• Know which regulations apply to your business, such as ITAR or ER, and identify high-risk jurisdictions.  

• Follow key elements of an export control and sanctions compliance program, including senior management commitment, risk assessment, internal controls, and training. 

• Vigilantly assess potential red flags and risk factors on a per-transaction basis, using resources like BIS “Red Flags” and Know Your Customer guidance.  

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Considering the rapidly changing export controls and sanctions landscape, companies need to ensure their compliance programs respond to the latest-breaking risks and demands from regulators.  While the scope and volatility of trade sanctions may seem daunting, companies can protect themselves from costly violations by proactively bolstering compliance programs.  

Export controls and sanctions risk can exist in any cross-border transaction involving foreign jurisdictions, people, or products.  A responsive sanctions compliance program needs to 1) Respond to specific risks based on your organization’s operations; and 2) Demonstrate to regulators that you have prioritized compliance and leveraged the tools available to you.   

The encouraging part is that you can strengthen an export controls and sanctions compliance program without incurring significant costs by implementing a few practical measures. 

If you are concerned about your sanctions risk, but aren’t sure where to start, ask yourself the following questions: 

1. Do you understand which regulations apply to your business? 

It is imperative to know which regulations and laws may apply to your business. Understand which government regulators (OFAC, BIS, DDTC, EU, OFSI) exercise jurisdiction over your business, products, information and services. For example, are exported items subject to the International Traffic in Arms Regulations (ITAR) (defense articles and defense services) or Export Administration Regulations (EAR) (dual-use and general commercial goods) and has the company classified those items accordingly under the Munitions List and Commerce Control List, respectively? The penalties for non-compliance differ depending on whether exported items are subject to the ITAR or EAR.  

Be familiar with your geography and high-risk jurisdictions/transshipment countries of concern. For example, BIS and FinCen published a joint alert listing transshipment countries of concern including, but not limited to, Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan. 

2. Do your compliance policies provide a digestible and practical roadmap for your compliance program? 

We recommend that businesses involved in cross-border transactions should follow the key elements of an effective export control and sanctions compliance program. OFAC, DDTC, and BIS all provide separate guidance for an effective compliance program but contain overlapping themes:  

• Senior management commitment – policy statement 

• Risk assessment 

• Internal controls 

• Handling violations and taking corrective action 

• Monitoring, testing, auditing 

• Training 

Additionally, compliance policies and manuals should act as a roadmap for your company’s sanctions compliance program.  These policies should: 

• Reflect requirements of regulatory guidance 

• Encompass all business cycles with sanctions compliance risk (e.g., sales, procurement, supply chain, etc.) 

• Clearly identify and explain compliance risks 

• Detail mitigating controls 

• Designate compliance roles and systems 

• Provide real-life examples to help employee comprehension 

• Identify records to retain and related storage systems 

• Be disseminated/readily available to employees 

• Be periodically updated based on regulatory, system, and business changes 

Regulators expect a risk-based compliance program that is tailored to the business and is routinely updated. Organizations should continually assess their export controls and sanctions compliance risks in a rapidly changing environment. For instance, consider changes in operations, locations, products, services, business relationships, etc. Companies should also monitor regulatory guidance and enforcement actions as a good sanctions compliance program is one that can respond nimbly to regulatory changes and guidance.  

3. Is your company exercising due diligence best practices on a transaction- and system-wide basis? 

Organizations should be vigilant about different warning signs and risk factors on a per-transaction basis. BIS “Red Flags” and Know Your Customer guidance found in Supplement No. 3 to EAR Part 732 is a great resource for ascertaining potential red flags. For example, any transactions with Russia and Belarus are high risk due to the significant OFAC and EAR restrictions involved.  

Companies should utilize enhanced due diligence for higher-risk jurisdictions, customer types, and significant relationships. Business partner due diligence should include several components, including: 

• Documents and electronic records provided by the business team members  

• Independent research of publicly available information and media 

• In-person visits, inspections and verification 

• KYC’s Customer – End Users 

• End Use verification 

• Screening and re-screening parties 

4. Are you enhancing the use of your company’s data and IT systems? 

Every organization has data, and regulators expect that organizations will utilize available data in their compliance programs.  Companies should ask themselves if they understand the extent of their organization’s data, and whether they are able to leverage that data to control sanctions compliance risks. For example, most companies closely track customers and sales, but do they also retain information on their distributors and agents, freight forwarders, shipping routes, and the origin of all the components in any branded products built by third-party manufacturers?   

Retaining all available data and entering it into IT systems in a standard format allows companies to automate transaction analysis for sanctions risk, screen third parties against restricted entity lists, and respond to demands of regulators. Failure to take such measures can lead to enhanced penalties in the event of a violation, whether intentional or not.   

Key essential measures to implement for data and IT systems include: 

• Integrate IT systems and automate restricted party screening when possible 

• Standardize data format across IT systems to allow for full-business cycle analysis 

• Require supporting documentation, including for customer onboarding, travel, shipment, and vendor payment request. This allows for automated matching, e.g., bill of lading to invoices to verify delivery location 

• Generate dashboards to alert for potential risks 

• Perform keyword searches on systems and emails for “code words” pointing to potentially prohibited transactions 

• Periodically test and enhance IT controls 

5. Are your employees equipped with the necessary training, resources, and skills to effectively execute your compliance program? 

Your people are the front line against potential export controls and sanctions violations.  Personnel in key roles perform due diligence on customers, authorize contracts and transactions, and can perform audits and inspections of your compliance activities and those of third parties.  It is critical that these personnel remain well-versed in evolving compliance risks and your company’s risk response.   

Compliance trainings should include: 

• Sanctions and export controls (including EAR and ITAR, as applicable) compliance awareness training for all employees/contractors – front line of defense 

• External trainings for key relationships 

• Job-specific training that is risk-based and tailored to employee roles 

• Multiple formats – online, in-person with Q&A, etc. 

• Knowledge checks and exams 

• Periodic evaluation of training content – is it keeping up with changes in regulations and the sanctions environment? Has it been updated for changes in business? 

• Continuous reinforcement – periodic training reinforced with sanctions compliance communications 

Additionally, organizations should perform quality assurance, audits, and inspections of both their own company and key compliance functions as well as those of their business team members.  Audits should be conducted by personnel that are qualified and independent.  Some key elements of such activities include: 

• Perform focused internal or external audits of your sanctions and export controls compliance program 

• Examine your key internal controls, ensure they are operating as designed 

• Test system/IT controls – e.g., automated screening, transaction holds 

• Conduct random records spot checks to ensure appropriate record retention 

• Audit/Inspect/Visit your business partners (e.g., freight forwarders, distributors, contract manufacturers, warehousing providers) 

• Establish a process to implement corrective actions – tracked milestones, deadlines and accountability 

• Create a feedback loop – communicate results, observations, recommendations and enhancements to key stakeholders 

• Establish a reporting hotline – mechanisms/channels for employees and business partners to report suspected violations for follow up 

In today’s dynamic global trade environment, companies should prioritize the development and enhancement of their export controls and sanctions compliance programs to effectively manage risks and adhere to regulatory demands.  

While the complexity and unpredictability of trade sanctions can be overwhelming, organizations can safeguard themselves against costly violations by taking proactive measures. This involves tailoring compliance programs to address specific risks associated with their operations and demonstrating a strong commitment to compliance to regulators. Importantly, enhancing these programs doesn’t have to be financially burdensome; practical steps can be taken to strengthen compliance efforts.  

For companies uncertain about their sanctions risk, a good starting point is to critically assess their current compliance posture by asking targeted questions about their operations and risk management strategies. 

Written by Richard Weinert and Nate Giarnese (BDO USA) and Luis Arandia and Nicholas Galbraith (Barnes & Thornburg). Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

MGO can help you understand and navigate complex export control and sanctions regulations. Our team of International Tax professionals offers tailored risk assessments, help develop comprehensive compliance programs and provide ongoing support to make sure you remain compliant with the latest regulatory changes. We can also conduct due diligence and training to keep your employees informed and prepared for potential risks. Contact us to help you confidently manage sanctions risk and protect your business from costly violations.  

The post From Uncertainty to Clarity: Key Questions to Help You Get Started with Addressing Sanctions Risk  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Resilient growth demands a dual-lens strategy, integrating internal capabilities with external market intelligence.  

• Manufacturers face unprecedented disruptions — from workforce shortages to rapid digital transformation—that require bold strategic responses.  

• Long-term success is built on proactive planning, data-driven insights, and cross-functional alignment, not reactive, short-term fixes.  

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Integrating Inside-Out and Outside-In Analysis to Future-Proof Decisions 

Manufacturers are navigating an environment of constant disruption, from tariff uncertainty and supply chain issues to geopolitical instability and labor shortages to technological leaps and evolving customer demands. 

Reactive strategies based on temporary conditions run the risk of losing market share and failing to meet customer expectations. Sustainable success requires proactive, long-term strategic planning focused on attractive markets. 

Today, finding new sources of growth is no longer about simply scaling operations. 

