• A financial statement audit evaluates whether a company’s financials are fairly presented in accordance with applicable accounting standards. An integrated audit also includes an assessment of internal controls over financial reporting.

• Common audit mistakes include late or missing provided-by-client (“PBC”) requested submissions, insufficient or unreliable documentation that hinders effective risk assessment, weak internal and IT controls, and errors in applying accounting standards.

• Preparing early, understanding the internal control environment, and training staff can help your company provide relevant and reliable information, which is critical for assessing audit risk and demonstrating compliance with applicable laws and regulations.

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Financial statement audits are a critical checkpoint for companies, stakeholders, and investors. While the process has its limitations, the goal of an audit is to provide reasonable assurance that the company’s financial statements are free of material misstatement (whether due to error or fraud).

However, the audit process is only as effective as the broader environment supporting it — including timely and reliable financial information, a well-resourced accounting function, effective oversight by the board or audit committee, and a clear understanding of the entity’s operations and the regulatory landscape of its industry.

Many organizations approach audit season underprepared or unaware of the common pitfalls and complex or nontraditional transactions that can delay the process, increase costs, or raise compliance concerns.

In this article, we explain the financial statement audit process, common mistakes we see companies make during external audits, and best practices that lay the foundation for a smoother audit experience.

Understanding Financial Audits

During a financial statement audit, an independent registered public accounting firm follows generally accepted auditing standards (GAAS) and assesses your company’s financial records, transactions, and reporting processes. Independent auditors gather and evaluate relevant and reliable evidence to determine whether the financial statements are presented fairly — following generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another applicable financial reporting framework.

The process typically follows these phases:

1. Audit planning and risk assessment: External auditors work closely with company management to understand the operations of the business, identify significant risk areas, and develop an audit strategy that is unique to the organization.

2. Internal control evaluation: The auditor assesses the design and operating effectiveness of internal controls over financial reporting, often through walkthroughs and targeted testing of key controls. The results of this evaluation directly inform the auditor’s risk assessment and the nature, timing, and extent of substantive audit procedures. In an integrated audit, this process also includes gathering information to develop an opinion on the effectiveness of internal controls. Auditors pay particular attention to information technology general controls (ITGCs), which are foundational to the reliability of automated processes and system-generated reports. If the auditors identify material weaknesses, they may need to disclose them in the financial statement footnotes or the auditor’s report (depending on the severity and context).

3. Substantive testing: The auditor gathers evidence by examining transactions, account balances, and disclosures through sampling, confirmations, and recalculations. Strong internal controls impact the audit team’s risk assessment and may allow the team to reduce the amount of substantive testing required.

4. Conclusion and reporting: The auditor drafts the opinion letter, communicating findings to management and those charged with governance.

10 Common Types of Mistakes Made in Public Audits

Despite best intentions, many organizations encounter issues during the annual audit that delay timelines, increase costs, or raise red flags. Here’s a look at some common mistakes and why they matter:

1. Inadequate Documentation of Internal Controls

Many companies fail to maintain sufficient documentation around their internal control procedures. This lack of documentation makes it difficult for auditors to understand and — if necessary — test the design, implementation, and effectiveness of key controls. As a result, auditors may need to perform additional walkthroughs or expand their substantive testing — potentially increasing audit costs and timelines.

For publicly traded companies, this issue can have additional implications under Section 404 of the Sarbanes-Oxley Act (SOX). Section 404(a) requires management to assess and report on the effectiveness of internal control over financial reporting (ICFR). Section 404(b) requires the independent auditor to attest to and report on management’s assessment for accelerated filers.

If the auditors deem internal controls ineffective, management must disclose material weaknesses in its annual filing with the SEC. This can affect investor confidence, internal resource allocation, and external perceptions of the company’s governance. These findings may also place added pressure on the accounting team to remediate deficiencies under tight deadlines while still managing the financial close and reporting cycle.

2. Late or Incomplete Audit PBC Requests

Prior to audit fieldwork, the audit team sends a “provided by client” (PBC) list to management outlining the documents and financial data auditors need. Submitting incomplete or delayed items stalls fieldwork and may increase audit fees.

3. Improper Revenue Recognition

Misapplying Accounting Standards Codification (“ASC”) 606 or lacking support for revenue transactions — including cutoff periods around year-end — is a recurring audit issue. Companies often struggle to identify and document performance obligations in their contracts with customers and allocate the transaction price appropriately among those obligations.

These issues are especially common in arrangements involving bundled products or services, where the timing and pattern of revenue recognition may differ by deliverable. Inadequate documentation or inconsistent application of these principles can lead to audit adjustments or the need for expanded testing.

4. Weak IT General Controls

Deficiencies in ITGCs — such as user access management, change management, physical security of IT systems, intrusion detection, and system backup and recovery processes — can compromise the integrity of financial reporting systems and result in control deficiencies or audit findings. Increasingly, cybersecurity risk is also a critical area of concern, particularly as companies face heightened exposure to data breaches and unauthorized access.

In cases where companies outsource key processes or use cloud-based platforms that affect financial reporting, it’s important to obtain and evaluate SOC 1 Type 2 reports from service providers. These reports help assess whether the third party’s control environment supports reliable financial reporting. Failing to obtain or properly review these reports can result in audit scope limitations or the need for additional procedures.

5. Errors in Lease Accounting

ASC Topic 842  introduced significant changes to lease accounting — increasing complexity in how companies identify, measure, and disclose lease arrangements. Common mistakes include misclassifying leases, failing to identify embedded leases in service or supply agreements, and incorrectly applying accounting treatment for lease modifications and remeasurement events.

Errors can also arise in calculating the right-of-use asset and lease liability, selecting the appropriate discount rate, and preparing the required footnote disclosures. These issues can lead to material misstatements and require substantial audit follow-up — especially when a company maintains a large or decentralized lease portfolio.

6. Inaccurate or Unsupported Estimates

Many key areas in financial reporting rely on management’s judgment, especially when it comes to technical estimates such as goodwill impairment, valuation of long-lived assets, fair value of debt or equity instruments, and contingent liabilities. These estimates require a disciplined process of identifying the appropriate valuation method, documenting key assumptions, and evaluating both supporting and contradictory information.

Errors often arise when companies fail to update assumptions based on current market conditions, skip critical steps in the impairment testing process, or use inconsistent inputs across related estimates. A lack of documentation or transparency around the basis of these estimates raises audit concerns and can result in restatements or material weaknesses in internal controls over financial reporting.

7. Failure to Perform Timely Reconciliations

Account reconciliations help ensure accuracy and reliability in financial statements by comparing information in your financial records with third-party support — such as bank statements or loan documents. Delayed or inconsistent reconciliations of bank accounts, intercompany balances, and key general ledger accounts can indicate larger issues with the financial close process.

8. Insufficient Segregation of Duties

In smaller or rapidly growing companies, it’s common for individuals to handle multiple steps within a transaction cycle — such as initiating, approving, and recording transactions. This increases the risk of errors and intentional misstatements.

A lack of proper segregation of duties introduces risk at the process level and signals broader weaknesses in the company’s control environment (a key component of internal control frameworks). When auditors identify these gaps, they may reduce their reliance on controls and expand the scope of substantive testing — increasing the time and resources required for the audit and potentially causing delays.

Strengthening segregation of duties supports the integrity of financial reporting and reinforces a culture of accountability.

