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Authored by Ashley Deihr, Colleen Lewis and Kimberly Macedo How a strategic internal audit partner can protect and enhance value at your organization
Internal audit in a time of transition Internal audit functions across industries are at a crossroads. At a time of increasing financial pressures, regulatory scrutiny and stakeholder expectations, organizations rely on internal audit to help assess and mitigate emerging risks across a wide spectrum of critical and time-sensitive strategic, financial and operational elements. Internal audit practitioners are expected to help their organizations manage risks as wide-reaching as financial controls, cybersecurity, talent management and fraud. At the same time, as we recover from the pandemic, internal audit shops are faced with turnover driven by an increasingly flexible and mobile workforce.  Compounding all this, internal audit is expected to work smarter, faster and harder by embracing agile auditing, leveraging data analytics and integrating with enterprise risk management (ERM) and compliance functions. The pressure to be effective, efficient, knowledgeable and collaborative change agents has never been greater. How a strategic internal audit partnership can address six common challenges Finding the right internal audit partner to provide co-sourced or outsourced support can help both your organization to manage this time of change and your internal audit function to serve as a trusted and valuable member of leadership. Consider the following key successes that can be driven by a strong third-party internal audit relationship: Challenge No. 1: Your audit committee expects expertise in an ever-widening list of topics. Solution: A co-sourced or outsourced internal audit partner brings a multitude of skillsets and deep expertise to the table. A firm well-versed in your industry’s particular risks can help you see over the horizon to address emerging risks (such as the following) and meet the expectations of your most sophisticated leaders: Governance ERM Regulatory compliance (federal, state, local, industry-specific) Strategic budgeting and fiscal resiliency Fraud risks Cybersecurity Diversity, equity and inclusion Contracts and grants management Talent management Further, in co-sourcing arrangements your team members can join integrated project teams to gain firsthand understanding of complex technical topics, learning priceless knowledge that can be leveraged for the next project, while allowing for career progression and exploration. Challenge No. 2: Your internal audit function has faced recent turnover, leaving you with open positions and skills gaps. Solution: Co-sourcing can provide you with fully equipped teams to seamlessly perform audits on a standalone basis, or the ability to supplement your existing teams with the specific levels of professionals you might be missing. A third-party internal audit partner allows you to quickly staff up or down to meet the changing needs of your organization, which is especially critical in an agile environment. The right partner will include professionals ranging from recent college graduates to seasoned professionals with 30 years of experience, allowing any gaps to be filled with the right resource. And in a high turnover environment (think The Great Resignation), an effectively managed outsourced or co-sourced relationship can actually lead to greater retention of organizational knowledge. The flip side to the recent shift towards remote work is that it is easier than ever to leverage the unique knowledge and skills of a third-party partner regardless of geographic location. Many engagement activities can now be completed successfully in a virtual environment.   Challenge No. 3: Your organization has limited funding budgeted for an internal audit function. Solution: Outsourcing or co-sourcing internal audit services can provide exceptional value. Internal audit activities performed by a partner firm can be budgeted on a yearly, hourly or project basis, ensuring that your organization only pays for the services it needs. In contrast, with a fully in-house internal audit function, your organization must fund a consistent level of salaries, benefits, training and nonproductive time, as well as technology and infrastructure costs related to employees. An outsourced or co-sourced model allows the internal audit budget to expand or contract over time as budgets and relative risk priorities shift, enabling a more agile approach to internal auditing. In addition, in an increasingly remote environment, organizations have been able to decrease the travel costs often associated with using a partner firm; rather, onsite work can be thoughtfully agreed upon considering the relative costs and benefits. Challenge No. 4: Your leadership wants internal audit to bring a competitive edge to its strategy and operations. Solution: An internal audit partner operates in a variety of organizations, including your competitors, peers and aspirational peers, and can therefore provide industry-leading perspectives to help you: Identify blind spots in your risk assessment and audit planning Maximize systems implementation and usage Implement effective monitoring and analytics practices Assess design of controls for reasonableness and efficiency Garner the support needed to invest in key enhancements Challenge No. 5: Your audit committee expects an objective perspective for certain internal audit activities. Solution: An outsourced or co-sourced internal audit partner comes to the table with a fresh perspective, untainted by organizational politics, history or relationships with stakeholders. The right partner can help invigorate the risk assessment and risk-based audit planning processes, handle investigations with sensitivity and independence and perform diplomatic advisory work requiring buy-in from multiple stakeholders. Challenge No. 6: Major initiatives and changes have stalled with leadership. Solution: An internal audit partner can serve as a thought leader to help to move forward ideas that have stalled, whether it is implementing a new system, exploring ERM or rethinking your internal controls structure. Your internal audit partner can help you understand and explore cutting edge changes, as well as educate your stakeholders on the possibilities and impacts of change; these professionals have often explained major past projects in whitepapers and industry presentations that can be leveraged to gain buy-in across your organization. An internal audit partner doesn’t need to be afraid of pushback, so it can bring fresh and exciting new thoughts to the table. The sky is the limit!
Choosing the right co-sourcing or outsourcing model for your organization Internal audit co-sourcing and outsourcing relationships can vary along a spectrum, with each model delivering certain common successes and challenges. Some of the most typical models are outlined below along with key considerations which may work best at your organization:
Industry spotlight Hear firsthand from our industry-specialized professionals how internal audit co-sourcing and outsourcing can benefit organizations across industries.
An organization’s internal audit function is key to ensuring that strategic risks are appropriately managed and mitigated. The combination of external forces (a complex regulatory environment, rapidly evolving technology, increasing cyber threats and uncertainty brought about by events like the COVID-19 pandemic) and internal forces (increasing demands from organization leaders and skill gaps, for example) should compel leaders to investigate working with a co-sourced or outsourced internal audit partner. These partners can not only help make today’s increasing challenges solvable, but can help internal audit to add value across a wide spectrum of risks, operate more efficiently and better partner with leadership in supporting the organization’s success. For more information or help choosing the right sourcing model for your organization, contact our industry-specialized internal audit professionals.