It’s about integrating internal analyses while monitoring and understanding external market dynamics. This balanced perspective empowers leaders to make decisions with confidence – even as uncertainties continue to challenge the industry. 

The Manufacturing Growth Imperative 

The Time to Act is Now 

It’s not hyperbole to say that the manufacturing industry is transforming at unprecedented speed. 

The sector faces significant challenges that demand bold strategic responses rather than safe tactical adjustments. 

This transformation is taking place during a time of massive disruption: 

• Supply chain vulnerabilities exposed by global disruptions 

• Workforce shortages amid shifting skill requirements 

• Digital transformation pressures and Industry 4.0 adoption 

• Rising customer expectations for customization and service 

• Increasing global competition and market volatility 

• Environmental sustainability demands and regulatory changes 

In such a turbulent environment, manufacturers can no longer rely on incremental improvements to drive growth. Instead, they need a strategic framework that allows them to systematically, properly evaluate opportunities and make informed decisions about where and how to grow. 

Manufacturing companies have access to a wealth of internal data – from customer reports to margin analyses, to R&D performance to production and supply chain metrics. At the same time, external data such as consumer trends, competitive moves, geopolitical shifts, and emerging technologies provide invaluable context. 

Executives who can blend these two dimensions are uniquely positioned to craft strategies that are both resilient and adaptive. 

The Dual-Lens Growth Framework 

Inside-Out and Outside-In Analysis  

Achieving sustainable growth requires evaluating opportunities through two complementary perspectives that work together to identify the most promising routes for expansion where companies have a “right to win”. 

Strategic Evaluation 

The Ansoff Strategic Growth Matrix  

After conducting outside-in and inside-out analyses, we can apply a framework to simplify complex decisions and provide a structured method to evaluate risks and rewards. 

A modified Ansoff Matrix is a powerful tool to visualize the most promising growth opportunities. This framework divides growth strategies into four quadrants, each addressing different combinations of internal capabilities and external market opportunities. 

From Analysis to Action 

Four Growth Acceleration Levers  

Irrespective of what quadrant in the Ansoff matrix a manufacturing company may decide it wants to play, it has four levers at its disposal to accelerate their growth strategy: 

The Path Forward 

Executing a Growth Strategy  

The integration of internal analyses with external insights—and the application of frameworks like the Ansoff Matrix—provide manufacturing leaders with the roadmap to sustainable growth. By continuously challenging the status quo, engaging with emerging market signals, and investing in transformational technologies, manufacturers can drive innovation, secure market share, and mitigate future risks. 

Forward-looking executives should focus on: 

• Data Integration – Invest in robust data analytics platforms that merge internal performance metrics with external market intelligence. 

• Strategic Flexibility – Use frameworks to stress test strategic choices and adjust priorities as market conditions evolve. 

• Collaboration & Alliances – Establish strategic partnerships that provide access to technological innovations and new consumer segments. 

• Cultural Shift – Promote an internal culture of continuous improvement and experimentation to stay ahead in a competitive marketplace. 

Structured Approach & Roadmap 

Successful implementation of manufacturing growth strategies requires a structured approach that balances immediate action with long-term transformation. 

Phase 1 

Assess and Strategize / 0-6 months 

• Conduct comprehensive inside-out and outside-in analysis 

Systematically evaluate market opportunities and organizational capabilities using the frameworks outlined earlier. Include revenue/margin analyses, customer research, competitive intelligence, technology assessment, and internal capability audits. 

• Segment and pressure test end market capacity 

Conduct internal analysis to assess segmenting business units aligned to end users and markets, root out complexity, and pressure test hypothesis. Ensure adequate end market demand and identify new market opportunities. 

• Identify strategic growth opportunities 

Apply the Growth Matrix to prioritize opportunities based on market attractiveness and organizational fit. Develop specific business cases for the most promising opportunities, including resource requirements, timeline, and expected returns. 

• Align leadership and stakeholders 

Build consensus around the strategic direction through structured engagement of executive leadership, board members, and key stakeholders. Establish clear governance and KPI monitoring. 

• Define your “North Star” 

Develop a compelling vision for the organization that inspires and aligns. Articulate how the growth strategy will create value for customers, employees, and shareholders. 

Phase 2 

Pilot and Scale / 6-18 months 

• Test strategic initiatives 

Implement limited-scope pilots for key growth initiatives to validate assumptions, refine approaches, and demonstrate value. Pilots should be structured as learning experiments with clear success criteria. 

• Validate technology investments 

Evaluate technology solutions through proof-of-concept projects that demonstrate functionality and value without requiring enterprise-wide deployment. Use these projects to build internal capabilities. 

• Refine based on market feedback 

Actively solicit customer and market feedback on pilot initiatives, using this input to refine value propositions, offering design, and go-to-market approaches before scaling. 

• Scale successful initiatives 

Once pilots demonstrate success, develop detailed scaling plans that address organizational requirements, process changes, technology infrastructure, and change management needs. 

Phase 3 

Optimize and Innovate / 18-36 months 

• Enhance operational efficiency 

Apply continuous improvement methodologies to optimize the performance of new growth initiatives. Use data analytics to identify bottlenecks, inefficiencies, and improvement opportunities. 

• Leverage data and analytics 

Develop more sophisticated data capabilities to refine market targeting, customer segmentation, and offering optimization. Implement closed-loop feedback systems that enable continuous learning and adaptation. 

• Explore emerging technologies 

Monitor technological developments and conduct targeted experiments with promising technologies that could enable new growth opportunities or enhance existing initiatives. 

• Build ecosystem partnerships 

Develop strategic relationships with technology providers, channel partners, and complementary solution providers to accelerate innovation and market access. 

Phase 4 

Sustain and Lead / 36+ months 

• Embed growth mindset 

Develop organizational systems and processes that continuously identify and pursue growth opportunities. Include incentive structures, performance management systems, and resource allocation. 

• Maintain competitive advantage 

Invest in capabilities that preserve differentiation as markets evolve and competitors respond. This might include continued R&D investment, talent development, or strategic acquisitions. 

• Adapt with agility 

Establish mechanisms for sensing market changes and rapidly adjusting strategies in response. This requires both market intelligence systems and organizational flexibility. 

• Shape industry standards 

Take a leadership role in influencing industry standards, regulations, and ecosystem development to create favorable conditions for continued growth. 

Turn Disruption into Opportunity 

The most successful manufacturers will be those that maintain a long-term strategic perspective while building the agility to respond to short-term market shifts. Success hinges on continuously assessing the interplay between internal capabilities and the dynamic external landscape. Manufacturers can not only weather disruption but also capitalize on the opportunities it presents, building a robust engine for sustainable growth and competitive advantage. 

Written by Val Laufenberg, Iliya Rybchin and Kevin Medved. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

At MGO, we understand the unique pressures manufacturers face in today’s disruptive landscape. Our advisors help you blend inside-out and outside-in analysis to build a growth framework that’s both resilient and adaptive. Whether you’re evaluating expansion strategies, navigating regulatory changes, or aligning organizational resources, we’ll help you uncover opportunities and make decisions with confidence. Let’s work together to future-proof your growth strategy. Contact us to learn more.  

The post Manufacturing Growth in the Age of Disruption  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• A slower SEC rulemaking process may reduce regulatory pressure, giving asset managers more time to adapt compliance strategies and implement reforms. 

• Shifting SEC priorities could lead to revised or withdrawn regulations, offering asset managers a chance to reassess risk and reallocate compliance resources. 

• A more supportive stance on digital assets may open the door for investment firms to expand offerings and attract clients exploring cryptocurrency exposure. 

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A Regulatory Reset in Progress 

With a new SEC chairman at the helm, your investment firm may soon feel the impact of a more measured and business-friendly regulatory approach. Paul Atkins’ confirmation signals a likely shift away from rapid-fire rulemaking and toward methodical, consultative oversight — a welcome reprieve for asset managers overwhelmed by previous years’ aggressive timelines and expanding mandates. 

While there’s still uncertainty about how far these changes will go, your firm can prepare to capitalize on a potentially reduced compliance burden, extended implementation windows, and emerging opportunities in areas like digital assets. 

What’s Changing at the SEC? 

The appointment of Chairman Atkins follows former Acting Chair Mark Uyeda’s philosophy: “Slow is smooth and smooth is fast.” This shift in mindset means your organization may benefit from longer regulatory timelines, fewer surprises, and increased opportunities to provide input before new rules are finalized. 

Key Implications: 

• Deliberate Rulemaking: Asset managers may no longer need to scramble to meet short compliance deadlines. The SEC appears poised to review and potentially withdraw or revise several proposed rules, including those on ESG disclosures, outsourcing, and custody of client assets. 

• Extended Timelines for Final Rules: Rules adopted but not yet in effect — such as the updated Form N-PORT — could see delayed implementation. This gives your firm more time to develop thoughtful compliance strategies and engage in dialogue with regulators. 

• Regulatory Clean-Up: An executive order mandates the SEC to eliminate “anti-competitive” regulations. This could simplify your compliance burden, reduce red tape, and make way for innovation — especially for firms looking to explore emerging sectors. 