9. Poor Communication Between Financial Reporting and Operational Teams

A disconnect between accounting and other departments — including operations, legal, and procurement — can result in incomplete or misclassified transactions and missed disclosures. This issue is especially common in areas like inventory management, project accounting, and deferred revenue recognition.

It can also impact the identification and disclosure of related party transactions, legal contingencies, and other matters that require input from departments outside of finance. For example, if legal teams do not communicate the existence of pending or threatened litigation, the accounting team may fail to properly record or disclose a loss contingency — resulting in audit findings or misstatements. Clear, documented communication channels between departments are critical for complete and accurate financial reporting.

10. Lack of Readiness for New Accounting Standards

Companies often underestimate the effort required to adopt new standards — such as those related to segment disclosures (ASU 2023-07), income tax disclosures (ASU 2023-09), and business combinations (ASU 2023-05). Late-stage implementation leads to rushed adjustments and audit stress.

Fortunately, many of these issues are avoidable through proper preparation, communication, documentation, and adherence to regulations.

How to Prepare for a Smoother Audit Season

Here are a few best practices to reduce audit risks and improve efficiency in the financial statement reporting process:

• Start early: Preparing for the year-end audit should begin months in advance. Develop and assign internal timelines for PBC deliverables, reconciliations, and close procedures.

• Assess and document internal controls: Clearly document your control procedures. Perform regular controls testing throughout the year and update them to reflect changes in processes or personnel at year-end.

• Invest in training: Your accounting and finance teams should stay current on new standards and audit requirements to reduce the risk of misapplication.

• Leverage technology thoughtfully: Use financial close and compliance tools to streamline workflows, manage documentation, and maintain audit trails.

• Conduct a pre-audit walkthrough: Reviewing key areas of risk, estimates, and controls ahead of time enables your company to address issues before auditors arrive.

• Foster collaboration: Create open channels of communication between auditors, internal accounting functions, IT, operational departments, and the audit committee to minimize misalignment. Collaboration between external auditors and the internal audit team can also be beneficial. However, under the Public Company Accounting Oversight Board’s new QC 1000 standards, internal auditors are considered “other participants” in the audit, which may affect how their work is evaluated and used. Companies should understand the implications of this designation and ensure internal audit activities are properly documented and aligned with audit objectives.

Be Proactive to Prevent Audit Mistakes Before They Happen

A successful audit is more than a compliance milestone. It’s a sign of sound corporate governance. By recognizing common mistakes and addressing them proactively, you can support more accurate and timely financial statements, reduce audit fatigue in your team, and build trust with stakeholders and regulators.

How MGO Can Help

Our Audit and Assurance team supports public companies through every stage of the audit lifecycle — from preparing internal controls documentation to navigating complex accounting standards and responding to auditor inquiries. Our professionals bring deep industry experience to help clients identify risks and streamline financial reporting processes. If you’re approaching audit season or facing challenges with audit readiness, reach out for guidance tailored to your specific needs.

The post 10 Common Public Audit Mistakes That Could Delay Your Timeline appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Ethical training and leadership can help reduce fraud risk in your casino operations.

• Fraud prevention begins with employee awareness, transparency, and well-communicated policies.

• Internal audit and risk management efforts are strengthened by a culture that prioritizes accountability.

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In any casino or Tribal gaming operation, the risk of fraud is an ongoing concern. With high-volume transactions, cash-intensive environments, and multiple operational layers, even well-structured controls can fall short — especially when the organizational culture does not support them.

That’s why your most effective line of defense isn’t just a system or checklist; it’s your people. How they understand expectations, perceive risk, and feel empowered to raise concerns directly influences your organization’s vulnerability to fraud.

The Human Side of Risk

When employees know what’s expected and see ethical behavior valued in practice, they’re more likely to do the right thing — and speak up when something doesn’t seem right.

Organizations that emphasize ethics and transparency often experience earlier issue detection and fewer instances of internal fraud. But that kind of culture isn’t built overnight. It requires leadership, communication, and a consistent message that ethics are part of how the business runs.

In regulated environments like gaming, where reputational and compliance risks are high, building an ethical foundation can offer both protection and a strategic advantage.

It Starts with Awareness

Employees don’t always recognize how certain actions — like offering excessive comps, skipping documentation, or bypassing approval workflows — can trigger risk. Regular, practical training helps close that gap.

Effective ethics training should be more than a once-a-year checkbox. It should reflect real-world scenarios and encourage open dialogue. Share anonymized examples of past issues, explore how breakdowns happen, and help staff understand their role in upholding financial integrity.

How leadership responds when someone raises a concern often sends the clearest message about what your organization values.

Leadership Shapes Culture

Ethics must be proven — not just stated. When senior leaders model accountability, ethical behavior becomes the standard across the organization.

This includes how issues are addressed, how support is shown for audit and compliance teams, and how ethics are reflected in performance discussions. When integrity is embedded in daily decisions, it helps foster consistency across departments.

Aligning Controls with Culture

While internal controls are essential — segregation of duties, dual approvals, surprise audits — they’re most effective when backed by a culture that supports their purpose.

For instance, employees are more likely to follow promotion approval processes when they understand why the rules exist. Controls are embraced, not resisted, when they’re reinforced by open communication and consistent expectations.

A culture that values transparency doesn’t cut fraud risk, but it creates an environment where controls are more likely to succeed.

A Real-World Perspective

One gaming organization created quarterly “Fraud Awareness Spotlights” using anonymized case studies to highlight areas where controls had been bypassed. These discussions opened space for employees to ask questions, learn from past missteps, and better understand their role in prevention.

Over time, the organization saw an increase in early reporting of process issues — helping management act before small problems escalated.

This wasn’t about policing behavior; it was about creating shared ownership over risk.

Sustaining the Effort

Building a culture of ethics is not a one-time initiative. It requires ongoing reinforcement through regular training, consistent communication, and support from leadership at all levels.

At MGO, we help casinos and Tribal gaming organizations develop fraud prevention strategies that reflect your unique culture and operational structure. Whether you’re refining reporting channels, enhancing staff education, or aligning audit procedures with your values, our team can help you build a stronger, more resilient organization.

The post Build a Culture of Ethics to Prevent Casino Fraud appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• A structured procurement cycle, from needs assessment to strategy updates, makes sure you’re compliant, fiscally responsible, and aligned with your community goals. 

• Strategic considerations such as risk management, transparency, sustainability, and technology help governments to build resilient procurement processes. 

• You should adhere to regular policy reviews and robust risk management practices to strengthen your accountability and maintain public trust. 

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In today’s intricate fiscal landscape, procurement for state and local governments has evolved beyond simple acquisition. It now serves as a strategic function that balances regulatory compliance, fiscal discipline, access, and innovation. This article provides a detailed exploration of procurement processes, key considerations for management, best practices, and risk management, offering valuable insights for CFOs, controllers, business managers, and procurement officers.

What Does the Procurement Cycle Look Like?

The procurement cycle to purchase or obtain goods and services for state and local governments is a multifaceted journey that requires careful planning and execution at every stage. From initial planning and needs assessment to the final closeout and lessons learned, each phase is critical in making sure procurement activities align with strategic goals and deliver value to the community.

This section outlines the key considerations at each stage of the procurement process, providing a comprehensive framework for effective management. By focusing on activities like confirming funding sources, drafting solicitations, evaluating proposals, awarding contracts, and monitoring performance, government entities can navigate the complexities of procurement with confidence. These considerations are designed to maintain fairness, transparency, and compliance while prioritizing best value and sustainability. Through diligent attention to these aspects, procurement professionals can enhance their strategies and contribute to the successful achievement of organizational objectives.

