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Read this if you are interested in artificial intelligence (AI).

Everyone is talking about AI right now. With the technology accelerating so fast, companies and individuals are struggling to figure out the impacts: Will it be helpful for businesses? Will it be harmful for employees? Will it change the way we work? 

The thought leaders at BerryDunn have been exploring the technology and ways it may benefit our clients moving forward—both for accounting services and for broader consulting services. Here are five reasons we're optimistic about the future of AI in business. 

1. AI has the potential to complete menial, time-consuming, and error-prone tasks faster and more accurately.
   BerryDunn’s Kathy Parker, Practice Leader for the firm’s Outsourced Accounting Group, recently shared her thoughts with MassCPAs, stating that “Our approach to clients has always been to act as their consultant and advisor, and AI won't change that. What we are starting to see is that AI software has the potential to reduce the manual work we do, which will free up time so we can do what we do best. I expect that AI will start to take care of things more reliably like automatic scanning, basic tax preparation, and some functions that take up a lot of staff time.” 
2. AI may free up resources so businesses can be more strategic.
   AI can help complete time-consuming tasks, saving time and staff resources to focus on more strategic initiatives. Parker is excited to think about adding more value to her clients by providing more strategic planning, benchmarking, and advisory services that will contribute to their success. She shared that “Clients are starting to recognize that AI can reduce the burden on accountants, and they're beginning to expect more from us. They don't just want our calculations, they want our expertise, and that's fantastic. Clients want to know how they compare with their competitors, and they want to know how to be proactive about their growth. They want dashboards to be able to easily see where they stand and they're looking for more sophisticated deliverables.”
3. AI could reduce the price of some services. 
   Parker also shared her view of how AI may affect prices for services such as tax and accounting. “Businesses may also expect to see a different fee schedule, given the potential reduced workload that AI could bring. Of course, that reduced workload will allow service providers to raise the bar in other, potentially more significant, areas of their business.”
4. AI could improve decision making for businesses.
   Tucker Cutter, a Senior Manager with BerryDunn’s higher education consulting team, believes that AI has the potential to significantly improve decision making for any business. His work focuses on the nexus of technology and people, helping higher ed institutions manage large-scale digital transformation projects. “I’m looking forward to seeing how AI will help us provide high quality decision-making guidance through enhanced data analysis and predictive analytics,” he shared. Once tools have been vetted and tested to prove their accuracy and reliability, AI has the potential to analyze data much faster than could be done manually by humans.
5. Clarity on the best use cases for AI will emerge.
   If you’re not inclined to be an early adopter, know that you’re not alone. Just as with any other technological revolution, there are still a lot of unknowns. It makes sense to be cautious, especially when you’re dealing with sensitive data. As the dust settles, you’ll be able to learn from the experience of early adopters about what works and what doesn’t. At BerryDunn, our consultants are keeping an eye on the technology and how it may impact processes, systems, and outcomes. 
   
   Cutter shared his approach to staying current on AI technologies so he can advise his clients, stating that “We need to understand how to use these platforms and tools as well as stay well-versed in AI/technology governance strategies. For the good of our clients, we are still responsible for keeping data strategy at the forefront even if it’s not top-of-mind for our clients.” Clarity won’t emerge overnight, but in the coming months and years, we’re confident that a healthy balance between what’s best for business and what’s best for people will be possible. 

Read this if you are interested in AI and considering using AI in your organization.

Since the debut of OpenAI’s ChatGPT, interest in artificial intelligence (AI), specifically generative AI, has soared. Businesses across industries and sectors are exploring how generative AI can transform their operations, services, and products. Generative AI presents a unique opportunity for companies to hyper-personalize their products and services, monetize their data, and create frictionless customer experiences, among other innovative use cases. The more advanced generative AI becomes, the more it can enhance the value companies bring to their customers. 

