Accounting Students – Should You Choose Tax or Audit?

June 19, 2019

Caitlyn Grimme, CPA | Supervisor | Published by Crow Shields Bailey PC

One of the biggest decisions an accountant will face is the choice to specialize in tax or audit.  While this decision may come easily to some, for others it can be the most difficult choice of their career.

Tax vs. Audit – What’s the Difference?

While both are accounting professions, the tax and audit paths can vary greatly.   In the tax division, your day will focus on trying to reduce the client’s tax liability.  Meanwhile, the purpose of an audit is to express an opinion as to whether the financial statements of a company are free from material misstatement. As such, auditors devise testing measures and scopes to evaluate the information provided by the client in order to express an opinion.  Additionally, auditors may also work on other forms of attestation engagements such as reviews and compilations, which provide limited to no assurance regarding the financial statements.

Both tax and audit are rules and research based. Tax professionals must comply with rules set by the Internal Revenue Service and The U.S. Securities and Exchange Commission. Auditors must also follow generally accepted accounting principles (GAAP), generally accepted auditing standards (GAAS), additional SEC and PCAOB guidelines if required, as well as certain industry-specific guidance.  However, while auditors rely on research and rules, they also rely heavily on auditor judgment.

Audit professionals must have strong interpersonal communication skills, as you are onsite communicating with clients on a daily basis.  Tax professionals typically work in the firm office and might not communicate directly with a client for several months.

Both career paths are now heavily dependent on computer and software applications, so regardless of your choice, proficiency in technology is important.

There is conflicting information from online sources regarding differences in pay for auditors vs. tax professionals.  Some sites state that lower level audit staff jobs are more plentiful than tax staff positions starting out and might offer higher initial pay.  However, other sites argue that tax professionals have higher initial earning power. At the end of day, I would recommend choosing the path that you are more passionate about, as the earning potential doesn’t appear drastically different for either course (note this may vary by firm, industry specialization, etc.).

Are There Pros and Cons to Each Path?

Although not every firm is the same, here are a few standard pros and cons:

Audit:

Pros:

  • Travel – audit professionals typically spend less time in the firm office than tax professionals. Whether the travel is local, regional, or national can depend on the specific accounting firm.  For instance, audit professionals at large regional or national firms might spend a significant amount of time traveling while professionals at local firms might travel primarily to clients in their area.  Independent of firm size, boutique firms specializing in a specific industry might travel more than others.  If you like a varied day/routine with occasional to frequent travel, audit might be a good fit for you.
  • Steady work flow – while the tax profession is driven by statutory deadlines, audit work is more consistent and constant throughout the year. There are still deadlines in the audit world, but these deadlines (which are usually set by governing bodies such as a board of directors or third parties such as bankers or bonding agencies) are usually spread more evenly throughout the year.
  • Teamwork – audit engagements typically consist of an “audit team” with a partner, manager/in-charge, and staff member, at the least. This environment yields itself to mentorship and in-the-field hands-on learning for those new to the profession.
  • Client interaction – with audit, a large portion of the engagement is performed “in the field” (i.e. at the client’s office). As a result, staff will be interacting with client personnel ranging from accounting clerks to the CEO on a daily basis.

Cons:

  • Travel – while travel might appeal to some, it might be a significant deterrent to others. It is important when interviewing for an audit internship or staff position to question the firm’s expectation regarding amount of time spent traveling, as it can range by firm size or specialization as noted above.
  • Professional skepticism – attestation engagements require independence from the client. This can be a problem for professionals who get too involved in order to “help” the client, as it can lead the auditor to making management decisions for the client and impairing independence and objectivity.

Tax:

Pros:

  • Deadline-driven – while the time surrounding tax deadlines can typically be very busy for CPAs in the tax department, there is usually a lull between these storms that provides plenty of time for vacation, continuing education, professional development, etc.
  • Independent work – while the audit department works on a team, tax professionals have more opportunity for independent work. While there is always someone available for questions if needed, if you prefer to work on projects on your own, then tax might be a better fit.
  • Fast turn-around – while audits may drag out for weeks or months, tax returns are usually much smaller individual engagements which lead to quicker turnaround. If you are someone who likes to quickly cross projects off your list, this might be the path for you.
  • Exposure – although you are not in the field with the client on a daily basis as in auditing, tax professionals receive more exposure to different clients throughout the year. For example, an auditor might work directly with 10-15 clients a year, while a tax professional might deal with 100.

Cons:

  • Deadlines – while the lull provided after a deadline is nice, the weeks and months leading up to a deadline require overtime work by tax professionals, which dissuades many from joining the profession.
  • Client exposure – since tax professionals work primarily in the office, they do not interact face-to-face with clients daily. This could be preferred if you tend to be more introverted, but extroverts might find this arrangement challenging.

I’m Still Undecided – What Can I Do?