Procurement Process for State and Local Governments

The diagram above depicts the entire procurement cycle for an individual transaction from the initial award through the procurement closeout and lessons learned. However, this relates to an individual procurement – the process is much more complicated and there are some additional steps that are just as important including monitor contract performance, conduct post-contract review, and update procurement strategies. A structured procurement process is essential for achieving strategic alignment and fiscal responsibility. 

Step 1: Identify Needs

The procurement journey begins with identifying the specific needs of the government entity. This involves a thorough assessment of requirements to make sure that procurement aligns with the organization’s strategic objectives. Engaging stakeholders early in the process can help clarify needs and set the stage for successful procurement.

Step 2: Develop Procurement Plan

Once needs are identified, the next step is to develop a procurement plan. This plan should align with the strategic objectives and budget so that procurement activities support broader organizational goals. A well-crafted procurement plan serves as a roadmap, guiding the entire process and helping to manage resources effectively.

Step 3: Conduct Market Research

Conducting market research is crucial to understanding the vendor landscape. This step involves identifying potential vendors, including diverse suppliers and cooperatives, to establish a competitive and inclusive procurement process. Market research helps uncover opportunities for cost savings and innovation.

Step 4: Draft and Issue Solicitation

With market insights in hand, the next step is to draft and issue a solicitation. Whether it’s a Request for Proposal (RFP), Invitation for Bid (IFB), or Request for Quotation (RFQ), the solicitation must include a clear scope and evaluation criteria. This allows vendors to understand the requirements and can provide accurate and competitive responses.

Step 5: Evaluate Responses

Evaluating responses is a critical phase where the best value approach is applied. Using a scoring matrix helps objectively assess each proposal, bid or quote against predefined criteria. This provides transparency and fairness in the selection process, leading to the best possible outcome for the government entity.

Step 6: Negotiate and Award Contract

After evaluating responses, negotiations with the selected vendor begin. This step involves finalizing terms and confirming proper documentation and notice of the award. Effective negotiation can lead to better contract terms and conditions, benefiting both the government and the vendor.

Step 7: Monitor Contract Performance

Monitoring contract performance is essential to making sure deliverables are met and payments are made according to the contract terms. Tracking risk indicators and maintaining open communication with vendors helps mitigate issues for project success.

Step 8: Conduct Post-Contract Review

Once the contract is completed, conducting a post-contract review provides valuable insights. This step involves evaluating vendor performance and identifying lessons learned. Such reviews are crucial for continuous improvement and enhancing future procurement activities.

Step 9: Update Procurement Strategies

The final step is to update procurement strategies based on data and insights gained from the post-contract review. This continuous improvement approach helps procurement processes remain effective and responsive to changing needs and market conditions. By following these nine steps, state and local government CFOs and procurement officers can streamline procurement processes, achieve strategic alignment, and meet fiscal responsibility. Embracing these best practices will lead to more efficient and effective use of public funds, ultimately benefiting the communities they serve.

Key Considerations in the Procurement Process

The following demonstrates the stages of the procurement process, the related activities, and key considerations for management: 

Other Key Strategic Considerations Throughout Procurement

Strategic considerations extend beyond the immediate transactional aspects. These considerations encompass a broader spectrum of questions that make sure the procurement process not only meets immediate needs, but also aligns with overarching goals and values. Addressing these critical questions is essential for fostering a procurement environment that is compliant, equitable, transparent, and resilient. By focusing on regulatory compliance, risk management access, transparency and public trust, best value, sustainability and resilience, and technology enablement, governments can enhance their procurement strategies to deliver long-term value and maintain public trust.

This section explores these key strategic considerations, providing a framework for thoughtful and effective procurement practices.

How Often Should Procurement Policies and Procedures be Reviewed?

Procurement policies should be formally reviewed at minimum every two to three years. Interim updates may occur more frequently, especially when regulations change, audit findings arise, or new technologies are implemented. Proactive management oversight makes sure policies remain current, enforceable, and aligned with strategic goals.

Procurement Risk Management Checklist

Effective procurement requires a robust risk management strategy. The following checklist outlines key risk categories, areas of concern, and best practice risk mitigations:

1. Compliance Risk

• Key Risk Areas: Inadequate competitive bidding; missing federal documentation
• Best Practice Mitigation: Train staff on requirements under the Uniform Guidance (2 CFR 200) and state laws; use standardized checklists; conduct pre-issuance legal reviews

2. Financial Risk

• Key Risk Areas: Vendor overcharges; contract overruns
• Best Practice Mitigation: Include cost control clauses; milestone payments; regular audits

3. Operational Risk

• Key Risk Areas: Vendor non-performance; supply delays
• Best Practice Mitigation: Prequalify vendors; build performance benchmarks and termination clauses

4. Reputational Risk

• Key Risk Areas: Conflicts of interest (COI); favoritism; transparency concerns
• Best Practice Mitigation: Publish solicitations, bids, and awards publicly; require COI disclosure

5. Strategic Risk

• Key Risk Areas: Misalignment with goals (e.g., sustainability)
• Best Practice Mitigation: Include evaluation criteria for strategic priorities; monitor key performance indicators (KPIs) after award

6. Cybersecurity Risk

• Key Risk Areas: Vendor access to sensitive systems/data
• Best Practice Mitigation: Require minimum cybersecurity standards; conduct IT security reviews pre-award

By embracing these best practices and considerations, state and local governments can streamline procurement processes, mitigate risks, and enhance public trust, ultimately benefiting the communities they serve.

How MGO Can Help

At MGO, we understand the complexities of public sector procurement and the importance of balancing compliance, efficiency, and strategic alignment. Our State and Local Government team provides tailored consulting, audit, and risk management services to help state and local governments strengthen procurement processes, safeguard public funds, and enhance community outcomes.

Whether you need support with policy reviews, compliance oversight, or implementing technology-driven solutions, MGO is here to help your organization achieve greater accountability and impact. Contact us to learn more.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Understanding Procurement Risk Management appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• AI in manufacturing boosts efficiency, but poor data quality can lead to costly errors and flawed forecasts.

• Cyber threats grow as AI connects IT and operational technology (OT) systems. Secure your infrastructure to reduce exposure.

• AI tools risk IP leaks and job disruption. Protect proprietary data and invest in workforce upskills.

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Amid growing cost pressures and dampened sentiment, manufacturers are turning to artificial intelligence (AI) to improve visibility, decision-making, and efficiency across complex operations. According to the Q2 2025 Outlook Survey from the National Association of Manufacturers, 84.7% of manufacturers plan to prioritize digital transformation in the next 12 months — with 21.8% placing significant emphasis on these initiatives.

While 72% of manufacturers already report measurable cost savings and performance gains from AI, overall optimism has dropped to 55.4% (the lowest level since Q2 2020). With rising input costs — particularly tariffs and raw material inflation — manufacturers must adopt AI with discipline and oversight.

But with accelerated adoption comes elevated risk. Manufacturing leaders must proactively manage the challenges AI introduces to avoid exposing the business to unnecessary vulnerabilities. This includes building strong governance frameworks with human-in-the-loop oversight, so critical decisions and outputs are always validated by skilled professionals rather than left entirely to automated systems.

