Connect with us

Accounting

Risk should work for your clients, not against them

Published

on

As a successful accountant, you are no stranger to risk. Whether working with individuals or business owners, you help your clients navigate a wide variety of economic, regulatory, political and personal factors to make the best possible financial decisions. And those factors are constantly changing. 

In daily life, risk is the probability of something bad happening based on the actions you take. Take investment risk. For investors, risk is the likelihood that their actual return will differ from their expected return. To understand what is happening in a portfolio, investors must understand risk. It’s a fundamental premise of investing that the more risk you are able to tolerate, the greater your potential return can be. For instance, growth stocks experience far more ups and downs than U.S. Treasury bills and hence are much riskier. 

You may not be advising your clients directly on their investments, but you owe it to them to make sure they are in touch with their risk tolerance and that they’re working with an advisor who takes that risk tolerance and their financial goals into account when constructing their portfolio.

Some investors are risk averse. Others embrace risk wholeheartedly. Most are somewhere in between. Whatever your client’s risk tolerance, the potential return on their investments should be commensurate with the amount of risk they’re willing to accept. That means understanding all the various sources of risk, managing them prudently, and using that knowledge to make better financial decisions even when the market is volatile and emotions are running high. As General George Patton famously said, “Take calculated risks. That is quite different from being rash.”

Managing risk

Managing risk is highly complex. Fortunately, there is powerful software that can assess thousands of different risk factors pertaining to securities and investments. When your client’s financial advisor connects these factors to their individual goals and helps drive risk-appropriate solutions, they can accomplish three important things: 

  1. Understand which accounts and specific holdings are driving your client’s overall risk, using sophisticated risk analytics.
  2. Illustrate, hypothetically, how different market events might impact your client’s current holdings and overall financial future.
  3. Explore strategies to shift and mitigate some of the embedded risks your client is facing.

If your client’s financial advisor is not able to provide this type of analysis, it might be worth making a change. Doesn’t it make sense to learn about the portfolio risks your clients are exposed to before something catastrophic happens that can derail their client’s retirement cash flow and financial future? It’s essential to consider risk, not just within your client’s portfolio, but across their entire financial picture.

By understanding the specific drivers of portfolio risk, you can help your clients and their financial advisors work together to model potential changes.

We can’t control the markets. But we can help clients understand risk, manage it and use it to drive appropriate financial decisions.

Many of our new clients believe they have a diversified portfolio because they hold mutual funds from different fund families. Usually, they’re not as diversified as they think. After conducting our mutual fund overlap analysis, we often find that many of their funds hold the same stocks, leading to unintended overexposure to specific companies or sectors. This overlap reduces the diversification benefits of the portfolio, as multiple funds essentially replicate similar risks. By identifying and reducing these redundancies, we can create a more diversified, balanced allocation that further minimizes risk and aligns with the client’s goal of stable returns.

Real-world example

A client told us they were well diversified because they owned a variety of mutual funds and exchange traded funds from several major fund families. After seeing our overlap report of their holdings, however, they were taken aback. Like many investors, they had a great deal of stock overlap in their mutual funds and ETF portfolios because those different funds held many of the same stocks. This increased their concentration risk and reduced the benefits of diversification.

This overlap can expose investors to heightened market volatility and to potential underperformance if the overlapping stocks decline. For taxable accounts, mutual funds present an additional risk due to potential capital gains exposure. That’s because fund managers may distribute gains from sales of long-held assets, resulting in unexpected tax liabilities. To reduce these risks, investors and their advisors should (a) analyze fund holdings for overlap, (b) diversify across investment styles and asset classes, and (c) prioritize tax-efficient ETFs or index funds. Regular portfolio monitoring and rebalancing can help address these challenges and maintain a well-diversified, tax-aware investment strategy.

Continue Reading

Accounting

IAASB tweaks standards on working with outside experts

Published

on

The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

Continue Reading

Accounting

Tariffs will hit low-income Americans harder than richest, report says

Published

on

President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

Continue Reading

Accounting

At Schellman, AI reshapes a firm’s staffing needs

Published

on

Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

Continue Reading

Trending