Practical tips for using a co-sourced or outsourced model to overcome common internal audit challenges

Healthcare & Life Sciences

Higher Education

Financial Services

Government Contractors

Manufacturing & Distribution

Private Equity

State & Local Government

Internal Audit for Life Science Companies 

Internal audit: understanding co-sourcing and outsourcing models

Welcome to the Baker Tilly podcast series where we speak with public sector leaders from across the firm about practical guidance to help government entities protect and enhance their value.  In this episode, public sector partner and Wisconsin Institute of CPAs board chair, Wendi Unger, connects with state and local government specialists, Carla Gogin and Dan Hedden, to discuss the ins and outs of outsourced accounting and auditing for local governments, including the available tools and realized benefits of working with third party accountants and municipal advisors like Baker Tilly to help free up internal resources and ensure GASB compliance. Listen to our podcast to gain insight into your outsourced accounting and auditing questions.

Public sector accountants explain the benefits of working with Baker Tilly as an outsourced accountant or auditor to improve governmental operations and save money.  

CommuniTIES: providing outsourced accounting and auditing value to local governments

Market studies show that small to midsize business leaders are looking for more from their accounting function. They desire data to help support business decisions, growth and strategic planning, rather than historical information. They want real-time access to their numbers and the ability to slice and dice information as needed. Given this, we are seeing more and more companies make the strategic decision to outsource their accounting function to an accountant or accounting firm. Doing this can transform the way you manage financial data by automating standard accounting tasks, providing real-time information on key performance indicators (KPIs), offering targeted insight on specific industry trends and granting access to top-level accounting talent when you need it.  Download our whitepaper to take a deeper dive into the benefits associated with outsourcing the accounting function and how it is allowing leaders to put their focus back on their core business.
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

Outsourcing your accounting function can transform the way you manage financial data by automating standard accounting tasks, providing real-time information on KPIs, offering targeted insight on specific industry trends and granting access to top-level accounting talent when you need it.