Digital Assets: A Strategic Advantage 

Chairman Atkins is also signaling a more favorable stance on digital assets. If your firm has been hesitant to move into cryptocurrency and blockchain investments, now may be the time to re-evaluate. 

Under the prior administration, SEC enforcement actions created a chilling effect on digital innovation. In contrast, Atkins — with advisory experience in crypto — is expected to introduce clearer, more constructive frameworks. His focus on “rational and principled” regulation could position digital assets as a viable component of your offerings, giving early movers a strategic edge. 

Don’t Scale Back Just Yet 

Despite this seemingly softer tone, your compliance strategy shouldn’t be scaled down prematurely. Regulatory priorities are still evolving, and the risks of misjudging the new agenda remain high. 

Stay informed and keep your compliance systems strong while observing how the SEC’s actions unfold. By maintaining readiness and flexibility, your organization can adapt strategically and avoid costly missteps. 

Your Best Practices for Navigating Regulatory Shifts 

• Monitor SEC statements and actions closely to stay ahead of regulatory pivots. 

• Use extended comment periods to advocate for reasonable, industry-informed rulemaking. 

• Evaluate potential investments in compliance technology or digital assets with regulatory trends in mind. 

• Avoid reducing compliance resources until changes are formally adopted and clarified. 

How MGO Can Help 

Navigating regulatory uncertainty requires both agility and insight, and that’s where MGO comes in. Our team stays on top of every SEC development, helping investment firms interpret shifts in policy, plan for evolving compliance demands, and seize emerging opportunities, from ESG to digital assets. Whether you need support rethinking your compliance strategy, evaluating new technologies, or engaging regulators during comment periods, MGO can give you the clarity and experience you need to stay ahead, regardless of the headlines.   

The post How a Softer SEC Could Benefit Your Investment Firm  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.

• Notice 2025-27 introduces new CAMT AFSI thresholds and adjustments, easing compliance for large corporations during the transition period. 

• The IRS extended penalty relief for underpayments of estimated CAMT through tax year 2025, reducing risk for affected taxpayers. 

• Corporations must still test CAMT applicability under full AFSI rules if they exceed interim thresholds under the simplified method. 

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On June 2, 2025, the Department of the Treasury and the IRS released additional interim guidance regarding the corporate alternative minimum tax (CAMT) imposed under Internal Revenue Code Section 55. Notice 2025-27 provides taxpayers an interim optional simplified method for determining whether a corporation is an applicable corporation and, therefore, subject to the CAMT. The notice also extends previous guidance that temporarily waives penalties for underpayments of estimated CAMT.  

Background 

The Inflation Reduction Act of 2022 amended Code Section 55 to create a CAMT for tax years ending after December 31, 2022. The CAMT applies only to “applicable corporations” and generally exacts a tax equal to 15% of an applicable corporation’s adjusted financial statement income (AFSI). In general, a corporation’s AFSI is the net income shown on its applicable financial statement (AFS), after taking into account various adjustments set out in Section 56A.  

A corporation (other than an S corporation, a REIT, or a RIC) is an applicable corporation for a taxable year if it meets an average annual AFSI test during one or more taxable years that are prior to that year and end after December 31, 2021.  

• If the corporation is not a member of a foreign-parented multinational group (FPMG), the corporation meets the average annual AFSI test for a taxable year if the average annual AFSI for the three-taxable-year period ending with that taxable year exceeds $1 billion (the general AFSI test).  

• A U.S. corporation that is a member of an FPMG satisfies the average annual AFSI test for a taxable year if (i) the FPMG meets the $1 billion average annual AFSI test, and (ii) the average annual U.S. AFSI for the three-taxable-year period ending with such taxable year is $100 million or more. 

Proposed regulations published on September 13, 2024, provided an optional simplified safe harbor for determining applicable corporation status, which generally substituted $500 million for $1 billion in the general AFSI test and $50 million for $100 million in the FPMG AFSI test, and simplified the calculation of AFSI for purposes of applying the safe harbor thresholds. To rely on this safe harbor, a taxpayer and each member of its test group must consistently apply certain portions of the proposed regulations. 

Notice 2025-27 

Interim Simplified Method 

In response to public comments received on the proposed regulations, Notice 2025-27 provides an interim optional simplified method for determining applicable corporation status. Under the interim simplified method, “$800 million” is substituted for “$1 billion” when applying the general AFSI test, and “$80 million” is substituted for “$100 million” when applying the second prong of the AFSI test for FPMGs. 

As with the safe harbor in the proposed regulations, Notice 2025-27 modifies the calculation of AFSI for purposes of the interim simplified method, requiring AFSI to include: 

• Adjustments for financial statement consolidation entries (Section 56A(c)(2)(A)) 

• Adjustments to disregard certain federal and foreign taxes (Section 56A(c)(5)) 

• Adjustments related to effectively connected income (Section 56A(c)(4)). 

For purposes of applying the interim simplified method, Notice 2025-27 requires additional adjustments that were not authorized under prior iterations of the simplified safe harbor method. In particular, the notice requires adjustments under Section 59A(c)(9) (related to certain credits treated as payment against the corporation’s federal income tax) and Section 59A(c)(12) (related to unrelated business taxable income of tax-exempt entities), as well as specific adjustments related to amounts associated with certain credits to the extent not otherwise captured by the adjustment under Section 59A(c)(9). These adjustments were included in response to public comments and are generally expected to reduce a corporation’s AFSI.  

Similar to prior simplified methods, if a corporation’s AFS covers a period that differs from its taxable year, average annual AFSI under the interim simplified method of Notice 2025-27 is calculated using the three-AFS-year period ending during the taxable year. 

The notice also clarifies that if a corporation uses the interim simplified method of Notice 2025-27 and exceeds the applicable threshold, the corporation will be an applicable corporation only if it is determined to be an applicable corporation under the statute or, if it chooses to follow them, the proposed regulations.  

Effective Date and Reliance 

Corporations may use the interim simplified method in Notice 2025-27 for any taxable year ending on or before the date a Treasury Decision adopting a simplified method pursuant to Section 59(k)(3)(A) is published in the Federal Register and for which the original federal income tax return has not been filed as of the date Notice 2025-27 is published in the Internal Revenue Bulletin. Importantly, taxpayers may use the Notice 2025-27 simplified method without becoming subject to, or violating, the reliance rules (including the consistency requirements) provided in the proposed regulations. 

Insight 

Comments received on the simplified safe harbor contained in the 2024 CAMT proposed regulations suggested increasing the safe harbor’s AFSI thresholds as well as favorably expanding the modifications to AFSI to reduce compliance burdens and costs for corporations that might exceed the safe-harbor thresholds but that are not expected to be applicable corporations under the regular AFSI test. The IRS issued Notice 2025-27 to prescribe the new interim simplified method, which incorporates some taxpayer suggestions. The notice states that Treasury and the IRS intend to issue revised proposed regulations that include a method similar to the interim simplified method of Notice 2025-27 prior to finalizing the CAMT regulations. 

Taxpayers should be aware that even though they may take advantage of the interim simplified method of Notice 2025-27 when determining whether a corporation is an applicable corporation, those that exceed the simplified method’s AFSI threshold will still be required to determine if they are an applicable corporation under the regular AFSI test, the rules and calculations for which are onerous and complex. 

Extended Waiver of Section 6655 Addition to Tax 

Notice 2025-27 extends previous interim guidance that temporarily waives penalties for underpayments of CAMT. The notice provides that the IRS will waive any addition to tax imposed under Section 6655 attributable to a corporation’s CAMT liability for any taxable year that begins after December 31, 2024, and before January 1, 2026. (Previous notices (Notice 2023-42, Notice 2024-33, Notice 2024-66) provide similar relief for tax years beginning before January 1, 2025.) For these taxable years, corporations are not required to make installment payments of CAMT to avoid Section 6655 additions to tax. To benefit from the waiver, corporations must file Form 2220 and complete it as directed in the notice. 

As with previous waivers, this waiver only covers taxes imposed under Section 6655 additions to tax for failure to make sufficient and timely estimated income tax payments—and does not waive additional taxes for underpayments under other sections, such as Section 6651, which imposes penalties for payments not made by the due date of the corporation’s return (without extension). Therefore, any CAMT liability due for the 2025 calendar year must be paid by April 15, 2026, to avoid penalty. 

Additional Interim Guidance and Regulations 

Notice 2025-27 states that the Department of the Treasury and the IRS anticipate issuing additional interim guidance regarding the CAMT to respond to other comments submitted in response to the CAMT proposed regulations, including among others: 

• How unrealized gains and losses on certain investment assets reported for financial statement purposes are taken into account for purposes of determining AFSI 

• Alternative rules for determining a partner’s distributive share of partnership AFSI 

• AFSI adjustments resulting from certain transactions between a partner and a partnership 

• AFSI adjustments resulting from certain corporate transactions 

• The interaction of the CAMT and the tonnage tax regime 

• Alternative rules for early reliance on the CAMT proposed regulations. 

