Living Your Vision Part 1

This article begins a new journey for you the reader and for us as well. Through this series of editorials we are going to try to help you create a path that will enable you to “live your vision.” What exactly does that mean? In our terms, living your vision is creating a path through life that enables you to live your best life. A key step in achieving this is planning for a secure and comfortable future where you can be financially sound without having to work until the day you leave this Earth. The following quote from James Allen one of the fathers of the self-help movement, provides a perfect summarization to take to heart. “The vision that you glorify in your mind, the ideal that you enthrone in your heart – this you will build your life by, and this you will become.”

How do you Define your Journey in this Life and Your Vision of Success?

People search for ways to tap into the magic “it” that will allow them to have the kind of life they are most comfortable living. You hear a lot of advice about the “power being within you and you just have to harness it” in order to achieve this kind of existence. You can mediate, read books, listen to self-help programs, create dream and goal boards, and do daily affirmations and still never really figure out those key first steps that actually allow you to define your vision for your journey through this life.

Start Defining your Vision as Soon as you can. There’s no Time like Now.

It’s never too late to start with a vision plan. A lot of people try to figure it out in their twenties if they are really getting a solid grip on the future and what it may bring. However, no matter your age, getting a start is better than never starting at all! As C.S. Lewis said, “You can’t go back and change the beginning, but you can start where you are and change the ending.”

Take a moment to figure out what you want out of your life and where you want it to go ideally, not just in a financial sense but in a whole life approach. There are some things to check in with yourself to see if you are doing. Decide which elements you need to put together and define what type of vision you want to build.

Never be Afraid of Things that Seem Impossible. Always Take Risks.

There should never be a point in your life where you stop daring to take chances. Nothing should look impossible and you should keep pushing forward to make things happen in your professional and personal life. You are your first and best advocate. If you aren’t pushing yourself to achieve tasks that might seem insurmountable; no one else will.

Failure is a Partner to Success. Failure Builds Experience and Leads to Success.

Thomas J. Watson, the man who created the IBM corporate structure encouraged people to not only keep pushing to do impossible things, but also to fail, and not to just fail, but to look at failure as a partner of succeeding. It is something you can grow and learn from and will help clarify the path that you want to take. “Would you like me to give you a formula for success? “asks Watson. “It’s quite simple, really. Double your rate of failure. You are thinking of failure as the enemy of success. But it isn’t at all. You can be discouraged by failure or you can learn from it, so go ahead and make mistakes. Make all you can. Because remember that’s where you will find success.”

Be sure to have Passion and a Desire to Define your Vision as your Own.

Find the desire that fuels your vision of a present and future that you want to achieve. What’s the point of moving forward with a plan and a vision if it doesn’t actually spark desire for success within you? It’s one of the fundamental building blocks that allows you to set the cornerstone for your future journey in life and financially. If you aren’t passionate about one path and you don’t have a driving desire to fulfill that journey and continue on that path; maybe there is a need to examine how you came to be on this path in the first place. Did someone else pass their own dreams and desires onto you until you embraced their journey as your own? Find your true passion, funnel that into your vision, and you will have the drive and determination to build your current vision and future visions.

Work Hard, Strive for Excellence in Your Journey, and Find Success.

The final starting point when defining your vision is to strive for excellence in your journey, and work diligently to get to success. Success is not something that sits at the end of your vision journey and just waits patiently for people to come to it. Hard work, a good work ethic, and being excellent to yourself and your path of a vision for the present and future are the only ways that you will achieve this success. Success does not come to the lazy and to those who sit waiting for opportunity to knock at the door.

TAX ALERT: Details of California’s “Wayfair” Nexus Law

California is one of several states now incorporating requirements for sale tax collection from online retailers located outside the state but delivering goods to buyers within. Based on the U.S. Supreme Court ruling in South Dakota v. Wayfair, California Assembly Bill 147 was signed into law by Governor Gavin Newsom on April 25, 2019. The new law, effective retroactive to April 1 of this year, requires retailers selling tangible personal property into the state to “collect tax from the purchaser, file a return and remit the tax to the California Department of Tax and Fee Administration (CDTFA).”