Retail

Small Business

Dental Practices

Craft Beverage

Restaurants & Franchises

Grocery & Convenience Stores

Oil & Gas

Lodging

Advantage

Client accounting services

Sage Intacct

Outsourcing your accounting function: making data-driven decisions while saving time and money

Cost segregation study – the basics Individuals and companies that build, purchase, remodel or expand any kind of real estate can benefit financially from using cost segregation. The purpose of a cost segregation study is to identify personal property components that can otherwise get buried in the lump-sum costs of the building purchase or construction project, which typically end up classified as real property. A cost segregation study can unearth those assets and recover their tax value. Further, it increases cash flow by deferring taxes and typically creates tax savings of 2% to 5% of the total basis of the property. While the primary benefit is present-value tax savings, permanent tax reductions often occur as well. Real property and personal property explanation With the main objective being the classification of real property versus personal property, you may be asking, what’s the difference? Real property: A building and its structural components. This property is typically depreciated over a 39-year life.  Personal property: Carpeting, cabinetry, wall coverings and fixtures. This property is typically depreciated over a five or seven-year life.  What’s the benefit?  By completing a cost segregation study, items typically classified as real property can be identified as personal property, opening the door to shorter depreciable lives. In addition to the shorter lives, personal property also offers accelerated depreciation methods that may be available in the first year of use, resulting in an even higher, immediate deduction. All of these factors allow for quicker depreciation deductions, which result in lower taxes in the early years after the project. One example of the type of item a cost segregation study can unearth is related to electrical costs of the project. In many cases, electrical components are likely to be capitalized as part of the building due to the nature of electricity benefiting the entire building. However, if the electrical component is dedicated directly to equipment, such as a dental chair or tools, then this may be able to be classified as personal property versus real property.  A cost segregation study will not only analyze the tangible pieces of the project such as the electrical components, but also all the fees incurred for the plan and design of the project. This includes architect fees, engineering fees, and related costs. The fees and costs are allocated among all components rather than being allocated completely to the building. Below you will see an example of a cost segregation study Baker Tilly recently completed for one of our clients. In this example, total present value project federal tax benefit is $82,000 or 4% of the cost of the project! Note, the benefit could be limited by other provisions of the tax code, including the excess business loss limitation in IRC section 461(l).
Conclusion Proper cost segregation requires expertise in accounting, appraisal, tax law, valuation, engineering, architecture, real estate and construction cost estimating. Baker Tilly has the depth of expertise needed to help you take advantage of this opportunity. A cost segregation study can be completed on past or current transactions. Therefore, if you feel you missed an opportunity in a previous year when you purchased, built or renovated your practice, please reach out to one of our dental experts today. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Individuals and companies that build, purchase, remodel or expand any kind of real estate can benefit financially from using cost segregation. The purpose of a cost segregation study is to identify personal property components that can otherwise get buried in the lump-sum costs of the building purchase or construction project, which typically end up classified as real property. A cost segregation study can unearth those assets and recover their tax value. Further, it increases cash flow by deferring taxes and typically creates tax savings of 2% to 5% of the total basis of the property. While the primary benefit is present-value tax savings, permanent tax reductions often occur as well.

Cost Segregation

Building or remodeling your office? A one-time tax savings opportunity may be available.