Written by Kevin Ainsworth, Jacob Davis and Seth Gee, Senior Manager. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Navigate CAMT Complexity 

MGO’s tax professionals guide corporations through the evolving CAMT landscape — from determining applicable corporation status to navigating AFSI adjustments and compliance requirements. We help simplify complex calculations, assist with proper application of IRS guidance, and reduce your risk of penalties. Our team monitors CAMT regulatory changes in real-time and provides practical, audit-ready strategies for large corporations facing these new tax burdens. Whether you need help modeling liability, documenting AFSI adjustments, or filing Form 2220, MGO can help you stay compliant and strategic. Contact us to learn more.  

The post IRS Issues Additional CAMT Interim Guidance  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Goods subject to certain tariffs (Sections 301, 201, and 232) may no longer qualify for de minimis duty-free entry. 

• New rules would require additional data for low-value shipments to improve tracking and enforcement. 

• Shipments exceeding $800 per person per day would be ineligible for the de minimis exemption 

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On January 17, 2025, U.S. Customs and Border Protection (CBP) issued a Notice of Proposed Rulemaking (NPRM) that would revise the entry process for de minimis shipments valued at under $800 pursuant to 19 U.S.C. § 1321(a)(2)(C). Specifically, the proposed new rule would (1) exempt imported merchandise subject to trade remedy statutes (such as the Section 301 “China tariffs,” Section 201 “Safeguard tariffs,” and Section 232 “National Security tariffs”) from eligibility for de minimis entry; and (2) require reporting of the full 10-digit Harmonized Tariff Schedule of the United States (HTSUS) classification for certain de minimis shipments.  

Current regulations allow articles to be admitted to the U.S. duty- and tax-free if express couriers’ import consignments on behalf of one person/entity on one day are less than $800 in value. However, merchandise subject to absolute or tariff-rate quota (whether the quota is open or closed) and merchandise subject to antidumping and countervailing duties are currently ineligible for the de minimis administrative exemption, but goods subject to Section 301, 201, and 232 tariffs may claim the exemption.    

Over the past decade, CBP has witnessed a 600% increase in low-value shipments into the U.S. following the increase in 2016 of the maximum value eligible for de minimis from $200 to $800. This exponential increase has challenged the agency’s ability to effectively enforce U.S. trade laws, health and safety requirements, intellectual property rights, and consumer protection rule. In particular, many unscrupulous global traders (especially Chinese-based e-platforms, as cited by CBP in a January 17 press release) have used this special entry process to evade the payment of duty on commercial shipments that would otherwise be subject to formal entry procedures (and corresponding duty and import fee payments) when valued over $2,500. As stated in the NPRM, “[t]ransnational criminal organizations and other bad actors perceive low-value shipments as less likely to be interdicted because these types of shipments are not subject to the more extensive formal entry procedures. This has resulted in attempts to enter illicit goods, such as illicit fentanyl, into the country through these [low-value] shipments.” 

CBP also noted the lack of information available to the agency through this low-value shipment exemption that would otherwise be required for formal entry processing. The “overwhelming volume of low-value shipments and lack of actionable data collected pursuant to the current regulations inhibits CBP’s ability to identify and interdict high-risk shipments that may contain illegal drugs such as illicit fentanyl, merchandise that poses a risk to public safety, counterfeit or pirated goods, or other contraband.” 

Finally, CBP noted in the NPRM the significant advances in technology that have occurred since 1995 (the date of the last significant update of the low-value shipment rules). What used to be an entirely manual process by the agency has significantly evolved with technological progress in data processing and the successful run of two pilot programs that further cemented the capabilities of CBP’s “Automated Commercial Environment” (ACE) to automatically review low-value shipments with additional data elements and tracking capabilities to target illicit goods. 

Proposed Changes 

The major changes proposed via the NPRM are as follows: 

1.    End the ability of all goods subject to Section 301, 201, and 232 tariffs (whether or not the goods were granted an exclusion from such tariffs) to claim duty-free entry under the de minimis provisions. However, CBP acknowledged operational difficulties in relation to international mail shipments, noting that the U.S. Postal Service (USPS) cannot collect duties directly from foreign mailers. To determine whether to exclude international mail shipments from the scope of this proposed rulemaking, CBP is soliciting comments from the public and the USPS.  

2.    Require additional information on de minimis shipments under the current basic entry process and through the creation of a new enhanced entry process intended to encompass merchandise subject to partner government agency (PGA) regulations and/or non-exempt from duties, taxes, and fees. The new entry process would require the electronic transmission of the individual bill of lading or other shipping document used to file or support the entry, as well as additional data elements, including: 

• Clearance tracing identification number (CTIN); 

• Country of shipment of the merchandise; 

• 10-digit HTSUS classification of the merchandise; 

• Seller’s and purchaser’s name and address; 

• Any data or documents required by PGAs; 

• Advertised retail product description; and 

• Marketplace name and website or phone number. 

3.    Clarify the existing rule that when the aggregate fair retail value of shipments imported by “one person on one day” under the de minimis exemption exceeds $800, all such shipments imported on that day by that person become ineligible for duty- and tax-free entry under the administrative exemption. 

Comments on this proposal are due no later than March 17. Comments should reference docket number USCBP-2025-0002 and can be submitted at: https://www.regulations.gov  

Written by Mathew Mermigousis and James Pai. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com  

How MGO Can Help 

With these proposed changes, those businesses engaged in cross-border trade have to prepare for heightened compliance requirements and increased scrutiny from CBP. Our trade and customs professionals can help you navigate these regulatory shifts by providing strategic guidance on tariff classifications, compliance with enhanced reporting obligations, and duty mitigation strategies. We stay ahead of evolving trade policies to make sure your operations remain efficient, compliant, and cost-effective. Whether you need assistance in adapting your supply chain, managing customs documentation, or responding to CBP inquiries, we’re here to support you. Contact us to learn more.  

The post CBP Proposes New Rule to Tighten Enforcement of Low-Value Shipment appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Audit committees (ACs) are prioritizing enterprise risk management (ERM) due to a dynamic risk environment influenced by geopolitical factors, supply chain disruptions, and technological advancements.

• The composition and structure of the board are critical for effective risk governance, and AC members need industry knowledge and relevant experience to oversee the ERM process effectively.

• Boards should clearly articulate risk appetites, engage in ongoing education, and stress-test ERM processes, with holistic risk conversations.

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1. Enhanced Risk Governance: Audit committees (ACs) are prioritizing enterprise risk management (ERM) due to a dynamic risk environment influenced by geopolitical factors, supply chain disruptions, and technological advancements.

2. Board and Committee Composition: The composition and structure of the board are critical for effective risk governance. AC members need relevant experience and deep industry knowledge to oversee financial reporting and ERM processes effectively.

3. Leading Practices for Oversight: Boards should clearly articulate risk appetites, engage in ongoing education, and stress-test ERM processes. Effective risk conversations should be holistic, incorporating strategy and planning, and involving collaboration across the organization.

In an era when the business landscape is characterized by rapid changes and rising uncertainties, the need for robust governance oversight has never been more critical. As organizations strive to navigate an increasingly complex business environment, the role of the board in overseeing enterprise risk management, financial reporting, and compliance becomes paramount. This publication discusses the evolving priorities and responsibilities of audit committees (ACs) in 2025, emphasizing risk governance, technology integration, and investor expectations. 

Enhanced Risk Governance and Enterprise Risk Management Integration 

Today’s ACs are watching an evolving risk landscape impacted by significant geopolitical factors, continuing supply chain disruptions, global inflation, and the emergence of technology that for many companies may prove highly disruptive to their businesses. According to the BDO 2024 Board Survey of approximately 250 sitting directors, 31% identified enterprise risk management (ERM) as the governance process requiring the most significant time and effort over the next 12 months. Today’s dynamic risk environment, coupled with regulatory (e.g., SEC) and stakeholder expectations, require corporate risk assessments to cover the entire enterprise, not just financial reporting. A recent Audit Committee Practices Report found that 47% of respondents assigned ERM oversight to the AC, 15% to a risk committee, and 35% to the full board. ERM is expected to be an integrated, holistic process that considers all manner of risks to the organization (e.g., strategic, regulatory, operational, and reputational). Regardless of the express responsibilities within the board and committee charters, all board members are expected to exercise skepticism and be risk aware. 

Governance Structure and Composition   

The combined structure and composition of the board plays a crucial role in risk governance. AC members have a significant responsibility in reviewing and overseeing risk factors as part of their mandate to oversee the financial reporting function, and their directive often extends to oversight of the ERM process as well. This requires well-informed directors who understand not simply financial accounting but have relevant experience and deep industry knowledge about the company’s specific risk factors and the experience to make judgments about how well management is identifying, prioritizing, and managing risks. For example, consider the adequacy of an AC that has the additional responsibility for cyber risk oversight that is composed solely of financial experts who may have no current understanding of the cyber risk landscape or impact of emerging technology on the protection of data to ask informed questions of management about risk detection and mitigation strategies. 