Details of California’s Nexus Law

California used the South Dakota law as a relative guide, where the threshold – or nexus – for collecting taxes by online retailers begins once sales reach $100,000 or 200 transactions in the state. California instructs retailers to begin collecting the 7.25% state tax on the sale of tangible personal property for delivery into the California once sales reach $500,000, but with no transaction threshold.

Furthermore, Special Notice L-591 was issued by the CDTFA to also take effect on April 1. This notice requires retailers to collect local use taxes once a threshold of $100,000 or 200 transactions has been reached within that locality or district, regardless of sales or transactions in another district within the state.

Another component of the new law addresses the sale of goods to California residents through platforms such as Amazon, eBay, Etsy and others, where the platform or “marketplace” facilitates the transaction. The marketplace facilitator must register as a seller with the CDTFA, collect sales tax on behalf of the seller, and remit the tax to the California tax department. This particular phase of the law is not scheduled to become effective until October 1, 2019.

Although the new California law will undoubtedly impact many online retailers, there is a provision that may provide some relief to smaller businesses. The temporary provision states that for businesses selling tangible personal property into California that is less than $1 million through the tax period ending December 31, 2022, taxes and fees may be waived by the CDFTA if the retailer registers with the state and was not required to do so prior to the law becoming effective.

More Complications for Retailers

It is estimated that anywhere from $1 billion to $2 billion of tax revenue went uncollected from out of state retailers and that the new law could provide an additional $500 million in tax revenue to the state.

Much of this depends on how simple California makes the tracking, reporting and payment of tax revenue by online retailers. While the collection of revenue based on a single, state-wide tax rate might be simple enough, the additional district taxes may potentially add complexity to the issue, making it more difficult to collect. Some states are offering allowances when retailers use automated tax software to track and collect taxes and not holding the retailer accountable if mistakes are made due to the software. This may be relatively easy at the state level but difficult at the district level, as every address must adhere to the latest zoning requirements for specific districts while also ensuring alignment according to the tax software being used.

What Consumers Must Understand

For consumers in California, there may not be a significant change in the rate in which they buy online, as many are already paying sales tax on goods purchased this way. Any concern consumers have regarding a revoking of the Internet Tax Freedom Act (ITFA) should be alleviated, as the ITFA only prohibits states from levying tax on internet access, not the sale of tangible personal property.

It is likely that California will see additional tax revenue with the implementation of this new law. How much revenue will remain to be seen, especially with the $500,000 threshold as well as the provisional leniency for smaller businesses until 2022.

Cannabis Private Investment Review

The Private Investment Trends Defining the Future of Cannabis

The MGO | ELLO Cannabis Investment Review is the first publication of its kind for the cannabis industry.  Developed in cooperation with PitchBook, the premier data provider for the private and public equity markets, the report offers a wide range of marketplace insights to an industry that is increasingly hungry for data.

The Review examines this generation’s most dynamic industry from a private market perspective, investigating venture capital and private equity trends, and the consolidating M&A deals reshaping the cannabis landscape.

The report finds that venture capital investment in cannabis has soared to new heights, far surpassing last year’s impressive rally, despite federal restrictions on banking and financing. Plus, investment in cannabis reached nearly $1.3 billion before the first half of 2019, exceeding last year’s tally of nearly $1 billion for all of 2018.   The report goes on to examine a number key factors influencing cannabis industry growth, including:

  • The growing cannabis ecosystem
  • Location: The impact of federal, state and local laws on cannabis investments
  • How to value cannabis startups
  • What’s next in the cannabis industry?
Download the PDF >

Download the PitchBook

Thank you for your interest.

Please fill out the short form below to download your PDF of the MGO | ELLO Alliance 2019 PitchBook.





MGO Managing Director Attends Harvard Business School Executive Program

Antony Gordon Shares his insights in a special edition Insight post

Antony Gordon, Managing Director at MGO had the opportunity to attend the prestigious Harvard Business School (“HBS”) for a special session of their Executive Program of The Business of Entertainment, Media and Sports. We asked him to give us his thoughts on the program, but in terms of valuable tools they used and content. He also provided insight into the future usages of the course and mentions several of the higher profile talent that were part of the session. Here is Antony’s blog created from his time at Harvard!

