As an auditor, it can be tremendously challenging to help clients navigate the highly technical myriad of accounting standards while maintaining independence. Due to independence rules, an auditor may advise their client on accounting matters and use their professional judgment in deciding whether providing this assistance will threaten or impair their independence. However, during this advisement, the auditor must be extremely careful not to overstep the independence rules and elevate to a level of management in the decision making—which would compromise the audit entirely.
During an audit of an extremely technical or complex transaction, an auditor might question the accounting for the transaction, asking the company to provide its analysis supported by accounting standards explaining why they accounted for the transaction a certain way.
It’s not uncommon that an auditor disagrees with client’s accounting treatment and its supporting analysis, asking the client to consider certain technical accounting guidance, and then revisit the original accounting treatment. But because the auditor has to maintain independence, they can’t conclude for client the accounting treatment and provide the technical accounting analysis that client needs to support it.
Oftentimes in these situations, a client may not have the in-house expertise to support their accounting, address the auditor’s concerns, or decide which course of action to take to revise the accounting—leaving them at a loss for how to continue. That’s where a second certified public accountant (CPA) comes in.
What is a Second CPA?
A second CPA is essentially a second set of eyes on transactions that provides the technical expertise a client needs, and doesn’t need to be independent of the client or adhere to the independence rules of the auditor. The second CPA works as an expert in the nuances of the transaction, and helps ensure that critical areas (such as financial reporting and internal controls over financial reporting) will withstand the scrutiny of the audit. Furthermore, unlike the external auditor, your second CPA can consult and assist in navigating areas of accounting standards that are highly technical and overwhelming to help management make the best decisions to remediate errors or material weaknesses identified by the external auditor.
The Importance of Second CPA Services
Companies don’t always have the bandwidth and expertise in-house to deal with these complicated situations and accurately handle reporting in accordance with GAAP. And since an external auditor can’t make the decisions for management, companies need second CPAs to bring the necessary expertise to choose a successful course. Providing in-depth experience that isn’t present in the company, the second CPA will be able to navigate the complex issues identified. They can also talk productively with the auditor to handle accounting concerns that the client is unable to adequately address due to lack of expertise.
Also, companies don’t have to employ a full-time second CPA year-round. These CPAs are able to come in on an as-needed basis to aid companies when audit challenges arise—saving time and money while providing an extremely valuable resource when required.
When Do I Need a Second CPA?
There are many situations when second CPAs can lend a helping hand, but they’re most commonly engaged when:
- New regulatory guidance is announced
- Accounting for mergers & acquisitions or complex financial transactions is needed
- Transactions must be completed and accounted for in accordance with accounting standards
A public pharmaceutical company with a national audit firm entered into a complex financing arrangement with a new investor. The client needed assistance identifying any accounting issues related to the new financing before reviewing their findings with the auditors. A second CPA was engaged and prepared a technical memo analyzing the financing documents and pertinent terms, citing relevant authoritative and interpretative accounting guidance. They also identified other U.S. Securities and Exchange Commission (SEC) registrants with similar financing arrangements, and summarized the accounting conclusions reached by those adjacent companies. The client’s auditors sent the memo to the national office, where it was reviewed and approved, allowing the client to make a timely filing with no changes to its accounting or disclosures.
Conclusion: Why Use a Second CPA?
Sometimes, based on the expertise inherent in your team, understanding the technicalities of your unique accounting challenges isn’t feasible. Your external auditor may be able to identify problems in your transactions, but due to independence issues, they won’t be able to provide solutions—leaving you unable to choose a proper path.
Engaging a second CPA is an excellent way to receive top-tier guidance right when you need it. Harnessing advanced knowledge in your specific industry, Wolf & Company’s CPAs are able to take the challenges presented and provide adequate explanations for certain accounting practices, or develop solutions to correct any errors identified by your auditor. Wolf’s seasoned CPAs will work with you to avoid issues and ensure a clean, smooth audit.