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The PCAOB Auditor’s Report

December 14, 2017

All publicly owned companies must have audited financial statements that contain a report of the registered independent accounting firm performing the audit. Here is a description of what the reports actually say. The following represents the most updated requirements and is applicable for audits of periods ending on or after December 15, 2017.

Accounting firm
Only registered accounting firms can perform an audit of a publicly owned company. They must be registered with the Public Company Accounting Oversight Board (“PCAOB”). Certified public accountants can audit nonpublic companies and other entities and do not need to be especially registered with the PCAOB, but must be suitably licensed to do that. This blog only covers audits of public companies under the PCAOB oversight and who also must have their quality control practices reviewed by the PCAOB. The auditor’s report for non-publicly owned companies and entities is substantially similar but the differences are not covered here.

All auditors must be independent. There are strict rules to assure this and violations are treated seriously either by the PCAOB, SEC, AICPA, peer reviewer or the state oversight committee. Very generally “independent” means the firm, its partners and certain family members can have no investment, creditor, management or other involvement in the company being audited. The independence requirements are provided by federal securities laws and applicable rules and regulations of the SEC and the PCAOB.

What the auditor did
They audited the Company’s statements that are specifically mentioned. Their responsibility was to express an opinion on the financial statements based on their audits. They point out that the financial statements are the responsibility of the Company’s management.

How they did the audit
They followed the standards of the PCAOB that required that they planned and performed the audit so they could obtain reasonable assurance about whether the statements are free of material misstatement, whether due to error or fraud; that they performed procedures that responded to those risks; that they examined on a test-basis evidence regarding the amounts and disclosures in the statements; that they evaluated the accounting principles used and significant estimates made by the Company’s management; as well as evaluating the overall presentation of the financial statements.

Purpose of what the auditor did
So they could have a reasonable basis for their opinion.

Expressing their opinion
They give their opinion that the financial statements present fairly, in all material respects, the financial position of the Company and the results of its operations and its cash flows as of, and for the dates and periods they mentioned, in accordance with accounting principles generally accepted in the United States of America.

Additional work the auditing firm did (optional in this report)
The audit report will state that they also audited in accordance with PCAOB standards the Company’s internal control over financial reporting (“ICFR”) and that there is a separate ICFR report that is also included with the financial statements. Some choose to combine the ICFR report and include the information and their opinion in the Auditor’s Report.

The ICFR report says the auditor had to plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting [only] was maintained in all material respects and included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures that they considered necessary in the circumstances; and that there is reasonable assurance regarding prevention or timely detection of unauthorized transactions that might have a material effect on the financial statements. There is a caution that internal control procedures over financial reporting may not prevent or detect misstatements.

The firm signs the report.

Period of engagement
They need to provide when they started serving as the company’s auditor.

The latest date of their responsibility for the audit is provided in in accordance with PCAOB standards.

Future changes
Critical Audit Matters (“CAM”) language, if applicable, will be added for fiscal years ending on or after June 30, 2019 for large accelerated filers and for all others for fiscal years ending on or after December 15, 2020. If there are no CAMs then that should be stated. Emerging Growth Companies (“EGC”), broker-dealers, investment companies registered under the Investment Company Act, and employee benefit plans (11K filers) are exempt from CAM reporting. EGCs have the option of including CAMs.

Margaret F. Gallagher, CPA, in our Technical Resources department assisted in the preparation of the above. Peggy can be reached at or 973.898.9494, x4414. For additional information, you can also go to as all of their standards are available for free, online.

Supercalifragilisticexpialidocious Part 3: Bitcoins

December 12, 2017

A previous blog talked about the importance of understanding your investments and how they can generate a profit. My last blog talked about my not understanding 100+ PE stocks especially since I believe that earnings drive value. Today I will discuss Bitcoins and explain why I do not understand the rush to own them.

Bitcoins are “hot.” They are part of a generic category of cybercurrencies of which there are many “brands” and variations. However Bitcoins seem to be the most popular, so they will be specifically mentioned here. However, my comments would apply to most cybercurrencies.

Bitcoins started out as a currency and has been performing as such until this year, when it started to trade as a investment security with huge daily market swings, excessive volatility and now an organized futures market and with investment bankers facilitating active markets.

Let me be clear, I do not fully understand how Bitcoins are “mined,” created, regulated, registered, transferred, kept secure and doubt that there is transparency in the process or that it is immune to many forms of cybercrime. However, I do not want to talk about the validity of Bitcoins, but rather their use as a currency which was their raison d’être. I believe that cybercurrencies will, one day, become a valid cross border medium of exchange, i.e. a currency. However I do not believe that that time is now.