Owners of a healthcare clinic analyze strategies to maximize wealth and diversify investments with the help of dedicated advisors Background/client need  Our client is a leading healthcare clinic with more than 10 locations. The client was considering consolidating a few locations into a single space in hopes of reducing doctors’ travel time and expenses. The client also had plans to hire an associate that would help grow the business and its capacity to serve more patients. However, the current rental space they were hoping to consolidate these clinics into was not large enough to accommodate these changes. The client knew that additional office space would soon become available for rent in their current building which would accommodate their needs and also provide room to grow. However, the client was also entertaining another option — to build an entirely new office building that would provide the needed room for growth while also giving the owners the opportunity to build equity in the business (versus paying rent to an unrelated party). In order to determine which of these options would be the best choice for their business, the client engaged Baker Tilly Advantage (Advantage) to do an in-depth build versus rent analysis.  Approach Working closely with the client’s real estate advisor, Advantage was able to identify which of the available lots would be best to purchase and build on, while also calculating the costs. Having this valuable data at their fingertips allowed Advantage to provide the client with a detailed build versus rent analysis that presented the projections of each scenario over the life of the building loan (20 years).  The analysis provided the client with the following: An after-tax cash flow analysis: Giving them the ability to see how much cash was needed each year if renting versus buying, as well as a cumulative comparison throughout the 20 year period An estimate of their increased equity in the company over a 20-year timeframe An expected rate of return from building a new owner-occupied office An estimated return on investment (after-tax): 
– Advantage built this into our analysis as we assumed some of the current doctors would be considering retirement within the 20-year time period.
– By having an estimate on ROI, the doctors are able to see if they could retire earlier than expected and also how much additional return they could earn by working longer. Insight into how much additional revenue would be needed to net a $0 variance in their change in cash position between renting and building (i.e., how much additional income would be necessary for the cash outflows between the two scenarios to equal each other?)  Results On the surface, the analysis provided the client with exactly what they asked for; an illustration of the differences between building a new office or continuing to rent and taking over the additional space when it becomes available. However, the real value of the analysis came from the additional questions it prompted, compelling the client to look to the future and think about things they otherwise would not have.  Such as:  Will there be ongoing maintenance cost for the new building and how do those compare to the costs associated with renting? As stated above, what additional revenues are needed to be able to “break-even”?
– Recruitment of new doctors and staff in a newer, bigger building
– When will current doctors retire?
– Will the current doctors take on the additional work?
– Will they follow through in hiring an associate to consume the additional work? Value increase in purchased lot and building What, if any, other investment vehicles are available that may provide better returns than an owner occupied building? Would building a larger building and having other tenants provide better ROI?
– What do landlord duties involve and is that truly the best use of doctors’ time? What are the lot and build costs in various nearby areas that allow the company to accomplish its goals? Can money be saved in different locations? Business owners should carefully weigh all financial and non-financial factors of owning or renting a business property based on their own circumstances. However, it is important to have a trusted advisor on your side to help you identify and address these items.  Connect with our dedicated small business advisors to learn more about how they can help you position your business for success.  For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Healthcare clinic maximizes wealth and diversifies investments

Our client is a Pennsylvania-based commercial real estate firm specializing in brokerage services, property management, lease administration and consulting. The firm’s ownership structure is a partnership with three equal partners. It has been a tax client of Baker Tilly Advantage (Advantage) since 2015.   During a tax-planning meeting following the release of the Tax Cuts and Jobs Act (TCJA), Advantage tax advisors discussed how the client could benefit from some of the new provisions, specifically, section 199A. Under the new regulation, eligible taxpayers may take a deduction of up to 20 percent of qualified business income (QBI) from partnerships, S corporations and sole proprietorships.  To determine if each partner would be able to take advantage of this opportunity, Advantage tax advisors had to gain a better understanding of their compensation structure. Approach Up until this point, the partners were being compensated via a base salary and also receiving guaranteed payments based on a bonus compensation formula, which were paid out as an expense of the partnership. The guaranteed payments are considered wage-like income so they do not qualify for the QBI deduction mentioned above. However, reclassifying their guaranteed payments as payments from net profits means they would be considered ordinary income and, thus, eligible for the 20 percent QBI deduction.   In order to determine whether remaining under the current structure or reclassifying the payments would offer the most tax savings for the client, Advantage tax advisors performed a modeling analysis. It was determined that reclassifying the payments as ordinary income (approximately $750,000) would result in a deduction of $150,000 ($750,000 x 20 percent deduction) in total.  Results By restructuring the partners’ operating agreement and reducing their taxable income by $150,000, Advantage tax advisors were able to reduce their tax liability by $50,000 to $60,000 (given the 37 percent estimated tax rate). We anticipate the client will benefit from this savings annually — as long as section 199A is in effect.  For more information on this topic, or to learn how Baker Tilly Advantage specialists can help, contact our team.

Partners of a commercial real estate firm to receive $50,000 to $60,000 in tax savings annually thanks to a new regulation from the Tax Cuts and Jobs Act.

Digital Transformation

Federal Tax

Small business saves up to $60,000 annually with tax reform strategies from Baker Tilly Advantage