There is arguably only one Business School in the world that could attract Grammy-winning singer Ciara Wilson, stars of HGTV series “Fixer Upper” Chip and Joanna Gaines, “NCIS: Los Angeles” actor Eric Christian Olsen, Cleveland Cavaliers power forward and NBA All-Star Kevin Love, Los Angeles Clippers small forward and Cameroonian prince Luc Mbah a Moute, New Orleans Pelicans power forward Julius Randle, former Bayern Munich goalkeeper and 2002 World Cup Golden Ball winner Oliver Kahn and former Everton midfielder Tim Cahill to spend four intense days in a classroom – and that is Harvard Business School (“HBS”).

This past week I had the distinct honor and privilege of representing MGO at Harvard Business School’s elite Business of Entertainment, Media and Sports (“BEMS”) Executive Course on HBS’s famous campus.

Each day was spent discussing one of the famous HBS case studies mostly penned by the head of the Entertainment, Media and Sports Department at HBS, Professor Anita Elberse (pictured next to Antony Gordon).

Day # 1:

A case study focusing on the Launching of Jay Z’s Decoded. The Case study revolved around David Droga and Andrew Essex, co-founders of advertising agency Droga5 and the unique campaign they developed in the form of a partnership between Jay Z and Microsoft Bing to launch Jay Z’s lyrical memoir, Decoded. The thrust of this discussion was the importance of pushing the envelope in creative marketing campaigns in the entertainment and media industries and how to marry talent and digital media.

Day # 2:
  • The Walt Disney Studios – We focused specifically on Disney’s “Tentpole Strategy” whereby the studio takes 7-8 huge bets every year on big budget movie releases.
  • Futbol Club Barcelona – The focus in this case study was key trends in the business of European football and the internal struggle at Barcelona FC whether to continue to invest in La Masia (Barcelona’s Youth Academy) Vs acquiring megastars, the model followed by Real Madrid.
  • LeBron James – We focused on the making of a billionaire dollar brand through the launch of LRMR which leverages LeBron’s name through equity positions in a broad range of companies as opposed to the outmoded straight sponsorship/endorsement model.
Day # 3:
  • The Metropolitan Opera – Here we looked at the initiative launched by Peter Gelb, the General Manager of the NYC Metropolitan Opera House, to expand the audience of opera viewers and to scale the Mets model by broadcasting performances live in high-definition to movie theaters across North America.
  • Facebook – This case study provided an opportunity to appreciate the paradigm shift brought about by digital marketing and the power of data mining;
  • Buzzfeed – We looked at the power of Native Advertising and the research done on increasing the chances of content ‘going viral’.
  • MRC’s House of Cards – This sessions was utilized mainly to discuss the major trends in the TV business and the position Netflix is seeking to carve out for itself in the television business.
Day # 4:

A case study on Dwayne “The Rock” Johnson. More specifically, we looked at the business model related to launching a digital channel.

The final session of the BEMS Course before wrapping up and the mini HBS Graduation Ceremony, was an interactive discussion lead by Professor Anita Elberse on The Future of Entertainment. The level of detail and the granularity of research that we discussed was mind boggling. The main points of which can be summarized as follows:

(i). Success in the Business of Entertainment, Media and Sports can only be reached by taking big bets. All the research indicates that attempts to mitigate risk at the cost of creativity does not work in these industries;
(ii). The power of megastars is what will drive these industries for the foreseeable future and is only becoming more profound;
(iii). Blockbusters success in these industries is not for the faint of heart. Binary big bets is the formula for huge success in these industries.

I feel privileged to be amongst a tiny fraction of people in the world that have had the opportunity to study at some of the most renown educational institutions in the world, including Oxford University and Harvard Law School. Having said that, everything pales in comparison to the experience at Harvard Business School last week. The course was life changing – both in terms of the scope of the content shared and the level of relationships that I developed in these industries throughout the world.

My take home goals in the near future on behalf of the firm are as follows:

To take the main points learned by some of the greatest minds and leaders in these industries and ensure that MGO is embracing some of these concepts to ensure that we remain ahead of the competition and have the intestinal fortitude to take the business risks that are absolutely required to achieve success in these industries through internal articles, a proposed presentation at our annual Partners Retreat on the material we covered and to earmark time to have a ‘Mini White Board Session’ with Kevin O Connell so make sure that the firms forward-looking strategy is in synch with the trends that were prognosticated at Harvard Business School. To that end, my focus over the next few weeks is to parlay the wealth of information and the robust relationships cultivated from the classroom to the firm.