Leading Practices for Board/Committee Oversight  

The board should be responsible for setting and clearly articulating risk appetites and tolerance thresholds and ensuring management is operating within those boundaries. There are several steps directors should take to advise management on risk and strategic priorities. These include: 

• Establishing incentives to provide accurate reporting on risks to the organization 

• Remaining forward thinking and open minded as the business environment rapidly changes 

• Prioritizing ongoing education, including inviting experts into the boardroom (e.g., economists, cyber specialists, technologists, and others) 

• Taking a hands-on approach by engaging with stakeholders, leveraging technology, and performing site visits 

The AC’s oversight of ERM goes beyond oversight of management’s processes to stress testing those results to help ensure priorities are aligned, mitigation efforts are sound, and the company can be resilient against new challenges. The AC should not only review the formal ERM processes performed by management but receive further reporting and updates at an established cadence throughout the year to enhance recurrent risk conversations. The Audit Committee Practices Report indicated 49% of boards discussed ERM monthly, as opposed to the 28% and 20% who add it to the agenda semiannually and annually, respectively. Effective risk conversations have several key characteristics that include considering the company holistically, incorporating the organization’s strategy and planning processes, and collaborating with professionals throughout the organization. Additionally, these conversations may benefit from this list of questions every board should ask about risk management. 

Risk Mitigation and Preparedness  

Much like our own immune systems, organizations are much better prepared to respond to risks if they are generally healthy. If the fundamentals of a business are strong and if potential shocks to the system have been considered and prepared for in advance, the business will be much better positioned to survive.  However, in today’s fast-paced business environment, the speed at which risks can materialize has a significant impact on risk management, often requiring response within minutes rather than overnight. Boards should consider whether management is prepared to identify rapidly materializing risks and react swiftly to disruptions. Resilience programs such as business continuity, IT disaster recovery, and cyber incident response programs should be adequately resourced and include formal documented processes and responsibilities, scenario planning, and crisis simulations that are updated regularly. 

Governance Oversight Priorities   

BDO’s 2024 Board Survey identified the activities directors expect to spend the most time on next year: 

Specific Governance Activities to Strengthen Both Management and the Board 

Conclusion 

Effective risk management and resilience through ERM integration are essential for navigating the complexities of the modern business environment. By adopting leading practices, aligning with strategy, and prioritizing forward-thinking approaches, ACs can enhance their oversight capabilities and help ensure the long-term success of their organizations. 

Emerging Technology and Cybersecurity 

The expanded use of technology is transforming business operations, reducing costs, and enhancing human capabilities. The challenge organizations face is balancing innovation with risk management, focusing on efficiency, productivity, cybersecurity, data governance, and human capital impacts. 

Governance Structure and Composition 

The 2024 BDO Board Survey shows the priority emerging technology and cybersecurity have in boardrooms today. Directors identified “advancing the use of emerging technology” as the second most important strategic priority and “lagging implementation of emerging technologies” as one of the most significant risks. Cybersecurity was also in the top five strategic priorities and significant risks. Additionally, 50% of directors plan to increase investments in emerging technologies, and 41% intend to boost cybersecurity investment over the next 12 months. While some organizations may create additional board committees for technology and/or cybersecurity, many consider the AC the appropriate committee to oversee these areas, given its familiarity with the need for strong implementation and internal control environments designed to protect the integrity of information being used and generated by the company.  

As boards formalize their oversight response to evolving technology, they should consider committee capacity and expertise. According to the recent Audit Committee Practices Report, 58% of AC’s have cyber responsibility, followed by 25% retaining oversight at the full board level. Seventy-three percent of directors report discussing the topic quarterly, followed by 15% semiannually. Similar to the evolution of sustainability oversight, technology is integrated throughout the corporate environment (e.g., human capital systems, operations, supply chain management, third-party risk, and financial reporting). Collaborative oversight will be essential and may require assignment to one or more board committees depending on the significance and pervasiveness of the risks. 

There is an ongoing debate about whether to bring subject matter experts onto the board or to cultivate director “generalists” supported with focused continuing education, with no definitive best practice emerging. For example, while the SEC dropped its proposed requirement to disclose whether cybersecurity expertise existed within the board, the board may determine that having a cyber expert among them may still be warranted. However, we caution about deferring responsibility for significant risks to a single board member. There is also growing support for all directors to be “technology and cyber literate,” much like they should be financially knowledgeable, with many boards encouraging directors to achieve and maintain certifications in these and other significant risk areas. 

In response to the SEC’s cybersecurity disclosures, directors report obtaining external assessments and creating internal processes as the top two areas for improvement in their oversight of cybersecurity. This includes understanding what cyber incidents may be considered material to the business and how prepared the organization is to respond timely and effectively to a cyber incident when it occurs. Consider additionally Questions Directors Should be Asking in Their Oversight of Cyber Risk. 

What is certain is that directors should continue to educate themselves in emerging and dynamic areas, including AI/generative AI and cybersecurity to continue to inform appropriate dialogues with management and auditors. Subject matter specialists may be invited to board and committee meetings to provide education to bolster collective board knowledge and address identified director skill and knowledge gaps, as well as serving as trusted advisors. Often, while these sessions may be requested by the board or AC chair, many boards encourage attendance by all directors and certain members of management.  

Oversight of Generative AI 

Board oversight of generative AI should be considered as part of the broader ERM mandate. From recognizing strategic benefits to mitigating associated risks, the board can embrace AI by establishing a safe environment and a culture of trust that accelerates innovation while promoting long term success. The board of directors further plays a pivotal role in guiding the responsible and ethical use and strategic deployment of generative AI. The board may consider establishing a cross-functional AI team that includes the CIO, CISO, general counsel, and operations providing regular reporting to the board or oversight committee. 

From an AC perspective, many finance teams are identifying efficient AI use cases to help analyze financial information, detect trends, and identify anomalies in large data sets. By the same token, auditors are incorporating AI into their auditing methodologies and tools to drive efficient and effective audits and address audit risk.  

Regulators from government to industry are also keenly focused on the role that emerging technologies play in shaping business opportunities and risks to consumers and stakeholders. We encourage the AC to remain attentive to developing rules and regulations that may impact how their business chooses to integrate and use technology and the impact those choices may have on their stakeholders.  

Questions directors should be asking in their oversight of generative AI. 

• What are the company’s policies around the ethical use of technology? How are those policies monitored, and how often are they reviewed and revised? 

• What is the process for identifying effective use of generative AI? Is the organization monitoring industry and competitor uses? Do these uses align with strategic objectives and business goals? 

• What is the process for adopting innovative technologies from identification to selection, implementation, education to monitoring and compliance? Who is responsible and accountable? 

• What monitoring and compliance controls exist? How are instances of noncompliance reported and remedied? 

• What are the risks associated with generative AI use, and what controls are in place to mitigate these risks?  

• What controls does the company have around the reliability, accuracy, and consistency of its data? 

• How does the organization monitor (and who is responsible for) the regulatory environment to ensure compliance? 

• How is the company mitigating third-party risk? 

• How are we remaining current with respect to developing laws and regulations related to the use of AI?

AI Oversight in Financial Reporting and Use by the External Auditor 

With disclosure demand increasing, it is anticipated that stakeholders will expect similar information around technology governance and oversight to what they are receiving about cybersecurity. Directors should not only confirm the company has processes around technology risk management, strategy, and governance that are operating effectively, but also that the governance oversight is established, documented, reviewed, and revised frequently.  

A recent report The Rise of Generative AI In SEC Filings, states that almost two-thirds of Fortune 500 companies mention AI in their annual report on form 10-K, 11% specifically reference generative AI, and more than half have a risk factor citing AI. ACs should ensure consistent and balanced messaging on emerging technologies, considering the materiality to their business when making public disclosures, while also anticipating stakeholder demand for details on process and governance oversight. 

Underlying the financial statements, ACs should evaluate the impact of technology, including generative AI use in the financial reporting function. Three increasingly interdependent elements — technological efficiency, regulatory compliance, and talent — impact both corporate finance teams and audit engagement teams. Data governance challenges can increase the risk for potential reporting issues, errors, or unreliable insights. 

The PCAOB has started “limited outreach” to understand audit firm and public company perspectives on the integration of generative AI in audits and financial reporting. Findings suggest that the integration is falling behind operational and customer-facing areas for many companies, which was further supported by BDO’s recent Board Survey results. Similarly, while some audit firms have started to incorporate generative AI into their audits, it remains primarily for administration and research as firms proceed cautiously in their testing and vetting of innovative technologies. 

Meanwhile, stakeholder demand for adoption is high. BDO’s inaugural Audit Innovation Survey revealed that senior finance leaders say tech-savvy auditors increase trust and influence auditor selection, while acknowledging continuing challenges in audits as technology is implemented. More than two-thirds (69%) of respondents say established data governance and internal data management are a barrier to a smooth audit experience. ACs should continue to engage in discussion with external auditors, as well as internal auditors, around their use of technology, the associated benefits, and risks. 

The CAQ recently released a resource providing an overview of the technology and regulatory environment along with audit considerations for companies deploying generative AI. They also included sample use cases that may be useful for the AC in the evaluation and oversight of their own company’s generative AI deployment. 