Artificial intelligence definitions

Before we specifically discuss generative AI, it is worthwhile to expand the discussion to AI generally. Artificial intelligence is certainly a buzz term and although people love to use it, AI can be used in many contexts and with various intentions, making it difficult to define. Here are some definitions of the more common AI technologies:

1. Artificial intelligence: Refers to the development of systems that can perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and language understanding.
2. Natural language processing: Enables computers or machines to understand, generate, manipulate, and interact with human language in text or voice form. Think of the last time you called a call center and spoke with an answering machine: Did you have to press the numbers on your phone to navigate through the conversation or could you answer via voice commands, possibly even full sentences? If the latter, that is natural language processing. Other examples include Apple’s Siri or Amazon’s Alexa.
3. Machine learning: Allows computers to learn and adapt without following explicit instructions. An example would be a computer playing chess that learns its opponents’ habits the more games it plays. Transaction monitoring software, often used by financial institutions as part of their anti-money laundering programs, also uses machine learning technology. Over time, the software learns over time to detect anomalies in patterns of transactions. Although humans may intervene to “guide” the software, the software primarily learns on its own.
4. Deep learning: Deep learning is a subset of machine learning. The biggest distinction between machine learning and deep learning is the data each is able to process. Machine learning does best with structured data. For instance, the transaction example above uses structured data—each transaction contains the same data points which can be easily identifiable, for instance, customer name, dollar amount, date, description, etc. Deep learning can analyze unstructured data, like text and images. You may have heard of surveillance cameras being able to identify individuals. The cameras do this through deep learning. Another example of deep learning is its ability to distinguish between types of animals. Over time, deep learning technology can learn which features distinguish a cat from a dog.
5. Large language model: A large language model is a machine learning model, specifically a type of deep learning model, designed to understand and generate human-like text. These models are trained on massive amounts of textual data, allowing the models to learn patterns, grammar, context, and even some factual information.
6. Generative AI: Generative AI is also considered a subset of machine learning and expands upon the applications of machine and deep learning. Where machine and deep learning can analyze data, generative AI is able to analyze data and then produce original text, video, images, and other types of content. It uses a large language model trained on a vast dataset to generate human-like responses in text-based conversations. Currently, generative AI most commonly creates content in response to natural language requests, like ChatGPT, where the user inputs a request and ChatGPT responds with an answer. If the answer is not quite what the user was looking for, they can modify the request and receive a (hopefully) better answer.

An easy way to envision AI is as a tree, with various branches representing different techniques and technologies. One of the branches is generative AI, which includes sub-branches such as ChatGPT and large language models. ChatGPT, powered by a large language model, functions as a conversational agent that can generate human-like text responses. Each branch and sub-branch of the AI tree contribute to the overall growth and understanding of AI.

Generative AI applications 

Generative AI already has a myriad of uses. Some of the more common ones involve using the technology to draft policies or messages—and even review policies or messages. The user can specify the tone, style, and length of the communication. (Author’s note: This article was not written with generative AI). Generative AI can also summarize large amounts of data. For example, a new policy or regulation could be input into generative AI software, and the software could provide only the salient points. Generative AI can also quickly provide responses to questions—think of it as a superpowered Google. Rather than inputting a question and searching through thousands of websites, generative AI will type up a response, as if you are having a conversation with the technology. Generative AI has even been known to help with software coding and Excel formulas. 

These uses are just scratching the surface of generative AI’s capabilities. According to a recent Gartner survey, executives believe the primary focus of generative AI will be on—in this order—customer experience/retention, revenue growth, cost optimization, and business continuity. 
 
If you have any questions about AI or your specific situation, please don’t hesitate to reach out to the BerryDunn team. We are here to help.

Read this if you are at an independent school and work internationally.

With fall officially in full swing, students are back on campus and summer is a fleeting memory for most. However, I am a firm believer that summer is a state of mind and with the start of a new academic year, some may be considering exploring new opportunities, such as widening your campus reach beyond the  United States. This article will discuss some tax considerations, pitfalls, and best practices if your school is looking to expand its programming internationally.

Recruiting international students abroad

If your school is new to the international stage, you may want to consider starting by dipping a toe in the pool abroad by recruiting internationally to draw foreign students to your domestic campus. This may involve contracting with domestic or foreign recruiting consultants or using the school’s own employees to travel abroad to conduct recruitment activities. You should consult with your tax advisor about the payroll tax implications of sending employees abroad.