I have to thank MGO for ensuring I was able to participate in a life changing experience that should be accretive to the firm’s bottom line in the years ahead.

TAX ALERT: Latest on the Wayfair Impact on State Nexus Laws

Following the US Supreme Court’s landmark decision in the South Dakota v. Wayfair case, states across the US are rolling out economic nexus laws requiring remote sellers to collect sales tax in states where they sell and deliver goods. The new nexus laws across the US will have a major impact on online retailers with intrastate business, state agencies tasked with enforcing and collecting new tax revenue, and consumers shopping from home.

The Fundamentals of South Dakota v. Wayfair

In 2016, South Dakota passed legislation that levies sales taxes on vendors that sell and deliver goods into the state. The state then sent notices to several internet companies they believed were well over the $100,000 threshold established in the new law. One of those companies receiving a notice was Wayfair, a Boston-based online retailer of home goods. Wayfair contested the legislation, bringing the fight to the South Dakota Supreme Court. The state court ruled that South Dakota was bound by the 1992 Quill Corp. v. North Dakota decision, indicating that state sales tax collection was not necessary for online retailers with no physical presence in the state.

South Dakota took their state’s decision to the US Supreme Court, where in June of 2018, the US Supreme court determined, by 5-4 majority, that internet retailers are subject to a state’s sales tax if selling and delivering goods to residents within that state, even if the retailer has no physical presence. As a result of this ruling, South Dakota placed a threshold, or nexus, of $100,000 gross retail sales or 200 individual transactions before sales tax would be collected.

Although it may have appeared that all internet purchases were exempt from sales tax, in reality, sales tax was historically only paid when purchases were made from an online retailer within a state where the retailer has a physical presence.  Before the Wayfair ruling sales tax was being collected on approximately half of all e-commerce purchases.

The Wave of Wayfair Laws

A growing list of states have begun implementing their own versions of e-commerce tax laws and establishing economic nexus rules, and those that haven’t are expected to do so by the end of the year.

Although incorporating sales tax requirements for individual states my sound complex – especially for smaller retailers, states are hoping to simplify the process by allowing online retailers that use compliance software some leniency. By incorporating this, along with simplified state rules, some states are offering audit immunity to sellers if errors are made by the sales tax software.

After the Supreme Court ruling, New York became one of the first states to begin enforcing what they viewed as existing tax provisions for out of state retailers. California signed into law their version of the tax law, effective April 1, 2019 while Pennsylvania’s law takes effect June 1st of this year. Texas, on the other hand, has been in no rush to implement their plan, specifically indicating they were leaving money on the table through the 2018 Christmas season. With that in mind, Texas now has an effective date of October 1, 2019.

States such as Ohio and Massachusetts are taking a different approach toward establishing nexus rules for their states. Their variation is based on cookies used for web tracking and mobile applications.  If a cookie has been placed on a buyer’s computer or mobile phone and a purchase has been made, then the online retailer is considered having established a presence in the state, although each cookie is roughly just a few kilobytes of data.

In all, 34 states have already established some form of nexus or are moving forward with their own versions.

The Implications for Retailers

Passing legislation and making official e-commerce tax laws is one thing. Effectively enforcing it might be another. MGO recommends that companies that exceed the nexus threshold properly register with each state and make provisions to comply with their respective tax laws.

Registering a business with each state should be generally straight forward, as each should have information easily accessible online.  Establishing a tax identification and tracking system, using either the state’s software or existing finance software, is essential to tracking sales and taxes due. Finally, companies must remit the appropriate payment to the respective state agencies in order to be in compliance.

Not complying with these steps could lead to an audit from each state in arrears, as well as back taxes owed to each municipality, including interest and fees.

Congress Could Take it out of the States’ Hands

While the states are moving to take advantage of the opportunity provided by South Dakota v. Wayfair, Congress has been considering two different approaches to resolving the issue. One, the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), are similar bills that allow for sales tax to be collected by each state if they simplify their sales tax. The other, proposed by US Representative Bob Goodlatte (R-VA), suggests that sales tax be collected by the business in the state where the company is located but then remit the collected tax to the states where the buyer resides.