Investor Expectations of Audit Committee Effectiveness 

The AC’s effectiveness is vital for robust corporate governance and investor confidence. While ACs are often assigned expanding responsibilities, they must not fall behind on the traditional mandate of their role. It is important to clearly define and regularly review the AC’s responsibilities and associated charter to ensure compliance with requirements, along with assessing the capacity and experience around expanded oversight responsibilities. 

Questions ACs should be asking about fulfilling investor expectations: 

• Is the AC fulfilling its requirements per applicable rules and regulations? 

• How does the AC determine effectiveness and independence of the external auditor? 

• Is our ERM process fit for purpose with respect to identifying and prioritizing emerging areas of risk? 

• Does the AC inquire about “close calls” – e.g., areas of focus by the external auditor that were considered but didn’t rise to the level of a CAM?  

• If applicable, is management’s remediation of deficiencies being done timely and effectively? 

• How is the AC leveraging internal audit (IA) for value creation and risk mitigation? 

• How often does IA revise their audit plan and update the AC on any deficiencies found? 

• What are the qualifications and experience of the IA team? 

• How is the AC ensuring collaborative input into the company’s disclosures? 

• What disclosure controls are in place, and how does the AC monitor effectiveness? 

• To what depth does the AC review, challenge, and approve items ancillary to the earnings release? 

• Do any/all directors sit in on earnings calls? 

• How does the AC ensure consistency around the company’s internal and external messaging? 

• How are AC members staying current with rules, regulations, and environmental trends? 

• What are the AC’s responsibilities beyond the core requirements, and does the AC have the capacity and experience to execute on them? 

• Does the company’s finance function need additional support? How and when was a gap analysis performed?

Oversight of Internal Audit 

Leveraging IA effectively can provide significant insights into the company’s operations and risk management processes, including emerging and high-priority areas such as AI, cybersecurity, and controls around non-financial data (e.g., sustainability metrics). The Institute of Internal Auditors has issued new Global Internal Audit Standards, effective January 9, 2025. These standards are designed to guide the professional practice of internal auditing and serve as a basis for evaluating the quality of the IA function by those in oversight roles (e.g., ACs). While not mandatory, the standards offer 15 guiding principles and essential conditions (i.e., activities of the board and senior management) that enable effective internal auditing. ACs can facilitate indispensable value from their IA function in several ways, such as: 

• Aligning expectations with the IA mandate 

• Setting clear IA authority, roles, responsibilities, and scope of services 

• Building an open and trusting relationship 

• Understanding the risk assessment process 

• Equipping IA with adequate resources and tools 

• Promoting the IA function 

• Assessing the performance of the Chief Auditing Executive (CAE) and IA function 

• Requiring the maintenance of a current IA charter for approval 

Best practices for the oversight of IA include regular reports to the AC to ensure continued alignment on audit strategy and goals, along with timely resolution of identified deficiencies before they become material issues. The PCAOB has also taken interest and added a mid-term project to consider updates to Auditing Standard 2605, Consideration of the Internal Audit Function. See the BDO Internal Audit Webinar Series and upcoming BDO in the Boardroom Podcast for discussions around emerging topics and best practices within the IA function. 

Oversight of Financial Reporting 

The AC plays a vital role in overseeing financial reporting quality and controls. Recent studies from Ideagen Audit Analytics and the Center for Audit Quality indicate that the number of financial restatements filed by SEC-reporting companies is at or near historic lows, likely the result of continued diligence around emerging risks and robust internal control environments. The AC should remain vigilant in these areas and sensitive to the impact macroeconomic and geopolitical factors will have on their companies, including but not limited to: political elections and potential changes in legislation, geopolitical and economic indicators ( e.g., inflation, interest rate changes, supply chain disruption, changes in tariff policies, war impacts) along with human capital matters associated with cultivating and retaining a skilled finance workforce.  

Regulatory Landscape 

The regulatory landscape is continually evolving, with robust SEC and PCAOB rulemaking agendas, enforcement actions, inspection findings, and litigation continuing to make headlines. The AC must stay informed about these changes and ensure compliance with new regulations, consider priority regulatory areas, and monitor the impact of legislation, as well as an upcoming transfer of executive power in the U.S. 

The PCAOB has prioritized transparent communication and continues to issue Investor bulletins, audit focus, and spotlight publications that ACs are encouraged to monitor. Some recent examples include the PCAOB’s information about their inspection activities that include observations, inspection activities from the past year, and inspection priorities for the upcoming year that can inform ACs in their oversight of the financial reporting and audit processes. The SEC also releases examination priorities and makes public recent comment letters issued to registrants.  

Fraud Risk 

Fraud risk evaluation and oversight are critical components of the AC’s responsibilities, and the current environment constitutes a heightened risk for organizations, including digitally enabled fraud. The PCOAB recently paused its significant proposed Noncompliance with Laws and Regulations (NOCLAR) auditing standard, but ACs should continue to stay informed and involved in this and other rule and standard setting. See the 2024 BDO Board Survey and the PCAOB’s recent Spotlight for discussion around solidifying a culture of compliance.  

Board’s Actions to Prevent and Detect Fraud 

Disclosure 

Recent SEC enforcement has focused on the adequacy of company disclosure controls under Exchange Act Rule 13a-15 and emphasized the need for comprehensive disclosure controls. The Division of Corporation Finance also continues its Disclosure Review Program. ACs should be aware of cited trends — e.g., misleading non-GAAP measures and ransomware attack disclosures — to ensure their company’s own alignment with regulatory expectations. 

Companies may consider maintaining a well-structured disclosure committee, which includes diverse management representation from various departments such as accounting, finance, IT, cyber, sales, and general counsel. ACs should monitor the disclosure committee’s recommendations to ensure transparency and regulatory compliance. Additionally, the AC should discuss disclosure of material judgments to understand exclusions and evaluate the necessity of included information. 

Disclosure alignment should be a priority in AC discussions, ensuring company-wide collaboration and consistency across sources that broadly include (but are not limited to) financial statements, MD&A, earnings releases, proxy statements, company websites, sustainability reporting, and marketing materials. ACs should frequently scrutinize noted comment letter areas and emerging risks, as applicable, such as: 

• China-related matters 

• Non-GAAP measures 

• Critical accounting estimates 

• MD&A 

• Revenue recognition 

• Financial statement presentation 

• Market disruptions 

• Cybersecurity 

• Supplier finance programs 

• Inflation 

• Other related rules (e.g., pay for performance) 

The AC should inquire about the rigor for how disclosures outside the financial statements (such as those related to earnings releases and sustainability reports) are verified for accuracy and consistency, including reviewing presentation slides and management’s commentary, while overseeing internal controls around non-financial metrics. 

The SEC recently disbanded their Climate and ESG Task Force stating the priorities were determined to be well integrated into overall company strategy and risk management. Additionally, the SEC’s new climate rules remain stayed and the issuance of anticipated new human capital rules are in question given the pending U.S. election transition. However, ACs should not lose focus as jurisdictions globally and locally are moving forward with significant reporting requirements that may impact a broad group of U.S. companies and will require significant action by management and oversight of the AC. ACs should discuss the emerging ESG disclosure landscape and company controls that are in place to monitor compliance as well as stakeholder sentiment, remaining attuned to verifiable data that reflect actual practices and do not mislead investors. 

Finance Function Talent Management 

The experience, effectiveness, interactions, and reporting of professionals in the accounting and finance functions serve as an important control in the oversight of financial reporting that the AC receives. In an environment where the war for talent continues, ACs should ensure they are evaluating resources and supporting the needs of the finance function in their companies.  

Oversight of the External Auditor 

Audit quality stems from the AC’s ability to exercise professional skepticism, including challenging assessments and estimates made by auditors and management. It is considered a best practice to build a strong professional relationship with their external auditors, which includes frequent, transparent communications about the audit, including:  

• Auditor independence 

• Scope, status and conduct of the audit,  

• Audit team and the audit firm including engagement team members’ experience, supervision and review,  

• Firm structure and potential impact on audit quality 

• Recent inspection results at the engagement level and at the firm level, and 

• Firm’s system of quality control  

See the PCAOB’s recent Audit Focus: Audit Committee Communications for reminders and common deficiencies in this area.  

SEC’s Office of Chief Accountant Paul Munter released this statement on the recent increase in deficiency rates found in audit inspections and the importance of the role of the AC in ensuring high-quality audits. 

The PCAOB has been active in its rulemaking intended to support the AC’s responsibility in oversight of the auditing function and selection and retention of auditors. This includes the recently adopted standards regarding the audit firm’s system of quality control, required firm reporting, and firm and engagement metrics, which at the time of publication are still awaiting SEC approval. Directors should remain knowledgeable about auditing standards and how those standards may impact the AC’s and management’s engagement with the auditors. Similarly, they should carefully consider proposed standard setting regarding the scope and procedures of financial statement audits, such as the PCAOB’s (NOCLAR) rules. A recent roundtable briefing paper may further impact how the auditor engages with the company, along with the types of controls and additional information that may become a required component of public company audits in the future. 