Currencies are a medium of exchange readily accepted in commercial, government and other transactions. Currencies are usually backed by some sort of credible body such as a government or NGO (nongovernment organization), backed by commodities such as gold, specie or oil, and the stability of the currency is an important element in it widespread acceptance. Things change, governments change, speculation and demand affects value, availability and individual tastes and feelings toward risk also change. Also currencies fluctuate between themselves. The dollar as measured against the Euro, Pound, Yen or Yuan changes continually, but always within a realm of what can be reasonably expected. The world has evidenced a self-correcting mechanism bring fluctuating currencies back to an equilibrium. In some cases, a country’s greatly rising currency will result in egregious inflation usually wiping out currency values and then there is a flight to “safe currencies,” commodities, or even things such as rare stamps, coins, books, maps and art. However, we haven’t seen unchecked inflation in Western society in generations. The worse here in the United States was on the waning days of the Carter presidency, and we survived that.

I no longer see Bitcoins as a currency. Rather, I see it as an investment “security.” As such it is being subjected to a current frenzy of buyers wanting to receive “free money” by buying them, no matter what the price, since they seem to feel there will always be a buyer to unload it at a profit. And there will be a buyer, until there isn’t, and then the Bitcoins will plummet and, with luck might revert to the value as the currency it started out as, or if not, then the value would almost completely disappear. Because of the reasons stated above I cannot understand or justify owning Bitcoins.

Supercalifragilisticexpialidocious Part 2: Stocks with 100+ PEs

December 7, 2017

After writing the previous blog I thought of something that I do not understand and want to share that with you here. I just don’t understand the high prices of certain stocks with minimal or no profits. Specifically stocks with 100+ Price/Earnings (“PE”) ratios.

A company priced at 100, 200 or more times earnings might be justified as an investment because of its growth rate and potential for profits, but at some point there has to be a reckoning. In general, earnings or cash flow determines value for investment assets. There are some exceptions such as where there is synergy or a strategic reason for a buyer; where a buyer thinks that parts of the underlying assets are worth more than the whole and they think they have a way to monetize that; when there is a nonfinancial reason to invest such as ego, or to become a “player” in an industry, or perhaps to buy a job for yourself or a child; to enter or build up a geographic area; obtain critical mass; where there is hidden or undisclosed value; or a new value creation opportunity. Other reasons people invest and sometimes drive up prices is an emotional attachment to an industry, product, primary owner or founder or familiarity such as the preponderance of owners of Coke in Atlanta or former owners of Kodak in Rochester. There are many other reasons why people determine the value of a business, and they would all be valid except that they would not apply to stock market investors.

I believe the motive for nonprofessional investors (such as you and me) should be for dividends and stock price growth. A company’s sales growth for growth’s sake is not a viable strategy unless profits materialize; and then it is the profits that will drive the stock price. That is a simple statement of value. We had a bubble that burst in 2000; and a mortgage lending bubble that burst in 2008. Going back to 1637 there was Tulip Mania and in 1720 a South Seas bubble. There are many more and it seems with investing, history does repeat itself. It reincarnates and pops up every once in a while. I do not know if it is now with certain stocks, or when it will surface, but it will. Earnings drive value. Earnings drive value. Earnings drive value. Except when it doesn’t, but not for stock market investors. For stock market investors, earnings does drive value. On the short run, anything is possible; but for the long term, it is profits that will drive the value.

Let me use a simple illustration to explain how earnings drive value:

  • When a stock is selling for 100 times earnings, i.e. has a 100 PE, it means the earnings are 1% of the stock price.
  • If the market’s average PE is 20 then the average stock earns 5% of its market price.
  • Using this information it would appear that the 100 PE stock is priced 5 times greater than the average stock.
  • If accelerated growth along with profits occurs then then today’s price might be justified at some time in the future so the current investors would be giving up some future profits to own the stock now.
  • But suppose the growth doesn’t materialize or the growth in sales continues but does not translate into earnings, is it reasonable to assume the stock will keep increasing…or even remain at its current price? I think not. Even if the growth materializes, at some point there has to be a leveling off or normalization of that growth; and that, I believe, will be reflected in the stock price which will then be based on earnings, which to me indicates a stagnation of the stock price at best or an inevitable price decline.

I wrote about stock prices in 2012, 2014 and 2015 using Apple as the illustration and I believe my insights then still hold true. Stocks are something to invest in to get gains from the business’ growth and dividend payouts. Without earnings the stock price cannot keep increasing forever. Therefore, I don’t understand the high stock prices with 100 or more PEs, so will pass on them..