The RTPA and MFA appear to have more support and may likely pass, especially with the recent retirement of Representative Goodlatte prior to the 116th Congress.

As of now, states continue to move forward under the South Dakota v. Wayfair ruling and 2019 could see most states implementing their own sales tax collection requirements.


Top Cyber Risks Threatening the Cannabis Industry

As cannabis evolves into a multi-billion dollar global industry, booming revenue, historic M&A deals, and eye-watering capital raises dominate business headlines. But as cannabis enterprises expand at a rapid pace and scale operations to meet growing demand, greater assets and a higher profile also increase the risk of targeted cyberattacks by threats inside and outside an organization. A number of breaches have already affected the industry, and the potential losses – due to compromised intellectual property, confidential customer and/or patient data, and other important information – can be catastrophic for both start-ups and established businesses.

MGO Technology Group has leveraged contacts from the dark web, conversations with federal authorities, and other proprietary research and insight to provide an overview of the leading cyber threats cannabis enterprises face.

Who is Targeting Cannabis and Where are They Attacking?

Information gathered by MGO Technology Group from underground assets and federal investigations indicates that, to date, there is no specific group actively targeting the cannabis industry. But there are hackers focusing on three areas within the seed-to-sale lifecycle:

  • Research and extraction
  • Cultivation
  • Consumption and retail operations.

Investigations revealed two incidents where intellectual property was stolen by a former employee due to partial or ineffective security practices. In addition to potential malicious insiders, external threat actors are expected to attack the research portion of the industry in order to steal intellectual property. Potential targets of hackers include strains being developed, marketing strategies, and technology practices related to cultivation.

Potential Impact on Hacked Cultivators 

The loss or modification of proprietary information, such as strain development and cultivation methodology, could severely impact the production of future products, result in a tampered or inferior product, or the loss of competitive advantage within the industry. While an increased timeline for a future product or loss of IP to a competitor would result in a negative financial impact, the release of a tampered product could also cause a negative reputational impact as well.

Risks Presented by Cannabis Payment Systems

The search for payment solutions in the notoriously cash-heavy cannabis industry has led to the emergence of a number of payment systems. While they may be convenient, they are a high-risk target for hackers. Mobile applications that are not securely developed or have appropriate oversight are at risk and provide an attack vector for malicious actors. The success breaching of an application could provide access to customer financial information, leading to mistrust of the application author and discontinued usage.

Protecting Medical and Customer Information

As the legalization of medical and adult-use cannabis spreads across North America, the customer base will continue to expand making retailers increasingly high-priority targets of malicious actors. Medical information and Protected Health Information (PHI) are already highly valued assets for cyber-criminals.

Similar to other small businesses and early stages of a new industry, the protection and security of computers and networks involved with customer information is minimal or inefficient. Specifically, this involves the Point-of-Sale system and supporting infrastructure, two of the most targeted assets, a breach of which would result in the theft of customer information. Once again, a breach of customer information, especially PHI, will not only have a negative impact to the reputation of the retailer and industry overall, but could result in HIPAA violations resulting in millions of dollars’ worth of fines.

For more information on how to protect and secure your company assets reach out to MGO Technology Group

Reading the Cannabis Leaves: What M&A Activity Tells Us About the Future of Cannabis

cannabis, M&A, mergers, industry, future, advisory, growth, planning, scaling, consulting, audit, tax

As more states legalize the use of cannabis for medical and recreational use, cannabis companies are seeing a rapid rise in revenue. Profits are always the long-term goal, but many companies that grow, process and sell cannabis, and related products, are raising capital and seeking mergers, acquisitions and partnerships in order to build a broad infrastructure ready to meet the increase in demand that will likely follow as more markets emerge.

Similar to the flurry of dotcom companies building out their platforms in the late 1990s, cannabis companies are investing vertically in order to provide seed-to-sale capability all under one roof. It’s this development, along with anticipated nationwide legalization, that is driving a number of mergers and acquisitions. Although there has been consolidation in prior years, 2019 is shaping up to be a bellwether, illustrating that the cannabis industry is preparing for a growth explosion.