The smooth operation of your organization’s accounting and finance department is essential to an organization’s overall success. One often forgotten tool to ensure seamless operations is a succession plan for key positions within the department. Creating a succession plan is easy. From experience working with thousands of clients nationwide, Baker Tilly specialists recommend using the following six-step approach to creating your accounting and finance department’s succession plan: Evaluate future changes and risks The first step in succession planning is to consider upcoming departmental changes and risks you already know about that would affect the continuity of the department’s operations. An example of a future change might be the retirement of a long time staffer and a potential risk could be operating with a small team where the absence of one team member jeopardizes the department’s operations. Build a team When developing your succession plan, it is important to bring together a team that represents different skillsets and perspectives to help ensure the succession plan is as comprehensive as possible. Identify key positions, requisite skills, and candidate sources As a team, determine which positions are critical to the department’s continued operations as well as the requisite skills and experience required for successor candidates. Next, consider how you would source candidates for the positions. For example, if you want to look internally, consider making a short list of candidates who are already qualified or could be qualified with some additional training should the need arise. If you need to look externally, determine how, when, and where you would market the position and whether or not it makes sense to bring in a third party recruiter. Ensure adequate coverage Determine how to ensure adequate coverage during a period where you experience a staff shortage and how to quickly onboard the successor candidate. When possible, it is ideal to allow the successor candidate time to work side-by-side with individual they are replacing to get comfortable in the new role. However, in situations where this is not realistic, you may consider cross training your staff to assist in the transition, bringing on temporary professional, or outsourcing specific duties to a third party provider. Develop the plan Once the team has evaluated the options and determined how to handle future succession issues, develop your plan in written form or as a verbal agreement. Continuous improvement After the plan is developed, it is a good idea to reconvene the team at regular intervals, for example quarterly, and otherwise as needed. These meetings will provide the team a venue to discuss plan improvements, gaps, and shortcomings. Once your plan is created, ensuring consistent implementation and continuous improvement are the keys to successful transitions. Although personnel changes are often unpredictable, your organization can be ahead of the curve by completing the above steps and making succession planning a strategic priority for the department. For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.

Energy

Succession planning for your accounting and finance department

We provide both short- and long-term solutions to your most pressing service and people needs. 

Virtual chief information security officer (CISO)

Our full line of outsourcing services includes:

Baker Tilly provides numerous outsourcing and managed services in order to help our clients focus on what they do best so they can win now and be prepared for tomorrow.

Baker Tilly provides short- and long-term outsourcing and managed services to help our clients focus on what they do best and succeed.

Katherine is a partner and West Coast consulting lead with Baker Tilly and has more than 40 years of experience in all aspects of accounting.

Ben Lozano is a partner in Baker Tilly’s risk advisory practice. Ben  has more than 30 years of experience with primary focus on risk  assurance, internal audit, SOX compliance, attestation engagements and  special procedures engagements. His areas of experience include: audits,  reviews, compilations, agreed upon procedures, SSAE16, SOC1/SAS 70s,  SOC2, project management, risk assessments, business process reviews,  control testing, system implementation assistance, IT risk assessments  and cost/benefit analyses. Ben leads teams conducting financial audits,  reviews, SSAE 18 SOC1/SAS70 audits, SOC2 audits, attestation engagements  and assistance with management assessments of the effectiveness of  internal control over financial reporting using the COSO framework,  business process reviews, control design effectiveness evaluations,  controls testing, policy/procedures reviews and evaluation of control  deficiencies.

Baker Tilly understands the office of the CFO and the unique challenges and complexities that accompany the leadership and execution of a high performing financial organization.

Baker Tilly leverages resources with extensive industry and public accounting experience to manage projects and assist financial organizations with the role of the CFO.

Leveraging best-in-class technology to provide comprehensive outsourced accounting and advisory services.

Our client accounting services practice leverages innovative, cloud-based technology to provide comprehensive outsourced accounting and advisory services. 

Leverage industry-specialized internal audit for organizational success.

Baker Tilly’s internal audit professionals serve as trusted advisors who proactively engage senior leaders and add strategic value via industry insights beyond compliance.

With Baker Tilly as your fund administrator, general partners are able to confidently focus on what they do best – deploying capital, managing investments and building investor relationships.

Baker Tilly provides full fund administration services including accounting and investor relations, fund performance reporting, middle and back office accounting and general consulting for investment firms.

Private Equity Fund Administration Services

A sound privacy program accounts for compliance, legal, financial, third party, reputational and activisms risks.

Baker Tilly’s dedicated privacy practice brings the critical combination of technical, regulatory and industry expertise required to support your privacy needs.

Banks need staff to assist with SBA loan applications and forgiveness review in response to the coronavirus (COVID-19) crisis and the CARES Act.

SBA Loan Administration Staffing Augmentation