Top 5 AI Risks in Manufacturing (and How to Manage Them)

Here are five critical AI risks manufacturing organizations face — and strategies to manage them responsibly:

1. Poor Data Quality Can Lead to Faulty AI Outputs

Manufacturers generate massive amounts of data from internet of things (IoT) sensors, machinery, and supply chain systems. However, if this data is unstructured or inconsistent, AI algorithms may produce inaccurate or misleading insights. This can result in flawed inventory levels, distorted demand forecasts, and even safety risks due to unreliable quality control systems.

How to manage it: Invest in foundational data hygiene and governance, such as continuous metric monitoring. Standardizing, structuring, and validating data across systems before deploying AI models is critical to ensuring reliable outcomes.

2. Cybersecurity Threats Expand with AI-Driven Connectivity

As AI tools integrate with OT and IoT infrastructure, they increase the attack surface across the manufacturing environment as well as regulatory risk exposure. Legacy OT systems, often not built with security in mind, become vulnerable when connected to AI-driven IT networks.

How to manage it: Implement robust cybersecurity protocols across IT and OT systems and adopt zero-trust architecture. Prioritize threat detection, continuous monitoring, and security-by-design when deploying AI platforms.

3. Risk of Intellectual Property (IP) Exposure

AI tools often rely on proprietary data — including process flows, equipment settings, and production methodologies — to generate insights. When shared on open platforms or in unsecure environments, this sensitive information can be at risk of theft or misuse.

How to manage it: Leverage secure AI environments with limited internet exposure and implement enterprise-wide access controls and data classification protocols. Train staff on responsible data handling practices and limit AI exposure to critical IP when possible.

4. Workforce Disruption from Automation and Digital Tools

AI technologies like computer vision and digital twins are redefining job functions on the factory floor. While these tools enhance efficiency, they may also displace certain roles — such as manual inspectors — unless companies invest in reskilling initiatives.

How to manage it: Develop talent strategies that focus on digital upskilling. Align workforce planning with technology adoption and support employees through change management and training programs.

5. Operational Disruptions from AI Model Failures

Without structured oversight, AI systems can produce unexpected outputs, including “hallucinations” — inaccurate or fabricated information. In critical functions like demand forecasting, these errors can lead to overproduction, tied-up capital, or delays.

How to manage it: Establish a cross-functional AI governance model with clear testing, validation, and human-in-the-loop oversight protocols. Embed monitoring systems to continuously evaluate model performance and flag anomalies early.

How MGO Can Help: Strategic AI Risk Management for Manufacturers

We work closely with manufacturing leaders to develop customized AI governance strategies that align with operational goals and industry regulations. Whether you’re adopting AI for the first time or scaling your digital infrastructure, our solutions — including cybersecurity, risk management, technical accounting, and digital transformation — are designed to help you harness innovation responsibly.

From safeguarding intellectual property to implementing secure, auditable AI platforms, we help you drive performance while reducing exposure to operational, financial, and reputational risk. Let’s build a smarter, safer future for your manufacturing operations together.

The post AI Risks in Manufacturing: How to Protect Your Operations, IP, and Workforce appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• DOJ has narrowed FCPA focus to cartel-linked bribery, shell firms, and TCOs tied to national security threats. 

• Corporate FCPA enforcement shifted to target individuals, reducing business disruption. 

• DOJ guidance now highlights the risk of material support to FTOs and urges stronger compliance controls. 

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On June 9, 2025, the United States Department of Justice’s (DOJ) Deputy Attorney General, Todd Blanche, released new guidance regarding FCPA investigations and enforcement by the department’s Criminal Division. 

The guidance reflects a consistent “America-First” approach, continuing the Trump administration’s pause on FCPA enforcement by introducing additional guidelines designed to “limit undue burdens on American companies operating abroad” and focusing enforcement on conduct that undermines U.S. national interests. In addition, the memo provides more detailed information on how enforcement efforts will be prioritized moving forward. 

Key Takeaways from the Guidelines: 

1. Continued Focus on Cartels and Transnational Criminal Organizations (TCOs): 

The DOJ will maintain its emphasis on the “total elimination” of cartels and TCOs. In addition to investigating bribery that facilitates these organizations, the DOJ will also prioritize “dismantling the financial mechanisms and shell companies used by criminal networks.” This raises the expectations for transaction monitoring by financial institutions and Money Service Businesses (MSBs). Specifically, the memo instructs DOJ prosecutors to determine whether the alleged conduct in cases they pursue: 

• Is associated with the criminal operations of a cartel or TCO; 

• Utilizes shell companies or money launderers known to support such organizations; or 

• Is linked to foreign officials or employees of state-owned entities who have received bribes from cartels or TCOs. 

2. Safeguarding Fair Opportunities for U.S. Corporations: 

The DOJ aims to protect U.S. companies from corrupt foreign competitors by identifying cases where alleged misconduct: 

• Deprived specific and identifiable entities of fair access to compete; or 

• Resulted in economic injury to American companies or individuals. 

3. Advancing U.S. National Security: 

There will be a particular focus on bribery of corrupt foreign officials that may threaten key minerals, deep-water ports, critical infrastructure assets, and the defense industry as a whole. 

4. Prioritizing Serious Misconduct: 

The DOJ will prioritize “serious misconduct” and will not penalize Americans for routine or facilitation payments in jurisdictions where such payments are permitted. 

Furthermore, the prosecution of FCPA cases will now focus on individuals rather than corporate entities, making the process less disruptive for companies. All currently active FCPA cases are centered on individuals responsible for the violations. Additionally, each new case must be escalated to senior DOJ officials for approval and consideration. The DOJ aims to ensure that FCPA enforcement is both expeditious and minimally disruptive to U.S. companies. 

Lastly, the new guidance makes notable reference to the Foreign Extortion Prevention Act (FEPA), indicating that prosecutors will consider whether U.S. companies have been harmed by foreign officials demanding bribes to secure contracts. 

What Does This Mean for Your Company? 

Given the current administration’s focus on Foreign Terrorist Organizations (FTOs) and Transnational Criminal Organizations (TCOs), companies now face increased legal risk of inadvertently providing “material support” to these groups. The definition of material support is broad, encompassing “any property, tangible or intangible, or service,” including currency or monetary instruments, financial services, lodging, training, expert advice or assistance, communications equipment, facilities, personnel, or transportation. Importantly, companies do not need to be directly complicit in making payments to such organizations; liability can arise simply from having knowledge that payments are being made to entities designated as FTOs. This places additional strain on existing compliance programs and controls, requiring companies to ensure they can appropriately capture this knowledge and prevent such transactions from occurring. 

The guidance confirms that, beyond the FCPA pause of February 2025, enforcement will not disappear but will become more targeted in support of U.S. companies and national interests. With a focus on national resources, security, and TCOs, certain industries will be more heavily impacted and should consider the following actions: 

Actions to Consider 

Reassess Your Company’s Risk Profile: 

• Identify whether your organization operates in regions known for cartel or TCO activity, and reassess your risk exposure accordingly. 

Conduct a Risk Assessment: 

• Evaluate risks based on your company’s geographic footprint and operational activities. 

Review International Procurement and Bidding Processes: 

• Examine your escalation procedures when red flags arise, especially if requests for intermediaries or consultants are made in high-risk territories. 

Engage with Security Teams: 

• Collaborate with your company’s security teams, who are often most knowledgeable about physical security in your areas of operation and transport corridors. Including them in the risk assessment process is essential for employee safety and for determining when heightened security measures are necessary. 