The Record Breaking Start to 2019

So far in 2019, there have been several mergers and acquisitions worth billions of dollars. The action got an early start with two announcements in December of 2018; the MedMen acquisition of PharmaCann, and the purchase of a 45% stake in Cronos by Altria, the parent company of Phillip Morris USA. The MedMen-PharmaCann agreement included an all-stock transaction worth US$682 million and gave the combined company licenses to operate in 12 states with 79 cannabis facilities. The Altria-Cronos deal equates to US$1.8 billion for a 45% stake, with an option to purchase a majority stake in Cronos down the road.

In March of this year, Arizona-based Harvest Health & Recreation, announced it would purchase Chicago-based Verano Holdings, a vertically-integrated operator of licensed cannabis cultivation, manufacturing and retail facilities, for US$850 million.

More recently, in early April Cresco Labs agreed to purchase Origin House in an all-stock transaction valued at US$824 million. In late April, Canopy Growth Corp paid US$300 million for the right to merge with Acreage Holdings. Ontario-based Canopy Growth Corp, the first publicly traded cannabis company in North America, will purchase Acreage shares for US$3.4 billion, with full legalization acting as a triggering event for the complex merger deal.

In addition to mergers and acquisitions between cannabis companies, there is growing interest in cannabis from non-industry companies, such as alcohol, pharmaceutical, and tobacco – as illustrated by the Altria-Cronos announcement. Companies such as Constellation Brands, an international producer and marketer of beer, wine and spirits, paid $190 million for a stake in Canopy Growth Corp, hoping to counteract slowing beer sales and enter new cannabis-related markets.

What is Driving Cannabis M&A Activity?

There are several factors motivating the increase in mergers and acquisitions in the cannabis space. Companies are seeking a variety of goals, such as a desire for vertical integration, an interest in operations in multiple states, and the aspiration by non-cannabis companies to enter the market. While these developments are worth noting, the trend is being driven by a much larger issue: the likelihood that cannabis use will be legalized nationwide by the US federal government. Investors and analysts believe this is more a case of when rather than if.

When legalization occurs and interstate restrictions are lifted, those companies maneuvering now will be well-positioned to effectively seize market share while others play catch up.

The US Congress, while not including language that would help resolve conflicting federal and state cannabis laws in pending criminal justice reform legislation, has left the door open to having a debate on nationwide legalization. “If there is an attempt to legalize across the country, we should have that debate and let the Congress decide the issue instead of creating a backdoor to legalization,” said Senator Chuck Grassley, the outgoing chairman of the Senate Judiciary Committee.

Forecasting Beyond 2019

The wave of consolidation in 2019 is likely only the beginning. If a federal law is passed that legalizes cannabis, there will likely be a second wave of mergers and acquisitions with much higher stakes as the industry sorts itself out in in an effort to anticipate and fulfill coming demand.

In addition to consolidation, there will likely be a change to the banking industry in relation to doing business with cannabis companies. As of now, financial institutions are at risk of penalties, such as asset forfeiture and criminal fines, if they do business with companies in this space. In response to that risk, the House Financial Services Committee voted in favor of a bill protecting banks from federal punishment if they do business with such companies.

These moves signal a shift in how lawmakers are now viewing cannabis. If the federal government legalizes cannabis and financial institutions are allowed to engage those companies growing and selling it, then consolidation and investment in the near future could make 2019’s dazzling transactions look like chump change.

Does Your Organization have a Need for an Independent Eye on Performance?

Alternative Engagement Types: Consulting Services, Agreed-Upon Procedures, and Performance Audits

By Scott P. Johnson, CPA, CGMA
Partner, Macias Gini & O’Connell LLP
State and Local Government Advisory Services

I have spent most of my professional career over the past 35 years serving government agencies and focusing on performance improvement, accountability, and transparency. I recognize the need for continuous monitoring and oversight in the public sector to ensure performance, public accountability, and stewardship of public resources. While participating on a number of professional panels and presentations throughout my career, I have often stated that I embraced the auditor and have welcomed them with open arms into the organizations that I had responsibility over. Why? Because I see auditors as an independent and objective lens, adding value to review and evaluate performance and to make recommendations for improvement. The organizations I have had the pleasure to work for took public accountability very seriously and supported performance improvement as a means to better serve their communities and stakeholders.