Additionally, tax-exempt organizations with aggregate expenses of $10,000 or more from grant making, fundraising, business, or program service activities outside of the United States may be required to complete Schedule F of their Form 990. It is important to track any foreign expenditures being incurred.

Selling intangibles and consultative services abroad

Maybe your school is no stranger to recruiting abroad and now you’re ready to wade into the shallow end and provide consultative services or sell your school’s valuable intangible assets abroad. We would recommend any exempt organization entering foreign markets protect itself from exposure to unrelated business income tax by creating a separate domestic legal entity known as a blocker corporation.

Developing a program abroad

Perhaps your school has a robust relationship with a specific region or regions abroad and you’re thinking of making the big jump into the deep end by developing some more permanent roots in the form of a school abroad or exchange program.

In addition to the considerations above, you should consult with local advisors in the jurisdictions you have operations in. There may be registration requirements and some areas may even require a separate legal entity to be established to operate.

This may trigger additional tax filings state-side such as Form 926, Form 5471, Form 8858, or Form 8865. If the school opens a bank account abroad, a Report of Foreign Bank and Financial Accounts or FBAR filing may be required. Failure to file many of these international filings can come with steep penalties.

If a foreign subsidiary is also created, and the school and the foreign subsidiary have intercompany transactions for goods or services, including intellectual property, the school may want to consult with a transfer pricing expert to have a transfer pricing study done. 

Conducting any activity internationally can come with complex tax issues, but we’re here to guide you through the process no matter what end of the pool you may be in. If you have questions about international tax issues or your particular situation, please contact our Independent Schools team. We’re here to help. 

In an industry where challenges abound when it comes to serving employees with robust physical and mental well-being support, we wanted to share this article from Construction Executive about construction companies that are taking the lead in creating a “culture of caring.”

As you’ll see in the article, companies who are doing well-being right are taking a variety of actions every day to help ensure that their employees feel supported, including:

• Getting leaders and managers out in the field to talk to employees (don’t just send emails)
• Giving everyone a voice
• Prioritizing mental health
• Finding and addressing root causes of employee burnout and stress
• Looking at well-being from a systemic perspective, the same way you look at workplace safety

As we’ve seen in our work with clients in the construction industry, running a successful company depends to a large extent on a loyal, satisfied, and (physically and mentally) healthy workforce. Companies that take care of their people are the companies well positioned for financial success.

That’s why BerryDunn has a well-being, culture, and engagement consulting team. If you’re looking for a simple way to assess your current employee well-being program, and actionable steps to improve, start by downloading our Well-being Maturity Model or scheduling a call with a member of our team.

Read this if you work at a broker-dealer.

On August 10, 2023, the Public Company Accounting Oversight Board (PCAOB) issued its 2023 Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers. This report covers 2022 inspections. Although the report is focused on the deficiencies by auditors during their audits, examinations, and reviews of broker-dealers, we share our key takeaways from the report below, including how these deficiencies may impact your organization. 

Examination engagements

Broker-dealers who do not claim exemption from the Customer Protection Rule must file an annual compliance report indicating their compliance (or non-compliance) with the financial responsibility rules. Auditors must conduct an examination engagement over the broker-dealer’s compliance with the financial responsibility rules. This examination must be conducted in accordance with the PCAOB’s Attestation Standard (AT) No. 1. The financial responsibility rules are: (1) the Account Statement Rule, (2) the Reserve Requirements Rule, (3) the possession or control requirements of the Customer Protection Rule, and (4) the Quarterly Security Counts Rule. The PCAOB found deficiencies with auditors’ testing of all of these rules but, most of the deficiencies were found in the Account Statement and Reserve Requirements Rules:

• Account Statement Rule: Firms (the auditor) did not test, or sufficiently test, controls ensuring that all customers received their account statements either electronically or by mail. In addition, firms did not test, or sufficiently test, controls over customer consent to receive account statements electronically and whether those customers were able to access their account statements. Firms also did not test, or sufficiently test, controls over the completeness and accuracy of information in accounts.