Evaluate Treasury and Payment Processing Controls: 

• Assess controls related to payments that could inadvertently involve unknown TCOs or cartels. 

Strengthen Third-Party Onboarding and KYC Processes: 

• Ensure your onboarding process includes robust Know Your Customer (KYC) procedures. Cartels and TCOs often operate through seemingly legitimate businesses and may require you to use their services if you operate in their territories. Understanding beneficial ownership is critical. 

Test and Update Whistleblower Mechanisms: 

• Ensure your whistleblower system addresses both safety and compliance concerns associated with operating in cartel or TCO territories. Update training for employees in high-risk areas and review internal escalation protocols to ensure prompt notification and response. 

Written by Didier Lavion. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Stay Compliant in a Changing Global Enforcement Climate 

As FCPA enforcement pivots toward national security and individual liability, MGO’s team can help your company reassess its compliance risk, especially in regions with cartel or TCO activity. We support cross-functional teams with actionable risk assessments, KYC enhancements, and controls that align with DOJ expectations. Whether updating your whistleblower protocols or safeguarding procurement in high-risk territories, MGO assists your legal and finance teams to strengthen your compliance infrastructure without disrupting core operations. Contact us to learn more.  

The post New Guidelines on FCPA Investigations by the DOJ: What Companies Need to Know  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Proactive compliance risk assessments help state and local governments avoid funding clawbacks, penalties, and reputational damage.

• Strong internal controls, continuous monitoring, and staff training are essential for preventing improper payments and managing regulatory complexity.

• Integrating compliance into broader risk management frameworks builds financial resilience and reinforces public trust.

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Part III: Ensuring Compliance and Financial Integrity – Preventing Improper Payments and Managing Regulatory Risk

This is the final installment in our series, Navigating Fiscal Uncertainty. Having explored budgetary and revenue risks, we now turn to compliance — a cornerstone of public sector accountability.

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Introduction

In an environment of heightened fiscal scrutiny and increasing regulatory complexity, compliance is not just a legal requirement – it is a cornerstone of public trust and financial integrity. For state and local governments, the prevention of improper payments and adherence to regulatory mandates are essential for maintaining both fiscal discipline and the public’s confidence. In Part III of our series, we explore how to conduct compliance risk assessments, prevent improper payments, and establish robust internal controls to manage regulatory risk.

Understanding Compliance Risk

Compliance risk encompasses the challenges associated with making sure all financial operations meet statutory, regulatory, and internal standards. For state and local governments, noncompliance can result in:

• Funding Clawbacks: The return of funds due to noncompliance.
• Penalties and Legal Challenges: Potential fines, litigation, or sanctions under laws such as the False Claims Act.
• Reputational Damage: Eroding the public’s trust in the management of government funds.

Example:

A local government might face a situation where insufficient documentation for vendor payments triggers an audit, resulting in the recovery of funds and significant negative media coverage. Such incidents underscore the importance of rigorous compliance measures.

Approaching a Compliance Risk Assessment

1. Inventory Regulatory Requirements

Mapping the Regulatory Landscape: Begin by identifying all applicable regulations – from federal requirements (such as 2 CFR Part 200 and OMB circulars) to state-specific mandates and internal policies.

Items to Consider:

• What specific federal, state, or local regulations govern your operations?
• Are there any recent regulatory changes that impact your current processes?
• How are these requirements documented and communicated across the organization?

Develop a Compliance Matrix: Create a detailed compliance matrix that links each regulatory requirement to specific internal controls and reporting deadlines. This matrix acts as a roadmap to make sure no requirement is overlooked.

Example:

A county government may develop a matrix that clearly outlines deadlines for submitting grant expenditure reports, documenting employee time for federally funded projects, and procedures for vendor verification. This matrix is reviewed regularly to make sure it reflects current regulations.

2. Evaluate Internal Policies and Controls

Review and Gap Analysis: Conduct a thorough review of existing internal policies, procedures, and controls. Compare these against the compliance matrix to identify any gaps or areas that need improvement.

Items to Consider:

• Are current policies up to date with the latest regulatory requirements?
• What internal controls are in place to prevent improper payments?
• How is documentation managed, and are records readily accessible in the event of an audit?

Documentation Practices: Establish rigorous documentation standards for all financial transactions, approvals, and compliance-related communications. Effective documentation is the first line of defense in audits and regulatory reviews.

Example:

A state department might notice through internal audits that certain expense claims are not supported by adequate documentation. By revising internal guidelines and conducting training sessions, the department improves its record-keeping practices, thereby reducing the risk of noncompliance.

3. Implement Continuous Monitoring and Training

Internal Audits and Real-Time Monitoring: Schedule regular internal audits focusing on high-risk areas like payroll, vendor payments, and subrecipient oversight. In parallel, use compliance management software to monitor key indicators in real time.

Items to Consider:

• What frequency is appropriate for internal audits of high-risk areas?
• Which automated tools can provide early warnings of compliance issues?
• How are audit findings communicated and remedied?

Employee Training and Culture: Invest in ongoing training programs for finance and administrative staff to make sure everyone understands regulatory requirements and proper procedures. Cultivating a culture of compliance helps prevent errors and fraud before they occur.

Example:

A municipal finance department might institute quarterly compliance training sessions and utilize an online learning platform to keep staff updated on new regulatory changes. This proactive approach not only minimizes errors but also reinforces the importance of ethical financial management.

4. Preventing Improper Payments

Segregation of Duties and Pre-Payment Reviews: Implement robust internal controls that separate the responsibilities for authorizing, processing, and reconciling payments. Pre-payment reviews are crucial to make sure each disbursement is supported by the necessary documentation.

Items to Consider:

• Are there clear, defined roles in the payment process to prevent conflicts of interest?
• What checks are in place to verify that payments align with approved budgets and vendor contracts?
• How are duplicate or erroneous payments detected and prevented?

Automated Detection Tools: Leverage technology like AI-driven analytics and duplicate payment detection systems to flag anomalies. These tools can analyze large volumes of transactions to identify irregular patterns that might indicate improper payments.

Example:

A local government might adopt a financial software system that automatically compares vendor invoices with contract terms. When discrepancies are detected – like a duplicate invoice or an invoice that exceeds the agreed-upon amount, the system alerts the finance team for further review.

Key Considerations and Concerns

• Evolving Regulations: The regulatory environment is continually changing. CFOs must stay informed about legislative updates and adjust internal controls accordingly.
• Subrecipient and Vendor Oversight: For organizations that distribute funds to subrecipients or rely on multiple vendors, making sure all partners comply with guidelines is essential. Lapses in oversight can have cascading effects on overall compliance.
• Integration with Overall Risk Management: Compliance should be integrated with broader risk management processes. This established that financial, operational, and regulatory risks are not viewed in isolation but are addressed holistically.

Strategic Recommendations for Compliance

• Build a Comprehensive Compliance Framework: Integrate compliance risk assessments into your overall risk management strategy. Use a combination of internal audits, automated monitoring tools, and periodic external reviews to establish ongoing compliance.
• Regularly Update Training Programs: Keep all employees informed about the latest regulatory changes and internal policy updates. Regular training and clear communication channels help reinforce a culture of accountability.
• Engage External Expertise: Consider partnering with third-party auditors or consultants to provide an objective assessment of your compliance framework. This external perspective can highlight blind spots and offer recommendations for improvement.
• Establish Clear Reporting Channels: Implement secure, anonymous channels for staff to report potential compliance issues or irregularities. An effective whistleblower program not only detects problems early but also reinforces organizational commitment to integrity.