Much like a traditional CPA firm can provide different types of services related to an entity’s financial statements, i.e., audit, review, or compilation, based on need, when government agencies are considering an independent evaluation of performance of their programs or operations, the CPA firm’s advisory or consulting arm can step in and offer a number of engagement types based on the agency’s unique needs: consulting services engagements, attestation engagements (e.g., agreed-upon procedures), and performance audits. It all depends on if, and at what level, assurance is needed. The primary driver of what type of product should be considered is typically based on, for instance, issue complexity, taxpayer concerns or expectations, statute requirements, or increased need for transparency on the efficiency and effectiveness of operations. While the driver of the engagement may differ, time constraints and budget are also determining factors.

This is the first article in a three-part series focusing on performance audits. The primary focus of this article is to discuss the differences of the three aforementioned types of engagements – consulting services, agreed-upon procedures, and performance audits – and to provide guidance when a performance audit might be an option.

It is important to identify the differences between (1) performance audits, (2) consulting services engagements, and (3) agreed-upon procedures attestation engagements. On numerous occasions throughout my government service career and also while serving clients, questions have come up regarding the objectives sought, the scope of the engagement, and the engagement type when considering an evaluation of performance for a particular program or area of operations. Each of these engagements differ in purpose and reporting requirements, as well as potential cost, as shown below in Figure 1.0. These engagements are governed by different standards, formal reports are not always required for each, and independence is not always required (i.e., consulting services).

Performance Audits Defined

Performance audits are defined as engagements that provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight to, among other things, improve program performance and operations, reduce costs, facilitate decision making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability. *1

Furthermore, GAGAS states that management and officials of government programs are responsible for providing reliable, useful, and timely information for transparency and accountability of these programs and their operations. Legislators, oversight bodies, those charged with governance, and the public need to know whether (1) management and officials manage government resources and use their authority properly and in compliance with laws and regulations; (2) government programs are achieving their objectives and desired outcomes; and (3) government services are provided effectively, efficiently, economically, ethically, and equitably. *2

Agreed-Upon Procedures (AUP)

Based on my experience, it usually comes down to identifying a few factors that determine the engagement. First, the agency must determine the purpose and scope of the work, specifically what questions they would like to have answered. These questions can be broad or very narrow. For example, in an AUP, management may make an assertion about whether a subject matter is in accordance with, or based on, established criteria that is the responsibility of a third party and hires a CPA to add credibility to that assertion by performing specific procedures to test compliance with the criteria. If an agency needs to know something very specific and wants an independent party to perform specific procedures and tell them what was found, then an AUP is appropriate. However, an AUP report does not provide recommendations, an opinion, or conclusion about whether the subject matter is in accordance with, or based on, the criteria, or state whether the assertion is fairly stated. While the agency may want to use an AUP, some key steps that are taken in consulting engagements and performance auditing, such as planning, are not required in an AUP engagement. Also, risk is not assessed in developing the scope, nor does the auditor use a risk-based approach, which is required in a performance audit. Finally, in an AUP, auditors do not perform sufficient work to be able to develop elements of a finding or provide recommendations.

*1 See Paragraph 1.21 of GAGAS.
*2 See Paragraph 1.02 of GAGAS.

Consulting Services Engagement vs. Performance Audit

For a consulting services engagement or performance audit, the initial questions are then turned into the objectives of the engagement. If the agency wants an objective review of operations or a program to assist them in making decisions, for example, to assess the management of specific funds, and wants findings and recommendations to improve operations, then the agency should discuss the options of a consulting services engagement or a performance audit. From here, the decisions are truncated. The agency needs to consider whether the report is for an internal audience, such as governing officials, management, or staff, or an external audience, e.g., a regulatory agency or the public. If the communication is intended for internal use, then a consulting services engagement with observations and recommendations may suffice. For these engagements, findings, recommendations, and a conclusion is provided to assist management in decision making. Or, an independent third party, such as a CPA or an internal auditor, may be asked to answer the engagement’s objectives to an external audience, in which case a performance audit may be more appropriate due to the need for an independent, objective report that can withstand scrutiny and is subject to peer review. Sometimes there isn’t a choice; some agencies are bound by the government code or local ordinance to conduct audits under GAGAS.