The Apple blogs were posted May 8, 2012, May 8, 2014 and Feb 17, 2015. They can be accessed in the archives on the right side of this blog site.



December 5, 2017

The movie and musical show Mary Poppins has two interesting investment issues I would like to give my take on. Compounding and investment quality.

There is a song in the movie about how financial assets grow through the magic of compounding. I believe that is something that investors should always be mindful and aware of. Note that in order for compounding to take place, there needs to be dividends or interest payments. Look for that and that they are paid out of profits, not from what was invested. In other words, there must be operating cash flow.

The play has dialogue about opportunities for George Banks’ employer which is an investment bank. He eventually chooses a simple factory project over an elaborate money making scheme. His reasoning was that it wasn’t clear what product was being sold in the scheme or how it would make its money other than from its investors, while the simple project would sell its products at a modest profit and grow its sales and profits in a methodical manner.

What happened a little later is that his bank’s management felt they lost a great opportunity because every other bank seemed to be benefitting greatly from the scheme while he invested in a mundane business so they suspend George. It then turns out that the scheme was a big loser for all of its investors and George’s employer was protected from that while the factory loan became very successful, so he is reinstated along with a promotion. The issue here is that it is important to understand the underlying products and business model that will generate profits; and without that understanding it is better to forgo it.

Now, what does this mean to you? Well, do you make your investments in companies where you understand their business model and how they can generate profits, or do you follow the herd grasping at possible increased market values?

I have a simple rule: If you do not understand how money can be made, then don’t invest in it. However, if you do understand how money can be made, then that should only be the first step in finding out more, don’t use that as the only criteria.

Understanding what you invest in is a supercalifragilisticexpialidocious moment.

Five Ways to Be Cyber Secure

November 30, 2017

After listening to a hair raising program in New Orleans that I mentioned in a blog last week, I spoke to Anurag who suggested I share his article with my readers, so here it is. If you want to discuss these issues further you are welcome to contact Anurag or Joe at their contact info at the end of this blog. Here are Anurag’s five ways you can make your virtual life more cyber secure.

#1 Avoid Using Checks For Making Payments
Your personal checks contain sensitive information like your name, bank account number, routing number and in some cases even your address. Armed with your checking account number and bank routing number, criminals can create blank checks using an online checkbook retailer and can start writing checks from your checking account. So, starting now, stop using checks to make payments. If you plan to continue to use checks, set an auto alert on your checking account to notify you of all check payments. This way you can catch a check fraud early and take it up with your bank. Using electronic payment mechanisms and, whenever possible, using a credit card for payment will give you more time to flag fraudulent transactions and reduce your risk of losing money.

#2 Don’t Provide Your SSN Just Because It Was Asked For!
When filling out forms at the local hospital or when seeing a physician, you jot down your name, address and insurance information. Then you come to a space for your Social Security number (SSN). Should you fill in your SSN? If it’s your doctor or hospital asking, the answer is – No! Doctors, hospitals and other healthcare providers may want your SSN to help with debt collection in the case of a problem with your insurance company or unpaid copay, but you are under no obligation to hand over that information. Just leave the area of the form blank and the provider will likely not ask or notice. If they do, let them know that your insurance ID should suffice and that you prefer not to reveal your SSN unless mandated by law. This can reduce your risk of identity theft by reducing the number of places where you leave your SSN behind.

#3 Security Questions… Thou Shall Not Answer Them Correctly
Many websites and applications now rely on security questions to determine your identity if you forget your password or as an additional authentication layer. While it is human nature to answer these questions correctly during set up, it is not the most secure behavior. There are a lot of people who may know your mother’s maiden name; so why not create a new one and use that as an answer? Now it is not just an answer to a security question but another password that no one else knows and cannot guess. The wackier the answer, the better. And, it’s never too late to update your answers if you, like so many of us, answered them correctly in the first place.

#4 It Is Never Too Late to Reset, Until It Is
With so many hacks and data breaches occurring daily, including the one billion passwords lost by Yahoo, if you have not done so recently, consider resetting all your passwords. Stop and think! Which other websites are using your same old Yahoo password or LinkedIn, Adobe, Dropbox, Tumblr, BitTorrent, Evernote? Yes, they all suffered a breach in the last two to three years. When you do reset your password, make sure that you come up with an easy-to-remember, complex password. Looking for a secure way to store all your passwords? Password safe is a great tool – It’s a local secure store and easily meets general password needs. There are many other options which may provide portability and integrate with different browsers. If you use Excel or Word documents or Post-it® notes, then switching to a secure password vault utility should definitely be on your New Year’s resolution list.

