THE ROLE OF AN EXTERNAL ACCOUNTING AND AUDITING FIRM

The many compliance obligations for a PEO require partnering with an external or third-party accounting firm. The question is what exactly should an external accountant be responsible for? Let’s explore the proper role of an external accountant within PEO operations from both a practitioner and internal operators’ viewpoint. We’ll discuss which tasks and responsibilities require third party engagement and offer best practices to choose, evaluate, and work with the right partner.

The external accounting firm assumes a multifaceted role, as firms will generally have a wide range of services to cater to a diverse set of needs. These services generally fall into the following categories:

Audit and Assurance Services:
The most common types of engagements that fall into this category are 1) financial statement audits, 2) examination attestations, 3) agreed-upon-procedures, and 4) reviews. These types of engagements are usually performed to meet a business’s third-party reporting requirements (for a financial institution or for state licensing requirements).

Tax Services:
This typically includes a variety of services ranging from 1) tax planning and strategy, 2) preparation of federal and state income tax returns, and 3) representing businesses in tax audits conducted by tax authorities and assisting with resolving disputes.

Consulting and Transactional Services:
This includes engagements such as 1) due diligence, 2) valuations, and 3) mergers and acquisitions.

The PEO industry has its own unique set of challenges when it comes to compliance. These may include the requirement of an annual financial statement audit for licensing purposes, specific state quarterly agreed-upon-procedures, quarterly examination attestations for Certified PEOs. In addition, there can be complex tax reporting requirements due to the number of states a PEO is required to file in.

These types or services are not all-encompassing and tend to evolve as a business grows. For example, in a company’s early growth stage, the emphasis may be on the area of tax planning to optimize a business’s tax strategies and take advantage of available deductions and credits and to minimize tax liabilities as the business grows. Conversely, a more mature business may place emphasis on capital structure optimization or mergers and acquisitions to sustain further growth and profitability. As businesses evolve and expand, their accounting needs become more complex, requiring a higher level of expertise and support from their external accounting firm. When selecting an external accounting firm, the ability to tailor and expand the services, if necessary, as the business grows may be an important consideration. In addition, utilizing an external accountant that offers a wide range of services can have certain advantages, particularly around implementing a holistic approach which can enable better coordination and alignment of financial strategies.

While the initial reason for engaging an external accounting firm is usually out of necessity due to specific reporting requirements of a third party, I don’t believe it should be one that is viewed in the lens of a commodity, but rather an opportunity to be a trusted advisor to a business. An effective and valuable external accountant can provide actionable insights, guidance, and expertise to help the business make informed decisions to help achieve their financial and strategic goals, while also ensuring the business meets its legal financial reporting and tax requirements.

Traditionally, an organization hires an external accounting/auditing firm to perform financial statement reviews and audits and preparation of multiple corporate tax filings. While these are certainly needed for a PEO, the support required of an external accounting firm is so much more.

Deciding on a partner to help navigate the needs of your PEO is a critical decision and can be overwhelming. Once you determine what services are required or desired, it’s time to pick a partner. In most cases, a PEO can choose the external accounting firm partner of their liking but sometimes an investor or board committee may dictate this relationship. In either case, it is helpful to choose one that is plugged into and advocates for the PEO industry including active membership and participation in NAPEO. The right partner must be able to provide PEO specific advice, guidance and best practices.

When you are ready to choose or change your external accounting/auditing partner, the following steps may be helpful:

• Gather feedback from other PEO colleagues or strategic partners regarding their own solutions.
• Have conversations with multiple prospective firms to gauge cultural fit.
• Create a RFP that encompasses required services such as audit, tax return preparation, ESAC review, CPEO compliance, state tax attestations; entities; state presence; and requirement for on-site visits.
• Decide in advance what is most important in a partner and analyze proposals received based on specific criteria. For example: pricing, cultural fit, availability based on deadlines (most PEOs have similar deadlines for audits and agreed upon procedures. It’s important to ensure that your potential partner can fit a new client into that same timeframe.), and technology.

Remember an external accountant that performs any assurance services (audit, tax attestations, ESAC agreed upon procedures, etc.) must maintain their independence which ensures objectivity and impartiality to the financial statement reader. Therefore, they may be unable to provide bookkeeping or other day-to-day support such as payroll tax filings and return preparations.

Once the partner is chosen, the following operational best practices will help nurture the relationship. You should understand the documents that will be provided by the external firm like an engagement letter and management letters. Also, be aware of deadlines imposed by your accounting firm that are set to ensure you remain compliant with: state PEO registrations, ESAC, CPEO certification, IRS, state and local taxing authorities for annual tax filings, bank requirements, investors, and Board of Directors. Understand what is needed and be prepared when the accountants arrive. Use electronic portals for efficiency and data security. Review the relationship with your external accountant annually and consider an RFP every few years.

The external accounting partner can play a critical role in the success of a PEO’s financial health and compliance. Their expertise ensures accurate financial reporting, adherence to regulatory requirements, and strategic decision-making. By selecting a PEO-centric partner, a PEO can ensure they are leaning into industry standards and best practices from an original source. Following best practices in choosing and working with your PEO-centric external accountant will help you maximize success.