FINRA Rule 2231 (the Rule), which covers customer account statements, in general, indicates that account statements must be sent to customers at least every calendar quarter. The Rule also lists which items must be included on the account statement. But the Rule does not necessarily go into detail on ensuring receipt of/access to account statements. Amendments to the Rule have been announced but are not effective until January 1, 2024. The amended Rule indicates “a member may satisfy its delivery obligations under this Rule by using electronic media, subject to compliance with standards established by the SEC on the use of electronic media for delivery purposes.” And, as indicated in FINRA Notice to Members 98-03 (which was published on January 1, 1998), “broker-dealers should consider the need to establish procedures to ensure the applicable delivery obligations are met and should take reasonable precautions to ensure that information transmitted using either electronic or paper media is delivered as intended.” Thus, although still not explicitly stated in the Rule, it does appear there is an expectation by the SEC, FINRA, and the PCAOB that controls over receipt of/access to account statements are maintained.

In our experience, having controls over the delivery and actual receipt of the account statements is equally as important as ensuring the account statements are provided timely and include all the required information. For instance, if account statements are provided electronically, is the link to access the account statement periodically tested to help ensure it is accessible? If such controls are not in place, your auditor may request they be implemented. You may also consider having your auditor review your account statement controls in advance of them performing audit procedures to help ensure you have included all the controls they expect to see. This may also be an opportunity to eliminate controls they do not consider to be key to compliance with the Account Statement Rule.

• Reserve Requirements Rule: Firms did not sufficiently test controls related to the determination of credit balances reported within the customer reserve computation pursuant to Exhibit A of the Customer Protection Rule. Firms also did not test, or sufficiently test, controls over the broker-dealer’s establishment and maintenance of a special reserve bank account for the exclusive benefit of its customers or for broker-dealers in accordance with the Reserve Requirements Rule.

Proactive auditor communication

Similar to the above, it may be worthwhile holding conversations with your auditor well in advance of their planned procedures to see if there are any gaps in expected controls they identify. Being proactive will give your team ample time to implement such controls and help ensure they are in accordance with auditor expectations. This is especially important as it relates to determination of credit balances—although every broker-dealer must comply with Exhibit A of the Customer Protection Rule, determining credit balances is largely dependent on your broker-dealer’s operations and processes. Thus, internal controls expected to be in place will be largely dependent on your organization’s specific operations and processes.

Specific to the special reserve bank account, the Customer Protection Rule indicates broker-dealers must obtain and preserve a written notification from each bank for this type of account. This notification must indicate the bank was informed of the purpose of the account and the balances are being kept separate from any other accounts maintained by the broker-dealer at the bank. Furthermore, the broker-dealer must have a written contract with the bank indicating the cash and/or qualified securities will not be used as security for a loan and are not subject to any right, charge, security interest, lien, or claim of any kind. Broker-dealers should have internal controls in place to help ensure compliance with these provisions of the Customer Protection Rule and to help ensure they remain compliant should there be changes to their banking relationships.

Review engagements

For those broker-dealers that do claim exemption from the Customer Protection Rule, they must file an annual exemption report. This exemption report contains various assertions made by management for the fiscal year. Auditors must perform a review of this exemption report in accordance with the PCAOB’s AT No. 2. The PCAOB found a considerable uptick in deficiencies in review engagements, having examined 52 engagements with 21 of those engagements with identified deficiencies. This 40% deficiency rate was a 12% increase from 2021’s inspections and a 17% increase from 2020’s inspections. Some of the most notable deficiencies identified by the PCAOB (in bold font below) were:

• Firms did not evaluate evidence obtained in the audit of the financial statements that contradicted broker-dealer assertions regarding compliance with the exemption provisions in exemption reports. These review engagements are often performed simultaneously with the financial statement audit of the broker-dealer, and the audit firm should be leveraging the work conducted during the financial statement audit to adequately perform the review engagement. However, this also means that if contradictory evidence is found during the financial statement audit, such as identification of the broker-dealer holding customer funds, this evidence needs to be considered while performing the review engagement.
• 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. A review is substantially less in scope than an audit or examination and primarily consists of inquiries. Auditors are required to make inquiries regarding the controls the broker-dealer has in place to maintain compliance with the exemption provisions as well as those monitoring procedures in place to help ensure compliance is maintained throughout the fiscal year. These controls need not be tested but the auditor should document the results of these inquiries. This is another area where being proactive can be beneficial, especially if your broker-dealer plans to enter a new business line. Hold discussions with your auditor early on to determine if controls remain adequate or if revisions may be necessary.
• Firms did not accurately identify in their review reports assertions made by broker-dealers in their exemption reports. As noted above, broker-dealers must file annual exemption reports. These exemption reports contain various assertions made by management. The auditor, through their review engagement, tests these assertions (primarily through inquiry) and ultimately issues a review report on these assertions. The auditor’s review report should mirror the assertions made in management’s exemption report. Although it is the responsibility of the auditor to check this when drafting the review report, broker-dealers should pay close attention to this when reviewing the auditor’s draft review report. If inconsistencies between management’s exemption report and the auditor’s review report are identified, this should be brought to the attention of the auditor.