Establishing compliance and preventing improper payments is a critical component of financial management for state and local governments. Through comprehensive compliance risk assessments, robust internal controls, continuous monitoring, and ongoing staff training, CFOs and directors of finance can safeguard public funds and maintain the trust of their communities. By proactively addressing compliance challenges, organizations can minimize legal risks, avoid funding clawbacks, and build a resilient financial infrastructure capable of withstanding future uncertainties.

Series Conclusion: A Proactive Roadmap to Fiscal Resilience

This three-part series has explored the essential elements of managing fiscal uncertainty in state and local government finance. We began with budgetary risk management – emphasizing realistic forecasting, monitoring, and contingency planning. We then examined revenue risk assessments – focusing on diversification, accurate forecasting, and cash flow strategies. Finally, we addressed the critical area of compliance – outlining how to prevent improper payments and manage regulatory risks effectively.

For CFOs and directors of finance, the challenges are significant, but so too are the opportunities. By integrating these risk assessments into strategic planning, leveraging technology, and fostering a culture of transparency and accountability, financial leaders can transform uncertainty into a catalyst for innovation and long-term stability. In doing so, they not only protect public funds but also reinforce the trust that the community places in its government institutions.

As you work to build a resilient financial framework, consider the insights and strategies outlined in this series as a roadmap to navigating today’s complex fiscal environment. Whether you are refining your budgetary forecasts, diversifying revenue streams, or enhancing compliance protocols, proactive risk management will empower your organization to thrive in even the most uncertain times.

How MGO Can Help

At MGO, we understand the unique compliance challenges facing state and local governments. Our experienced team works with public sector leaders to conduct detailed compliance risk assessments, strengthen internal control environments, and implement real-time monitoring systems that reduce your risk of improper payments. We also keep your teams informed and aligned with the latest regulatory changes.

Whether you’re building a compliance matrix, managing subrecipient oversight, or integrating compliance into your broader risk strategy, MGO delivers the experience and the tools to help you stay compliant, protect public funds, and uphold the trust of your community. Contact us to learn how we can support you in creating a stronger, more resilient financial future.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Navigating Fiscal Uncertainty: Risk Management Strategies for State and Local Governments  — Part Three appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Your board should boost tech literacy and structure to oversee innovation, risk, and digital transformation effectively. 

• Staying current on AI, cybersecurity, and data privacy laws is essential for strong technology governance. 

• If you want strong, effective tech oversight, it’ll require cultural alignment, workforce readiness, and smart investment strategies.  

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Technology is no longer just an operational tool; it is a core driver of strategy, risk, and opportunity. For boards, the imperative to innovate is matched only by the responsibility to govern technology effectively. As organizations harness emerging technologies, the boardroom must be equipped to navigate complex issues ranging from regulatory compliance and risk management to cultural alignment and investment prioritization.  

Here we explore the top five boardroom conversations shaping technology governance for directors seeking to foster innovation while safeguarding organizational integrity and value. 

1. Assessing the board’s technological literacy and access to expertise  

• Determine whether the board, as a whole, has the appropriate knowledge and experience with technological innovation and implementation to provide strategic oversight.  

• Assess the board’s familiarity with the company’s technology debt when considering opportunities to implement emerging technologies.  

• Consider whether the circumstances of the company indicate the need to appoint a member with specific and relevant technology expertise. 

• Discuss whether the current board structure supports the strategic technology goals, objectives, and identified risks.   

• Weigh potential decisions for a dedicated technology committee, assigning technology to a specific existing committee, or keeping responsibility with the full board.   

2. Remaining apprised on a shifting regulatory landscape 

• Given the fast-evolving nature of data privacy, cybersecurity, and AI regulations, consider the board’s ability to confirm compliance with all laws and regulations.  

• Request continuing education and updated thought leadership from counsel and other advisors, subscriptions to emerging legislative trackers, etc.  

3. Engagement with management to understand risk management effectiveness  

• Consider whether management has adopted a viable framework that provides accountability and instills trust in its use and deployment of AI. 

• Assess whether the underlying data hygiene of the organization – including data integrity, access and privacy rights protections, effective internal controls, and system security – will enable technology to provide usable and ethical outputs. 

• Evaluate management’s use case identification in prioritizing the opportunity/problem being addressed versus the risk exposure to the organization. 

• Assess how human supervision and continuous monitoring are built into the process to identify and mitigate issues promptly. 

4. Cultural alignment and workforce preparation 

• As technology is being integrated and implemented, consider the appropriateness of training and upskilling the workforce to use and monitor new tools, identify and remedy associated risks, and comply with internal policies, procedures, and external rules and regulations.  

• Determine the existence and robustness of cross-disciplinary change management to foster a cultural of innovation acceptance and empowerment.  

• Discuss management strategies in place to address cultural and operational challenges to widespread adoption and use.  

• Assess the quality and effectiveness of communication throughout the organization to drive employee understanding of the use cases being deployed, changes to workflows, and how their roles may continue to evolve. 

5. Prioritizing technology investment 

• Consider the process applied by management for evaluating use cases against the mission, values, and agreed upon strategy of the organization. 

• Determine whether management’s technology strategy focuses not only on the investment in specific tools and their implementation but includes adequate investments in security and risk management.  

• When planning to deploy AI technology, consider whether critical input is being provided by others responsible for related risks such as cybersecurity teams, general counsel, finance, human resources, and operations.   

Stay Engaged 

Directors are encouraged to stay educated, informed, and in constant contact with management when integrating and utilizing new and complex technologies. The BDO Center for Corporate Governance endeavors to support directors in engaging in effective governance by providing insights, learning, and networking opportunities in collaboration with BDO subject matter specialists, advisors, and peer networks designed specifically for boards of directors. 

Written by Amy Rojik, Rachel Moran and Lee Sentnor. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Supports Boards in Technology Oversight 

As technology becomes central to strategy and risk, MGO helps boards elevate their governance capabilities. From assessing board tech literacy to advising on AI risk frameworks and regulatory compliance, MGO offers tailored insights that empower directors to make informed decisions. Our team supports board and committee structures, provides continuing education on emerging tech, and helps align technology investments with organizational values. With deep experience in cybersecurity, data governance, and digital transformation, we work with you to navigate the complexities of modern technology oversight as it continues to evolve. Contact us to learn more.  

The post Top 5 Boardroom Conversations on Technology Governance  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Many business leaders prioritize short-term wins over essential long-term planning, risking financial and operational consequences.

• Neglecting proactive estate and tax planning — for instance, failing to update beneficiaries — can lead to costly legal issues, delays, and unintended asset transfers.

• Year-round financial planning protects your business, aligns with your legacy goals, and reduces tax exposure through structured decision-making.

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Planning a vacation is second nature. You invest time, research your options, and commit to a date. But when it comes to long-term financial planning, many business owners put it off — often until it’s too late.

This is more than procrastination. It’s human behavior. We naturally prioritize short-term rewards over abstract, long-term needs. Unfortunately, that delay can lead to missed tax opportunities, estate complications, and increased risk to your business and family.

Why Financial Planning Gets Overlooked

Vacations offer immediate benefits — enjoyment, relaxation, and memories. Planning them is fun and socially reinforced. Financial planning, however, is more complex. It involves thinking about scenarios like disability, death, or economic downturns.

Because financial planning doesn’t offer quick rewards, many business owners push it to the back of their to-do list. But that’s where real risks begin to accumulate.

