Guilty until proven innocent? ACA employer penalty letters are here

Read this if you are a Chief Financial Officer, Chief Compliance Officer, FINOP, or charged with governance of a broker-dealer.

The results of the Public Company Accounting Oversight Board’s (PCAOB) 2020 inspections are included in its 2020 Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers. There were 65 audit firms inspected in 2020 by the PCAOB and, although deficiencies declined 11% from 2019, 51 firms still had deficiencies. This high level of deficiencies, as well as the nature of the deficiencies, provides insight into audit quality for broker-dealer stakeholders. Those charged with governance should be having conversations with their auditor to see how they are addressing these commonly found deficiencies and asking if the PCAOB identified any deficiencies in the auditor’s most recent examination. 

If there were deficiencies identified, what actions have been taken to eliminate these deficiencies going forward? Although the annual report on the Interim Inspection Program acts as an auditor report card, the results may have implications for the broker-dealer, as gaps in audit quality may mean internal control weaknesses or misstatements go undetected.

Attestation Standard (AT) No. 1 examination engagements test compliance with the financial responsibility rules and the internal controls surrounding compliance with the financial responsibility rules. The PCAOB examined 21 of these engagements and found 14 of them to have deficiencies. The PCAOB continued to find high deficiency rates in testing internal control over compliance (ICOC). They specifically found that many audit firms did not obtain sufficient, appropriate evidence about the operating effectiveness of controls important to the auditor’s conclusions regarding the effectiveness of ICOC. This insufficiency was widespread in all four areas of the financial responsibility rules: the Reserve Requirement rule, possession or control requirements of the Customer Protection Rule, Account Statement Rule, and the Quarterly Security Counts Rule.

The PCAOB also identified a firm that included a statement in its examination report that referred to an assertion by the broker-dealer that its ICOC was effective as of its fiscal year-end; however, the broker-dealer did not include that required assertion in its compliance report.

AT No. 2 review engagements test compliance with the broker-dealer’s exemption provisions. The PCAOB examined 83 AT No. 2 engagements and found 19 of them to have deficiencies. The most significant deficiencies were that audit firms:

• Did not make required inquiries, including inquiries about controls in place to maintain compliance with the exemption provisions, and those involving the nature, frequency, and results of related monitoring activities.
• Similar to AT No. 1 engagements, included a statement in their review reports that referred to an assertion by the broker-dealer that it met the identified exemption provisions throughout the most recent fiscal year without exception; however, the broker-dealers did not include that required assertion in their exemption reports.

The majority of the deficiencies found were in the audits of the financial statements. The PCAOB did not examine every aspect of the financial statement audit, but focused on key areas. These areas were: revenue, evaluating audit results, identifying and assessing risks of material misstatement, related party relationships and transactions, receivables and payables, consideration of an entity’s ability to continue as a going concern, consideration of materiality in planning and performing an audit, leases, and fair value measurements. Of these areas, revenue and evaluating audit results had the most deficiencies, with 45 and 27 deficiencies, or 47% and 26% of engagements examined, respectively.

Auditing standards indicate there is a rebuttable presumption that improper revenue recognition is a fraud risk. In the PCAOB’s examinations, most audit firms either identified a fraud risk related to revenue or did not rebut the presumption of revenue recognition as a fraud risk. These firms should have addressed the risk of material misstatement through appropriate substantive procedures that included tests of details. The PCAOB noted there were instances of firms that did not perform any procedures for one or more significant revenue accounts, or did not perform procedures to address the assessed risks of material misstatement for one or more relevant assertions for revenue. The PCAOB also identified deficiencies related to revenue in audit firms’ sampling methodologies and substantive analytical procedures. Other deficiencies of note, that were not revenue related, included:

• Incomplete qualitative and quantitative disclosure information, specifically in regards to revenue from contracts with customers and leases.
• Missing required elements from the auditor’s report.
• Missing auditor communications:
  • Not inquiring of the audit committee (or equivalent body) about whether it was aware of matters relevant to the audit.
  • Not communicating the audit strategy and results of the audit to the audit committee (or equivalent body).
• Engagement quality reviews were not performed for some audit and attestation engagements.
• Audit firms assisted in the preparation of broker-dealer financial statements and supplemental information.

Although there have been improvements in the amounts of deficiencies found in the PCAOB’s examinations, the 2020 annual report shows that there is still work to be done by audit firms. Just like auditors should be inquiring of broker-dealer clients about the results of their most recent FINRA examination, broker-dealers should be inquiring of auditors about the results of their most recent PCAOB examination. Doing so will help broker-dealers identify where their auditor may reside on the audit quality spectrum. If you have any questions, please don’t hesitate to reach out to our broker-dealer services team.

Read this if you are at a rural health clinic or are considering developing one.

Section 130 of H.R. 133, the Consolidated Appropriations Act of 2021 (Covid Relief Package) has become law. The law includes the most comprehensive reforms of the Medicare RHC payment methodology since the mid-1990s. Aimed at providing a payment increase to capped RHCs (freestanding and provider-based RHCs attached to hospitals greater than 50 beds), the provisions will simultaneously narrow the payment gap between capped and non-capped RHCs.

This will not obtain full “site neutrality” in payment, a goal of CMS and the Trump administration, but the new provisions will help maintain budget neutrality with savings derived from previously uncapped RHCs funding the increase to capped providers and other Medicare payment mechanisms.

Highlights of the Section 130 provision:

• The limit paid to freestanding RHCs and those attached to hospitals greater than 50 beds will increase to $100 beginning April 1, 2021 and escalate to $190 by 2028.
• Any RHC, both freestanding and provider-based, will be deemed “new” if certified after 12/31/19 and subject to the new per-visit cap.
• Grandfathering would be in place for uncapped provider-based RHCs in existence as of 12/31/19. These providers would receive their current All-Inclusive Rate (AIR) adjusted annually for MEI (Medicare Economic Index) or their actual costs for the year.

If you have any questions about your specific situation, please contact us. We’re here to help.

Four steps to take if you get an ACA Tax Penalty Notice from the IRS
It’s been almost a year since the IRS filing deadline for 2015 Forms 1094-C and 1095-C. Most expected the IRS to issue employer penalty notices related to the 2015 calendar year in late 2016. To date, the IRS has not issued a single penalty notice. Employers who did not comply with the law are subject to penalty and there is a good chance that the IRS will issue 2015 penalty notices soon. So what do you need to do?

If your company receives an ACA penalty notice, you should follow these steps:

1. Scrutinize the information closely — do not assume the IRS claim is accurate
2. Be ready to refute the IRS’s claim — be sure to gather all of the pertinent facts
3. Do not forego your appeal rights — consult with outside tax experts or your legal team to make sure you understand them
4. Contact a tax specialist for guidance — preferably one with ACA and IRS experience

The fate of the ACA is unknown, but the repeal legislation passed by the House in early May retained the employer mandate penalties for 2015. Thus, there is a good chance that any future repeal legislation will also retain the employer penalties for 2015 — and possibly 2016 and 2017.

The bottom line?
Don’t panic, be prepared, and get outside help if you need it. If you need specific information or help with your penalty notice, please contact our ACA consultant Bill Enck.