Audits of financial statements and supplemental information

Deficiencies found within financial statement audits continue to be primarily centered around those areas that tend to have a higher risk of material misstatement. We specifically want to call out (1) revenue, (2) related party relationships and transactions, and (3) expenses and related accruals. These areas had deficiency rates of 34%, 33%, and 29% in 2022, respectively.

• Revenue tends to be the most complex and sensitive area in a broker-dealer financial statement audit. This can be due to many reasons such as its complexity in being calculated, its impact on net capital, and the sensitivity of its related required disclosures (through ASC 606). Most revenue deficiencies were related to firms that did not adequately respond to the risks of material misstatement for each relevant assertion of significant revenue accounts and disclosures. Given its sensitivity, revenue is often deemed a fraud risk (and thus a significant risk) by auditors. Auditing standards also include a presumption that improper revenue recognition is a fraud risk in every audit. Although this presumption can be overcome, it would likely be a high bar to overcome this presumption in a broker-dealer audit. As a result, your auditor will likely perform extensive tests of details on your revenue streams. This testing will likely differ depending on the revenue stream. This testing can also prove to be very time-consuming for your team, as you will likely have to pull various documents and agreements to support the auditor’s testing selections. Thus, it is important to set expectations with auditors early on, gaining an understanding of their anticipated testing plan, and possibly seeing if some of that testing can be spread out throughout the year, if time and resources permit.
  
  With the adoption of ASC 606, not only did revenue recognition change, so did revenue disclosures. The new disclosures are extensive and include disclosures around performance obligations; the nature, amount, timing, and uncertainty of revenue and cash flows and how they’re affected by economic factors; and variable consideration, to name a few of the requirements. You should work closely with your auditor to help ensure your revenue disclosures are complete and accurate. This close interaction becomes especially important if your broker-dealer enters new business lines.
• Related party relationships and transactions also tend to be a highly complex area in broker-dealer financial statement audits. This tends to be due to the subjectivity of related party transactions. Many broker-dealers have expense sharing arrangements with related parties and these expenses are often the largest in the financial statements, making them a high-risk area in nearly every broker-dealer financial statement audit. The PCAOB found that firms did not test, or sufficiently test, the accuracy and completeness of data used to allocate expenses or revenues between broker-dealers and their affiliates. It is critically important for broker-dealers to maintain well-documented expense sharing arrangements and maintain adequate documentation supporting expense sharing transactions and calculations.

Net capital also continues to be an area with high deficiency rates, with 11 of 41 audits having deficiencies in 2022 (27%, up from 18% in 2021). Deficiencies were primarily related to the auditor not performing sufficient procedures over allowable assets, adjustments to net worth, minimum net capital requirements, fidelity bond coverage deductions, and securities haircuts. This is another area where documentation can be key—especially documenting management decisions that may be considered aggressive (for instance, identifying an asset as allowable based on an interpretation of existing guidance). 

The PCAOB’s inspection deficiencies cover a wide variety of areas in the audits, examinations, and reviews of broker-dealers. Although these deficiencies are the primary concern of your auditor, these deficiencies will likely impact your broker-dealer as your auditor implements new procedures to remediate these deficiencies. Consider asking your auditor for the results of their latest inspection to see if their deficiencies, if any, may impact your next audit, examination, or review.

As always, if you have any questions or thoughts, please don’t hesitate to reach out to BerryDunn’s broker-dealer services team or use our Ask the Advisor feature.