If you are still unsure which path is a better fit, try out some of the following:

Apply for an internship – internships are a fantastic way to learn the basics of both disciplines.  Most large firms will offer internship experience on a tax or audit basis which allows full immersion in either path.  Smaller local firms may offer internship opportunities with exposure to both tax and audit in the same internship round (typically a “busy season” internship from January through April 15th).

Online forums – in the age of technology we live in, information is at the tips of our fingers, literally.  There are several sites with forum posts or resources surrounding this subject.  Check out the CPA exam forum on www.another71.com or the AICPA career guidance section, just to name a few.

Ultimately, the career you choose must be the best fit for you.  What are pros for one person might be cons for another (ex. frequency of travel engagements).  However, as long as you know yourself and what is most important to you, you will make the right decision.  Feel free to contact us to set up a job shadowing appointment if you would like to get a glimpse at a normal day for tax and audit professionals.

 

CSB’s Guide to Understanding Classification and Accounting for Leases Under ASU 2016-02

July 26, 2018

Kirsten Sokom, CPA | Supervisor | Published by Crow Shields Bailey

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 on Topic 842 for leases, introducing a principles-based approach in classification and accounting for lease agreements.

 

The changes under the new standard will require most leases to recognize a lease liability and a related right-of-use asset on the balance sheet, regardless of whether or not it is considered an operating or capital lease. ASU 2016-02 becomes effective for public companies’ fiscal years beginning after December 15, 2018. For all other organizations, the standard is effective for fiscal years beginning the following year, December 15, 2019; however, early adoption is permitted. This article summarizes classification and measurement of leases under the new standard.

 

Lease Classification

ASC 842 revised the lease classification criteria as outlined in ASC 840, and those new standards are as follows:

  • Does the lease transfer ownership to the lessee by the end of the lease term?
  • Does the lease contain a purchase option that the lessee is reasonably certain to exercise?
  • Is the lease term a major part of the remaining economic life of the asset?
  • Is the sum of the present value of the lease payments and any residual value guaranteed by the lessee equal to or greater than substantially all of the fair market value of the assets?
  • Is the underlying asset of a specific nature such that it would have no alternative use to the lessor?

If any of the above lease criteria are met, the lease is classified as a finance lease (formerly known as a capital lease). If none are met, the lease is classified as an operating lease. The classification of lease agreements under ASC 842 is similar to current guidance under ASC 840. One change to note is that the 75 percent and 90 percent bright-line tests are no longer included in lease classification criteria; however, ASC 842 indicates that these bright-line tests are acceptable criteria in determining the definition of “major part” or “substantially all.”

 

Operating Leases and the Short-Term Lease Election

Under current guidance (ASC 840), operating leases are not recorded on the balance sheet. This will change under ASC 842. Operating leases will generally be required to be recorded on the balance sheet unless certain exceptions are met, which will result in the addition of a right-of-use asset and the related liability for each operating lease asset.

One of these exceptions is the short-term lease election. Operating leases qualifying for this treatment are not required to be capitalized. Accounting under the short-term lease election would result in similar treatment for an operating lease under the current standard. However, to choose the short-term lease election, the initial lease term and all renewal options reasonably certain to be exercised must not exceed 12 months.

 

Initial Measurement

Initial measurement for operating and finance leases under ASC 842 are the same. The lease liability is calculated based on the present value of unpaid lease payments. This amount will also serve as the right-of-use asset’s cost basis, assuming there are no initial direct costs, prepaid lease payment, or lease incentives received to be taken into account.

 

Subsequent Measurement

While initial measurement is treated the same under ASC 842, subsequent measurement varies for operating and finance leases. For finance leases, the lease liability is reduced using the effective interest method. The interest portion is shown as interest expense on the income statement. The right-of-use asset will be reduced on the straight-line basis over the shorter of the expected lease term or the useful life of the asset. Amortization expense will also be presented on the income statement. If there are variable lease payments also associated with the finance lease, the payments will be classified as rent expenses.

With regard to operating leases, the lease liability is subsequently measured based on the present value of the unpaid lease payments using the effective rate of interest upon lease commencement. The right-to-use asset will be measured at the carrying amount of the operating lease liability while also considering any reduced initial direct costs, prepaid or accrued lease payments, and lease incentives received. On the income statement, both the amortization expense of the right-to-use asset and the recognized interest expense will be shown together as rent expense.

ASC 842 also requires reassessment and remeasurement of the lease if there have been significant changes to the lease term or other aspects of the lease. If you have questions about whether your lease needs to be reassessed, our CSB team is prepared to assist your specific situation.

Consensus surrounding the new standard suggests that finance leases will be more desirable due to the required calculations and disclosure requirements for operating leases. While the ASU 2016-02 language indicates that each lease agreement must be evaluated individually, the FASB has released transition guidance including several practical expedients that may be utilized upon implementing ASC 842.

 

If you have questions regarding how your current lease agreements will be categorized or measured under ASU 2016-02, give us a call. We are happy to provide guidance regarding changes in reporting requirements and your company’s financial performance under the new standard.