Two Critical Planning Moves That Safeguard Your Business

While every business has unique needs, these two actions can have an outsized impact on protecting your business and legacy:

1. Review Beneficiary Designations

Outdated or incorrect beneficiaries on life insurance policies, 401(k)s, or transfer-on-death accounts can cause major disruptions:

• An ex-spouse could unintentionally receive a payout.

• Children or business partners might be excluded from distributions.

• The estate could face delays or unnecessary taxes.

Action Step: Review all beneficiary forms annually and always after major life or business changes like marriage, divorce, new business partners, or ownership transfers.

2. Update Your Will and/or Trust and Estate Plan

Without a current will, your estate could be subject to state laws that may not reflect your intentions. For business owners, this may mean:

• Assets go to unintended recipients.

• Guardianship decisions for minor children are unclear.

• Operational control or ownership shifts unexpectedly.

Action Step: Revisit your estate plan regularly — especially after key life or business events — and work with professionals to align it with your current goals.

Make Financial Planning Part of Your Annual Business Cycle

Long-term financial and tax planning shouldn’t feel overwhelming. Treat it like any other operational process: break it into manageable steps, assign ownership, and review it regularly.

Here’s how to begin:

• Reframe it as a leadership decision: You’re protecting the future of your business and everyone connected to it.

• Build a planning calendar: Set quarterly check-ins to review financial documents and tax strategies.

• Delegate with intention: Work with tax professionals, estate attorneys, and CFO advisors to create a structured approach.

Just like when you schedule annual audits or strategic planning retreats, financial planning deserves a dedicated place in your calendar.

The ROI of Being Proactive

Vacation memories last a week. A thoughtful financial plan can support your business and protect your loved ones for decades.

By routinely updating beneficiary designations, revisiting estate documents, and aligning tax strategies with your long-term goals, you reduce risk. But, more importantly, you gain clarity, control, and peace of mind. These aren’t just financial tasks; they’re leadership decisions that reflect your commitment to what — and who — matters most.

How MGO Can Help

At MGO, we work with business owners, founders, and families across complex industries — cannabis, technology, life sciences, entertainment, and more — helping them integrate tax, estate, and financial planning into their broader strategy. Whether you’re navigating ownership transitions, building a succession plan, or just trying to simplify your financial picture, our team can help make planning part of your rhythm.

Start now. Build a strategy that supports your business today and protects your legacy for the future. Reach out to our team today to find out how we can help you.

The post Why Your Business Needs Long-Term Financial Planning appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Final Section 987 rules add complex new foreign currency reporting for U.S. owners of foreign disregarded entities, effective in 2025.  

• New “disregarded payment loss” rules may trigger U.S. income inclusions tied to foreign-deductible interest and royalty payments in 2026.  

• Global anti-hybrid tax regimes and Pillar Two rules reduce the effectiveness of FDE strategies and may increase global minimum tax exposure.  

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Since the Tax Cuts and Jobs Act was enacted in 2017, the use of foreign disregarded entities (FDEs), often achieved via the check-the-box election, has increased. FDEs are often used to reduce U.S. federal income tax, commonly with respect to global intangible low-taxed income (GILTI) inclusions, but also in other circumstances, including the base erosion and anti-abuse tax and intellectual property repatriation. In many cases, the use of FDEs has been an effective strategy and relatively easy to implement with minimal tax cost. However, two sets of recently promulgated U.S. tax regulations have altered the scales by creating potential new challenges for U.S. owners of FDEs beginning in 2025.  

Background

From a U.S. tax perspective, the use of FDEs can effectively achieve several tax planning objectives with little downside. For example, FDEs can simplify the application of the passive foreign investment company (PFIC) rules, eliminate various Subpart F inclusions, and reduce GILTI inclusions by aggregating qualified business assets or absorbing the activities of a loss-making entity. Additionally, from a compliance standpoint, FDEs generally require simpler and less comprehensive federal tax filings (Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)) compared to the much lengthier and onerous Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, that is required for controlled foreign corporations.   

2024 Brings New US Complexity 

On December 11, 2024, the IRS released final and proposed regulations under Internal Revenue Code Section 987 with respect to foreign currency gains and losses. Accounting for foreign currency fluctuations is not a new concept, and there have been multiple rounds of proposed but never finalized regulations on this complex topic dating as far back as 1991. As a result of the prolonged uncertainty, taxpayers have generally been able to use “any reasonable method” consistently applied.  

As a result of the final Section 987 regulations, accounting for foreign currency fluctuations will become more complex for FDEs. Unfortunately, there is virtually no time to prepare for this difficult exercise because the final regulations are generally effective for tax years beginning after December 31, 2024, that is, 2025 for calendar year taxpayers. For publicly traded companies, this complexity will need to be addressed in the first quarter to account for provision implications. 

The new regulations address the calculation of currency gains or losses to be reported by the tax owner of “qualified business units” (which generally include operational FDEs) when the tax owner and the FDE have different functional currencies. The final regulations provide detailed guidance requiring current and historical data points that may be quite difficult for many taxpayers to access. For example, Treas. Reg. §1.987-4 provides guidance for calculating the foreign currency gains and losses related to ongoing operations and Treas. Reg. §1.987-10 on the complex transition from previously used approaches to the new approach, and whether a transition gain should be taxed all at once or spread over 10 years. Treas. Reg. §1.987-11 and §1.987-12 discuss the approach to be taken when there is a transition loss.  

The final regulations offer several elections that may significantly simplify the calculation of currency gains or losses. Additionally, the proposed regulations that were simultaneously released provide an alternative election that may further simplify reporting. Some taxpayers could benefit from early adoption of the proposed regulations and should assess the implications of doing so, especially since early adoption requires application of the proposed regulations in their entirety, not a piecemeal selection of some portions of the proposed regulations.  

The second set of final regulations creating complexity for taxpayers with FDEs in their structure is the disregarded payment loss (DPL) rules. This is a subset of longstanding regulations regarding dual consolidated losses (DCLs), which are applicable to U.S. tax owners of (direct or indirect) FDEs and aimed at preventing “double dipping” whereby a single economic loss is used twice, once to offset foreign taxable income and again to offset U.S. taxable income.  

Historically, the calculation of a DCL ignored disregarded transactions. This is still the case; however, the new regulations, specifically Treas. Reg. §1.1503(d)-1, now require a U.S. tax owner of FDEs to recognize income equal to a “disregarded payment loss,” which is the net loss attributable to disregarded payments of interest or royalties that are deductible under foreign tax law.  

Pursuant to the final DPL regulations published on January 14, 2025, taxpayers must now maintain a complex and extremely detailed registry of transactions between disregarded entities and the ultimate U.S. tax owner and calculate U.S. income inclusions to create a symmetry that is directionally more in line with the historical concerns of foreign countries. Consequently, to the extent the disregarded payments involve interest or royalties, the DPL regulations may result in a new tax inclusion to the U.S. taxpayer. These rules are effective for tax years of the U.S. tax owners beginning on or after January 1, 2026. Like the foreign currency regulations, U.S. tax accounting for transactions involving FDEs’ foreign currency fluctuations will be more complex than transactions involving subsidiaries classified as corporations for U.S. tax purposes.   