Performance audits are typically the more costly engagement type of the three, given the amount of work required to conduct an audit and adhere to stringent standards. As we’ll explore in later articles, performance audits conducted under GAGAS provide the highest level of assurance among the three options, based on the level of work required. These audits involve developing the required elements of a finding and the documentary evidence required for planning, fieldwork, and reporting. The amount of work involved is much greater than in consulting services engagements, where observations and recommendations will suffice. Consulting services engagements are not audits and, therefore, offer no assurance. Similarly, in attestation engagements, where only specific procedures are performed, no assurance is provided. *3


Having been on both sides of deciding what engagement to recommend, either for an agency I worked at or to a client, it’s important to discuss the level of work required for each engagement type, the number of hours required to do the work under the appropriate standard within a reasonable time period, and the available budget. Finally, and most importantly, clients should understand that performance audits and consulting services engagements each have their place and serve unique purposes. A performance audit offers independence and objectivity at a step above a consulting services engagement, and might be the best option if a rigorous audit of a program or agency is needed. This is where the consideration of the agency’s need is paramount. There may not always be the budget or time available to conduct a comprehensive performance audit, nor a need for an in-depth evaluation or a legislative requirement to do so. In these instances, a consulting services engagement is a good option, especially when time and budget are factors. A consulting services engagement can provide a sufficient report with recommendations and advice. However, it’s important to make the agency aware of the limitations of non-audit services. In addition, the audience of the final report product and any regulatory requirements should strongly influence the decision-making process.

Forthcoming articles in this series will drill down and focus in more detail on the professional standards associated with performance audits as compared to other types of engagements, “why” an agency would want a performance audit instead of a consulting engagement or an agreed-upon procedures engagement, when a performance audit would be recommended, what key factors should be considered, and what are the expectations of the audience of the report. The third article in this series will focus on the reporting elements of a performance audit and a sample performance audit report.

*3  Attestation engagement standards are covered in GAGAS Chapter 7, and include agreed-upon-procedures, reviews, and examination engagements. Attestation examinations have the highest level of assurance, as an opinion is given; not so for the others. Auditors may use GAGAS in conjunction with other professional standards such as American Institute of Certified Public Accountants (AICPA), International Auditing and Assurance Standards Board (IAASB), or Public Company Accounting Oversight Board (PCAOB) standards. For financial audits and attestation engagements, GAGAS incorporates by reference for AICPA Statements on Auditing Standards and Statements on Standards for Attestation Engagements. In addition, the AICPA promulgates the consulting standards. AICPA standard committees have taken the position that only the U.S. Government Accountability Office (GAO) sets performance audit standards.

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  • Government Auditing Standards, issued by the Comptroller General of the United States
    – July 2018 Revision (effective for performance audits beginning on or after July 1, 2019; effective for attestation engagements for periods ending on or after June 30, 2020; early implementation is not permitted)
  • United States General Accounting Office. Best Practices Methodology – A New Approach for Improving Government Operations. May 1995

About the Author

Scott Johnson has 35 years of experience in government administration, with a focus on successfully overseeing internal service operations including; debt management, information technology, human resources, municipal finance, and budget. He has led large and mid-sized operations for California government agencies including the cities of Santa Clara, Milpitas, San Jose, Oakland, and Concord and the County of Santa Clara. Scott is a past president of the California Society of Municipal Finance Officers (CSMFO) and a member of the AICPA Government Performance and Accountability Committee (GPAC). He is currently a partner with Macias Gini & O’Connell LLP (MGO), leading the Advisory Services sector specializing in State and Local Governments, based out of California. He welcomes any questions or comments via email:

Greta MacDonald, MPA – Special recognition is given to Ms. MacDonald for her contributions and research for this article. Ms. MacDonald is a Director with MGO in the State and Local Government Advisory Services division. She has over 17 years of experience conducting over 35 performance audits in accordance with GAGAS, which is her specialization area.

Disclaimer: The views expressed in this article are those of the author and do not reflect the official policy or position of the GAO, AICPA, or Macias Gini & O’Connell LLP.