In September 2024, the PCAOB issued a spotlight focused on recent inspection deficiency findings with respect to auditor independence requirements and highlighted considerations for the AC particularly around its responsibility for the pre-approval of audit firm services, including but not limited to: 

• ACs are required to consider whether any services provided by the audit firm may impair the audit firm’s independence in advance. 

• ACs should consider whether the public company’s policies and procedures require that all audit and non-audit services are brought before the AC for pre-approval.  

• ACs should consider whether their auditor has implemented processes to identify prohibited relationships.  

• If the AC pre-approves services using pre-approval policies and procedures, the AC should consider whether the pre-approval policies and procedures are sufficiently detailed as to the particular services to be provided so that the AC can make a well-reasoned assessment of the impact of the service on the auditor’s independence.  

• Independence is a shared responsibility between the entity under audit, its AC, and its auditor. It is important for the company to have policies and procedures to proactively alert auditors to proposed or pending merger and acquisition activity that could have an impact on auditor independence. 

BDO is poised to release an audit committee pre-approval guide aid in early 2025 to be posted within the practice aid section of the BDO Center for Corporate Governance. 

As the regulatory environment continues to advance at a quick pace, ACs are being encouraged by regulators, auditors, and other stakeholders to be more engaged in the rulemaking and standard-setting process, as well as to remain active in the community establishing and discussing best practices. The PCAOB continues to be especially active in their board outreach and annually publishes high-level observations and key takeaways from their conversations with AC chairs. 

Conclusion 

The AC’s effectiveness is crucial for maintaining investor confidence and ensuring robust corporate governance. By fulfilling its mandate, adapting to evolving risks, overseeing the external and internal audit functions, evaluating significant risks (including potential fraud and emerging risks), and staying informed about regulatory changes, the AC can significantly contribute to the company’s success and the delivery of high audit quality to the markets. 

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

How MGO Can Help 

MGO can provide significant support to audit committees as they navigate their evolving priorities in 2025 through integrating ERM processes and addressing the dynamic risk environment that includes geopolitical factors, supply chain disruptions, and technological advancements. Our team can also assist in assessing and enhancing the composition of your board and audit committees to make sure your members have the relevant experience and industry knowledge necessary for effective oversight. Lastly, we can equip you with guidance on best practices for that board and committee oversight. Contact us to learn more.  

The post Top Audit Committee Priorities for 2025  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

MGO’s clients need a trusted partner to handle their 401(k) plan audits. We provide cost-effective, efficient service while offering insights into broader financial knowledge and regulatory complexities unique to each client’s business model. Our clients span industries ranging from manufacturing, technology, and apparel to food and beverage, professional services, and more. 

Challenge:  

When a company has 100 or more participants with balances in a 401(k) plan, it requires a 401(k) audit. A company needs an employee benefit plan audit provider that understands its unique business model and can help them navigate evolving regulatory requirements while maintaining transparency for employees and stakeholders. This calls for a nuanced understanding of employee classification, contribution eligibility, and plan participation rules.  

Additionally, with federal regulations governing employee benefit plans constantly evolving, a company needs an auditor with deep experience in ERISA, IRS, and DOL compliance standards for full regulatory adherence. 

Approach: 

When it comes to 401(k) audits, efficiency is key. By leveraging extensive industry knowledge and a thorough methodology, our team provides a seamless 401(k) audit experience that meets compliance and financial reporting requirements.  

Our risk-based approach addresses the complexities of a company’s diverse workforce and definitions of compensation — supporting proper classification and compliance with evolving ERISA, IRS, and DOL regulations. This approach allows us to provide cost-effective 401(k) audits to our clients. 

Value to Client:  

Our efficient approach provides a thorough and timely 401(k) audit, strengthening a company’s financial oversight and reinforcing trust among employees and stakeholders. By delivering a compliance-focused 401(k) audit, we help companies navigate complex regulatory compliance with confidence.  

Beyond the 401(k) audit, our insights into plan administration and financial controls highlight our deep understanding of employee benefit plan audits. Our strategic guidance positions us as a trusted advisor — often leading to invitations to bid on a company’s full-scale financial audit as well as other services. 

Need Help with Your 401(k) Audit? 

At MGO, we offer comprehensive audits covering all aspects of your 401(k) plan to help you achieve compliance and transparency. Reach out to our team today to learn about our Employee Benefit Plan Audits. 

The post Case Study: Simplifying 401(k) Compliance for Plan Sponsors appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The final regulations posed by the IRS and the Treasury have expanded to include all digital content, not just computer programs.

• The new rules define and classify cloud transactions, impacting how they are taxed and sourced.

• Proposed regulations introduce a formula for sourcing income from cloud transactions based on intangible assets, employee functions, and tangible property.

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The Department of the Treasury and the IRS on January 10, 2025, released final regulations on the classification of digital content and cloud transactions. These regulations — T.D. 10022 — generally follow proposed regulations issued in August 2019, with certain modifications to address stakeholder comments received. The regulations are generally effective for tax years beginning on or after January 14, 2025, with the option to elect to apply to tax years beginning on or after August 14, 2019, and all subsequent tax years, subject to certain conditions. 

Treasury and the IRS also released proposed regulations to determine how income from cloud transactions is to be sourced for U.S. federal tax purposes, and a notice requesting comment on the potential implications of applying the characterization rules for digital content and cloud transactions to all provisions of the Internal Revenue Code. Comments on both the proposed regulations and the notice are due by April 14, 2025. 

Relevance

Today, most businesses’ interactions with customers occur in some form of digital or cloud environment. Until now, there have been no final regulations specifically addressing the treatment of digital content and cloud transactions for federal income tax purposes. Both the characterization and sourcing of income from these transactions are important because they impact the application of various international tax provisions of the Internal Revenue Code, including the determination of U.S. withholding tax and other income tax reporting obligations. These regulations will apply to any taxpayer that engages in digital content and cloud transactions across various industries and in a cross-border context. 

A Closer Look

The final regulations modify Reg. §1.861-18 to expand its scope to include the transfer of all manner of digital content so that it is no longer limited to computer programs. Digital content is defined as a computer program or any other content, such as books, movies, and music, in digital format that is protected by copyright law or not protected by copyright law solely due to the passage of time or because the creator dedicated the content to the public domain.  

As in the 2019 proposed regulations, Reg. §1.861-18 classifies transfers of digital content into one of four categories:  

• A transfer of a copyright right in the digital content;  

• A transfer of a copy of the digital content (a copyrighted article);  

• The provision of services for the development or modification of the digital content; or 

• The provision of know-how relating to development of digital content.  

As a result of taxpayer comments, the final regulations replace the de minimis transaction rule with a predominant character rule for the characterization of digital content and cloud transactions. Under the new predominant character rule, a transaction that has multiple elements is classified in its entirety as a digital content or cloud transaction if the predominant character is a digital content or cloud transaction. The predominant character is generally determined by the primary benefit or value received by the customer in the transaction. If that is not reasonably determinable, the predominant character is determined based on the primary benefit or value received by a typical customer in a substantially similar transaction. 

If a copyright right is transferred, the transaction would generally be classified as a sale or license of intangible property. If a copyrighted article is transferred, the transaction would generally be classified as a sale or lease of tangible property. New sourcing rules were provided such that when a copyrighted article is sold and transferred through an electronic medium, the sale is deemed to have occurred at the location of the purchasers’ billing address for purposes of Reg. §1.861-7(c). Reg. §1.861-19 provides rules that generally classify all cloud transactions as services income, eliminating a delineation made in the 2019 proposed regulations between lease and services income. A cloud transaction is defined as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in Reg. §1.861-18(a)(2)), or other similar resources. A cloud transaction does not include network access to download digital content for storage and use on a person’s computer or other electronic device. 

The addition of numerous examples in Reg. §1.861-18 regarding the classification of digital content transactions in various industries, including online gaming and streaming of other types of content, facilitates understanding of the final regulations. The examples emphasize that providers will need to pay careful attention to contracting with customers, including the method and terms of delivery for digital content to achieve a preferred tax outcome. 

One specific example of this concept is the clarification of rules related to the distribution of “software as a service” or “SasS.” Example 10 in Reg. §1.861-19(d) discusses a fact pattern whereby Corp A owns the SaaS IP and provides the service to end customers through its own activities but engages Corp B as a distributor of the SaaS. Corp B will invoice customers, but since all cloud services are provided directly to the end customers by Corp A, the remittance of the required distribution fee to Corp A by Corp B is viewed as a cloud transaction (services income). Reg. §1.861-19, however, would view the distribution transaction as a license or sale of a copyright right by Corp A if Corp B has the copyright right to provide the cloud transactions directly to its customers and exercises such rights through its own activities, in exchange for a distribution fee. 

Reg. §§1.861-18 and 1.861-19 continue to apply only with respect to certain enumerated international tax provisions of the Code. However, Notice 2025-6 requests comments regarding issues to consider in deciding whether to apply the characterization rules in Reg. §§1.861-18 and -19 to all provisions of the Code. 