#5 Don’t Get Phished
Don’t fall for a “phishing attack.” Never click a link or open an attachment that you did not expect to receive. Scams today look very convincing, coming in the form of voicemails, eFaxes, invoices, social media, ADP/payroll themes or the IRS. If you’re not expecting something or have to think twice about the contents, don’t open it. If you do, you’re opening hackers to the contents of your computer in multiple ways. Remember, your CEO will usually not ask you to wire money via email nor will your CFO request you to run a W-2 report of all employees and email it. If they do, pick up the phone or walk to their office and confirm their requests. Finally, organizations should test their “human firewall” by engaging an external firm to provide “phishing” as a service and identify employees who fall for such attacks and need security training.

Need More Information?
This blog was originally included in the Withum Journal and was written by Anurag Sharma, CISA, CISSP, CRISC, MBA, Withum Principal. Anurag can be reached at If you have any questions about cyber security or would like to discuss your cybersecurity plan, please contact Anurag or Joe Riccie, Partner,, both members of Withum’s Cyber Secure Services Group.

Estate Planning Is a Lifetime Process, Not Just a Tax Saving Action

November 28, 2017

Estate Planning is a lifetime process, not an after-tax distribution program. You should periodically review your estate planning goals and documents to minimize the impact that the bumps in life can cause to your estate planning.

Following is a checklist of some life-changing events or activities that could affect your estate planning needs:

  1. More than two years since you reviewed your estate plan.
  2. Death or incapacity of a spouse.
  3. Death or incapacity of an executor, trustee or guardian.
  4. Marriage, remarriage or divorce.
  5. Marriage, remarriage or divorce of a beneficiary.
  6. Birth or adoption of a child or grandchild.
  7. Acquisition of substantial life insurance.
  8. Relocation to another state or acquisition of property in another state.
  9. Serious illness of a family member.
  10. Change in business interest or retirement.
  11. Financial irresponsibility of a child.
  12. Changes in federal and state estate tax law.

Except for #12 above, estate taxes are not, and should not be, the major issue in a client’s planning. Further, whether or not the estate tax is eliminated, there have been no proposals to eliminate the gift tax which will still need planning. Also, the federal actions do not affect state inheritance and estate taxes and these too need to be planned for. Without the proper plan and documents, the tax payments could turn out to be the least of the problems for heirs. Review the above list with your advisors to make sure your wishes will be fully able to be carried out.

The above originally appeared in the Spring 2017 Withum Journal and has been updated for inclusion here. It was prepared by Hal R. Terr, CPA, PFS, CFP®, AEP® and Withum Partner who can be reached at

Estate Planning Hall of Fame

November 21, 2017

On Friday I was honored by being inducted into the Estate Planning Hall of Fame. The award was presented at the annual Advanced Estate Planning Strategic Conference sponsored by the National Association of Estate Planners & Councils (NAEPC), and was held in New Orleans. I joined five other estate planning colleagues as this year’s inductees.

The two day conference had nonstop presentations from top experts in the field sharing their most up to date strategies. Some of the discussions were in real time since the House passed their version of “tax reform” on Thursday. Needless to say, we had a lot to talk about.

While a key element of planning is estate tax minimization, there are many other facets of what we do and these were also discussed. Some of which are methods of family wealth transfers; reducing family conflicts; business succession planning; asset protection; title and control of family assets; protection against identity theft; effective documentation to assure clients’ wishes are achieved; real life situations such as children born after the death of the client, or with in vitro fertilization, or with unknown children that make claims; uses and contents of prenuptial agreements; naming trustees, executors, custodians, guardians and people with powers of attorney; estates gone wrong using celebrities as the illustrations; uses of life insurance for estate liquidity and investment purposes; sales of unwanted or no longer needed life insurance policies; issues faced in gift and estate tax return audits; avoiding estate litigation; slippage and gray areas leading to ethical lapses by professionals; cash flow issues and income draw down during retirement; dividing, distributing and taxation of assets among heirs; income tax minimization by using trusts and other entities; and the scariest presentation of all – protecting a client’s privacy and personal security. I had a drink with the presenter of that last topic and he even scared me more.

There are many new estate planning issues arising daily and programs such as this NAEPC conference assures that we are kept current on as many state-of-the-art issues as possible. This was an intense two days that was thoroughly enjoyable because of the great presenters and interactions with colleagues from all over the country that I was able to meet with.

Joining me at the conference was Hal Terr, CPA, a partner at Withum specializing in estate and family wealth planning. Next Tuesday I will post as a blog an article Hal wrote for the Withum Journal on what to be aware of independent of estate taxes.

Have a great Thanksgiving! May every day be a day of Thanksgiving for you and your family.