Foreign Country Considerations 

Many foreign countries have expressed concerns about the potential lack of symmetry, that can occur when FDEs are used, in particular the opportunity to create a local tax deduction without a corresponding income inclusion in the U.S. Several countries have responded by unilaterally adopting a variety of anti-abuse regimes, often referred to as anti-hybrid rules. While this country-by-country approach continues (for example, Germany finalized its anti-hybrid rules in December 2024), a coordinated effort led by the OECD has produced a more global approach to anti-hybrid rules. In particular, the Pillar Two regime takes direct aim at hybrid structures and generally disregards U.S. tax classification elections altogether. Thus, the new 15% minimum tax introduced as part of the global anti-base erosion (GloBE) rules applies to every entity without regard to the entity’s classification as a corporation or disregarded entity for U.S. tax purposes. 

Written by Brandon Boyle, Chip Morgan and Helen Vu. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Global Structure Planning in a New Regulatory Era: How MGO Can Help

With new U.S. regulations on foreign currency and disregarded payments — as well as increasing global scrutiny of hybrid structures — multinational businesses need to rethink how they use foreign disregarded entities (FDEs) in tax planning. Navigating the evolving complexities around FDEs requires more than just technical know-how; it takes a proactive, strategic approach. That’s where MGO comes in. Our International Tax team stays ahead of regulatory developments like the new Section 987 and disregarded payment loss (DPL) rules, so you don’t have to.  From cross-border structuring to provision analysis, we bring clarity and compliance to a shifting global tax landscape. Contact us to learn more at mgocpa.com. 

The post Revisiting the Cost/Benefit Analysis of Foreign Disregarded Entities: Recent US Regulations  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• State and local governments should actively assess the reliability and timing of revenue streams to avoid disruptions caused by overreliance on volatile sources.

• Scenario-based forecasting, which is informed by historical trends and external factors, helps finance leaders plan for best, base, and worst-case outcomes.

• Maintaining liquidity reserves and exploring diverse funding sources, such as service fees or public-private partnerships, can protect against shortfalls and enhance your fiscal resilience.

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Part II: Revenue Risk Assessments — Diversification, Forecasting, and Cash Flow Strategies

This article is Part II of our series on Navigating Fiscal Uncertainty. Building on our discussion of budgetary risk, we now turn to revenue risk — the unpredictability of income that can undermine even the most well-crafted financial plan.

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Introduction

Revenue stability is the lifeblood of any public sector organization. For state and local governments, the challenge is not only to predict revenue flows accurately but also to diversify sources and manage cash flow effectively amid uncertainty. In Part II of our series, we delve into revenue risk assessments, exploring how to evaluate revenue streams, forecast future revenues, and mitigate risks associated with revenue volatility.

Understanding Revenue Risk

Revenue risk encompasses uncertainties related to the reliability, predictability, and timing of revenue. This includes:

• Revenue concentration: High dependency on a sole source, like federal funding or property taxes.
• Timing mismatches: Differences between when revenue is expected versus when it is actually received.
• External factors: Economic shifts, policy changes, and demographic trends that can influence revenue generation.

Example:

Imagine a city that relies heavily on sales taxes. During an economic downturn, consumer spending might decrease, leading to lower-than-expected sales tax revenue. Without alternative revenue sources or sufficient reserves, this shortfall could force difficult budget cuts or service reductions.

Approaching a Revenue Risk Assessment

1. Identify and Categorize Revenue Streams

Mapping sources: Start by categorizing revenue into distinct streams:

• Federal and state funding (i.e., grants): Often one of the largest sources but subject to political and economic variability.
• Local taxes and fees: Property, sales, or service taxes that provide a more stable base.
• Contract revenues and service fees: Income from contracts or fee-for-service programs.

Items to Consider:

• What percentage of total revenue comes from each source?
• Which revenue sources are most volatile or subject to external pressures?
• Are there opportunities to broaden the revenue base?

Example:

A local government might discover that 60% of its revenue is derived from property taxes, while federal funding only account for 20%. Recognizing this distribution helps in understanding which areas might be more susceptible to shortfalls and where diversification efforts should be focused.

2. Forecast Revenue with Precision

Historical trend analysis: Review historical revenue data to establish trends and identify seasonal or cyclical patterns. Historical analysis can reveal underlying patterns that help refine forecasts.

Items to Consider:

• What are the historical growth rates for each revenue stream?
• Are there seasonal variations that affect revenue collection?
• How have previous economic downturns affected revenue?

Scenario forecasting: Develop different revenue scenarios to account for uncertainty:

• Optimistic scenario: Based on favorable economic conditions and full appropriation of funds.
• Base scenario: Reflects moderate growth consistent with historical trends.
• Pessimistic scenario: Incorporates potential cuts or delays in revenue.

Example:

A county government might use historical data to project a 3% annual increase in local tax revenue under normal conditions. However, by modeling a pessimistic scenario where an economic downturn leads to a 2% decline, the finance team can better prepare for cash flow challenges.

3. Monitor Revenue Realization and Manage Cash Flow

Regular reporting and reconciliation: Implement robust reporting processes that regularly compare forecasted revenue against actual collections. This involves setting up monthly or quarterly review cycles.

Items to Consider:

• Are revenue collection processes integrated with financial reporting systems?
• How frequently is revenue data reconciled against bank deposits and collection records?
• What mechanisms are in place to alert management when significant discrepancies occur?

Cash flow management: Revenue timing is critical. Even if overall revenue targets are met, delays in cash inflows can create operational challenges.

• Liquidity reserves: Maintain sufficient cash reserves to bridge gaps between revenue receipts and expenditure obligations.
• Timing strategies: Consider measures such as accelerating collections or negotiating payment terms to better align revenue timing with expense schedules.

Example:

A municipal finance department may notice that although annual revenue targets are met, monthly cash flow reports reveal recurring shortfalls during the first quarter of the fiscal year. By establishing a reserve fund and adjusting collection strategies (such as offering advance payment incentives), the department can mitigate cash flow issues.

4. Diversify Revenue Streams

Mitigate concentration risk: Diversification reduces the risk associated with dependence on a single revenue source. Explore new revenue opportunities or expand existing streams.

Items to Consider:

• Are there underutilized local assets that could generate additional income?
• Can fee-based services be expanded or enhanced to create steady revenue?
• What partnerships or innovative financing arrangements can be pursued?

Example:

A state government that relies primarily on federal funding to fund infrastructure projects may consider developing public-private partnerships for infrastructure projects. These arrangements can generate additional revenue streams while sharing risk with private sector partners.

Effective revenue risk assessments require a comprehensive understanding of your revenue sources, accurate forecasting, and proactive cash flow management. By categorizing revenue streams, forecasting with scenario-based approaches, monitoring real-time performance, and diversifying revenue sources, state and local governments can build a more resilient financial foundation. The key is to remain vigilant and adaptable — ready to adjust strategies as external conditions change, to make sure revenue uncertainties do not compromise public services or fiscal stability.

How MGO Can Help

At MGO, we understand that revenue uncertainty can undermine even your strongest budgets. That’s why we work with state and local governments to assess revenue risks with precision and insight. Our State and Local Government team helps you map and analyze revenue sources, build robust scenario-based forecasts, and design effective cash flow strategies tailored to your unique operational needs.

From improving reconciliation processes to identifying new revenue opportunities, we can support you in building a diversified and resilient financial foundation … so your community can thrive even amid the murkiest uncertainty. Contact us to learn more.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Navigating Fiscal Uncertainty: Risk Management Strategies for State and Local Governments — Part Two appeared first on MGO CPA | Tax, Audit, and Consulting Services.