Sourcing of Cloud Transactions 

The proposed regulations (mostly designated as Reg. §1.861-19(d)) classify cloud transactions (such as software-as-a-service, on-demand platform access) as services and follow Sections 861(a)(3) and 862(a)(3) and some court cases in generally sourcing income to where services are performed. However, the preamble to the proposed regulations recognizes that such general sourcing rules were designed with more traditional operating models in mind. Thus, the proposed regulations attempt to consider the distinctive attributes of cloud transactions. The proposed regulations provide a mechanical formula that is based on the location of intangible assets, employee functions, and tangible property pertaining to the provision of the cloud transaction, and results in a fraction that is applied to the gross income from the cloud transaction to determine source. 

The intangible property factor is intended to reflect the contribution of intangible property to the provision of the cloud transaction and is comprised of research and experimental (R&E) expenditures, royalties, and amortization expenses for intangible property used in the cloud service during the taxable year. For this purpose, R&E expenditures are those associated with cloud transactions in the same product line as the cloud transaction performed and the amortization and royalty expense for intangible property that is directly used to provide the cloud transaction. If the same expense could be included in the intangible property factor for more than one cloud transaction during the taxable year, the expense should be allocated among those cloud transactions based on the relative gross income earned from each cloud transaction. The U.S. portion of the intangible property factor is determined based on the extent to which the R&E employees perform services in the same product line in the United States (determined using Industry codes). 

The personnel (employee) factor is intended to reflect the contribution of certain employees to the provision of the cloud transaction and includes the compensation of employees that perform or manage technical or operational activities of the cloud service (for example, engineering, operational, and support activities). Any compensation paid to R&E personnel is covered under the intangible property factor and is therefore excluded under the personnel factor. For personnel that directly contribute to multiple cloud transactions, the employee’s compensation is allocated based on the relative amount of time the employee spends contributing to each cloud transaction. If an employee contributes to multiple cloud transactions simultaneously, then that employee’s compensation is allocated based on the gross income earned from each cloud transaction. The U.S.-source portion is determined based on the extent to which the employees perform services in the U.S. 

The tangible property factor is intended to reflect the contribution of tangible property to the provision of the cloud transaction and focuses on depreciation expense or rental expense of physical assets (servers, networking equipment) directly involved in the provision of the cloud services. Depreciation expense is to be determined by dividing the adjusted depreciable basis (as defined in Reg. §1.168(b)-1(a)(4)) of the tangible property by the applicable recovery period as though the alternative depreciation system set forth in Reg. §168(g)(2) applied for the entire period the property has been in service. For any depreciation or rental expense that could be included in the tangible property factor for more than one cloud transaction, such expense should be allocated based on the relative gross income earned. The U.S.-source portion is determined by the location of the owned or leased assets. 

The denominator of the formula is the sum of the above factors. The numerator is the sum of each factor that is from sources within the U.S. The fraction that results from dividing the numerator over the denominator is multiplied by the gross income of the relevant cloud transaction(s) to determine the U.S. source amount. The remainder is assumed to be foreign-source. 

One of the most important aspects of the proposed regulations is that the above factors are applied exclusively on a taxpayer- by-taxpayer basis. Therefore, if the cloud transactions involve multiple related parties, the factors and activities of the related parties are not considered for purposes of the sourcing rules. However, attention should be paid to any related parties acting as agents for the taxpayer, as such factors/attributes presumably may be imputed to the taxpayer. 

A taxpayer can aggregate substantially similar cloud transactions and source the gross income from those transactions as if they were one transaction. An anti-abuse rule prohibits aggregating substantially similar cloud transactions if doing so would materially distort the source of gross income from any cloud transaction. 

David Hemmerling, Michael Masciangelo and Patrick Carew. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

Navigating the complexities of the new digital content and cloud transaction regulations requires a strategic approach to compliance and tax planning. MGO’s team of tax professionals has a breadth of experience in international tax provisions, digital transactions, and cloud-based business models. We can help businesses assess the impact of these new regulations, structure your transactions to optimize your tax outcomes, and make sure you’re compliant with evolving IRS guidelines.

Whether you need assistance with classification, sourcing, or documentation, MGO provides tailored solutions to help you mitigate risk and capitalize on opportunities in the digital economy. Reach out to our team to make sure your business is positioned for success with these regulatory changes.  

The post IRS, Treasury Issue Final and Proposed Regulations on Classification and Sourcing of Digital Content and Cloud Transactions appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Confirm the new auditor meets industry regulations and independence standards to keep compliance and avoid potential concerns. 

• Selecting an auditor with relevant experience supports financial reporting accuracy and a better understanding of industry requirements. 

• A structured transition process supports a smooth change, reducing potential disruptions and keeping financial reporting on track. 

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Changing auditors is a significant decision for any business, whether private or publicly traded. The choice affects regulatory compliance, financial reporting quality, and stakeholder confidence. If your company is considering a change, these key factors can help you navigate the transition effectively: 

1. Regulatory and Compliance Considerations 

Publicly traded companies must follow oversight and reporting requirements set by the Public Company Accounting Oversight Board (PCAOB) and the U.S. Securities and Exchange Commission (SEC). Auditor independence, rotation, and reporting timelines are critical factors. 

Private companies, while not subject to the same requirements, still need to follow American Institute of Certified Public Accountants (AICPA) standards. Reviewing whether a new audit firm meets industry-specific rules and regulatory expectations helps avoid compliance risks. 

2. Industry Knowledge and Specialization 

An audit firm with experience in your industry may offer deeper insights into accounting standards, risks, and financial reporting challenges. Businesses in technology, healthcare, real estate, or manufacturing face unique regulatory and financial considerations. 

Auditors with a background in industry-specific frameworks — such as Financial Accounting Standards Board (FASB)  or Governmental Accounting Standards Board (GASB) rules for public entities — can help the process. 

3. Transition and Onboarding Process 

Switching auditors involves transferring financial records, adapting to new audit methodologies, and maintaining reporting consistency. A well-organized transition reduces potential delays and misalignment between financial teams and the new audit firm. 

Your company should evaluate how the new auditor will handle the onboarding process — including access to prior audit documentation, risk assessments, and compliance reporting. A structured plan can help minimize disruptions. 

4. Audit Fees and Cost Transparency 

Audit fees vary based on factors such as company size, industry complexity, and added reporting requirements. While cost should not be the only consideration, understanding the full pricing structure is important to avoid unexpected charges. 

Some firms offer a base audit fee but charge separately for added services — including internal controls testing, risk management assessments, or regulatory filings. Requesting a detailed breakdown of fees allows for better budgeting and cost planning. 

5. Reputation and Stability of the Audit Firm 

The reputation and financial stability of an audit firm can change external feelings, especially for publicly traded companies. If an auditor has been involved in regulatory investigations, PCAOB deficiencies, or high-profile audit restatements, it may raise concerns for investors and stakeholders. 

Your company can review an audit firm’s regulatory history, inspection reports, and client feedback to assess its standing in the industry. A well-established firm with a history of quality audits may provide greater reliability in financial reporting. 

6. Technology and Data Security in Audits 

Advancements in audit technology have improved efficiency, accuracy, and risk assessment. Some firms use data analytics, AI-driven audit tools, and cloud-based financial reporting platforms to enhance the audit process. 

If a company handles sensitive financial or customer data, evaluating an audit firm’s cybersecurity measures is essential. Strong data security protocols help reduce risks related to unauthorized access or breaches. 

7. Communication and Audit Process Alignment 

The relationship between a company and its auditor should involve clear expectations around reporting timelines, issue resolution, and overall communication. 

Some auditors take a more proactive approach, providing regular updates, insights into financial risks, and recommendations for process improvements. Others may follow a more structured, compliance-only framework. Your business should assess which approach aligns best with your needs. 

8. Independence and Potential Conflicts of Interest 

Audit firms must follow strict independent guidelines to avoid conflicts of interest. Regulations limit non-audit services provided to clients — such as consulting, tax advisory, or internal controls assessments — to prevent potential bias in audit opinions. 

Both public and private companies should review whether a prospective auditor has existing relationships that could affect objectivity. The SEC and PCAOB provide guidance on situations that may impair independence. 

Think Ahead for a Smooth Auditor Transition 

Changing auditors is a significant decision that affects financial reporting, regulatory compliance, and stakeholder trust. Whether your company is looking for a different audit approach, advanced technology, or a firm with deeper industry knowledge, selecting the right provider is critical to a smooth transition. 

If your business is evaluating a new audit firm, researching regulatory history, pricing transparency, and service capabilities can help set up a solid foundation for the next audit cycle. 

Consider MGO for Your Next Audit 

At MGO, we bring extensive experience across multiple industries — offering audit and assurance services tailored to public and private companies, government entities, and high-growth organizations. We combine regulatory knowledge, advanced audit technology, and a commitment to transparency to help your business navigate the complex financial reporting landscape. Our approach goes beyond compliance by delivering meaningful insights that support financial accuracy, risk management, and long-term success. Contact us today.

The post 8 Key Considerations When You’re Changing Auditors appeared first on MGO CPA | Tax, Audit, and Consulting Services.