an internal audit function that had lost the trust of management and the audit committee. There were many challenges, but the top priority was to build relationships, establish credibility, and cultivate trust. This was accomplished by seeking constant feedback from management and offering to help, instead of being critical of mistakes and minor issues. Over the years, the client offered a “thank you” many times for guidance through the development of new controls during the implementation of new processes or systems. The prior audit team frequently declined to help in those situations.

Implementing a QAIP can seem like an uphill task, but most Internal Audit functions are inherently doing most of the required activities. With just a little guidance and developing repeatable processes, any internal audit function can be successful. In fact, there is no mystery to how it works. The IIA provides all the guidance and tools necessary.

You know your QAIP is successful if the result of your external assessment is that the audit function “generally conforms” with the Standards, or, more importantly, the organization is seeking internal audit’s help and advice outside of routine audits.

If you need help establishing an internal audit function that adds value, your audit activity needs assistance establishing a QAIP, or your audit function needs an independent external assessment to demonstrate compliance with the Standards, KraftCPAs has the knowledge and experience to help.

© 2021

Brian Gray promoted to top position at Kraft Technology Group

Brian Gray has been promoted to president of Kraft Technology Group, an affiliate of KraftCPAs. The promotion is effective March 26.

Gray, a graduate of Tennessee Tech University’s MIS program, joined KTG in 2016. His experience with other managed IT firms provided much-needed depth to KTG, and he was promoted to service manager within his first 18 months. In that role, Gray was invaluable in the continued build-out and maturity of KTG’s Managed IT and Managed Security services.

Gray was given responsibility for the entire service area of the business and took the lead on several strategic initiatives critical to achieving KTG’s 30% annual growth average over the past three years. In early 2020, Brian was promoted to director of operations and led the KTG team through a challenging year.

Gray replaces Don Baham, who left to pursue other business opportunities.

KTG is one of six affiliates of KraftCPAs; founded in 1992, it provides a variety of IT services to clients in multiple industries.