The Sharblog

Democracy in Action

A number of TSCPA members recently attended the AICPA Council meeting in Washington, D.C. The Council is the governing body of AICPA and has approximately 250 members who serve on it from around the U.S. It is sort of the AICPA version of the U.S. House of Representatives. The number of members serving from a state is dependent upon the number of AICPA members residing in that state. Thus, Texas has one of the largest delegations on the Council.

In addition to conducting the normal business of the Council at this meeting, Council members also took the time to conduct visits with their elected representatives in the U.S. Congress. And in this regard, Texas also has one of the largest Congressional delegations with 36 representatives and two senators for a total of 38 out of the 535 elected federal offices nationwide, or a little over 7 percent of the total. 

During our two-day stay, we collectively visited with 22 of our U.S. representative’s offices and our  two senators for a total of 24 visits. In some cases, we were able to meet with the legislator in person and in others, we met with a member of their staff. 

During our visits, we discussed a number of items of interest to the CPA profession. Some concerned issues where there is actual legislation up for consideration in the current Congress. Others were broader matters like tax reform and the “Principles of Good Tax Policy” developed by the AICPA Tax Division and the profession’s concerns about the federal deficit and AICPA’s campaign on that issue – “What’s at Stake.”

If you have never met with a member of Congress, it is a limited opportunity to make your point. A normal meeting will last about 15-20 minutes tops. So you have to be brief and to the point. And you have to realize that there are other individuals (constituents) and groups meeting before you and after you. Basically, members of Congress spend most of their days in these types of constituent meetings. So they are constantly being bombarded with information and requests concerning all sorts of issues.

We are fortunate that two of our Texas representatives are CPAs, Mike Conaway (R-11^th) from Midland-Odessa and Bill Flores (R-17^th) from Bryan-College Station. Some of our Council members got to meet in person with both Mike and Bill, and it is clear we are lucky as a profession to have  them both serving in the U.S. Congress. Their knowledge and experience as CPAs is extremely beneficial to the public policy debate. If we had more CPAs serving in Congress, we probably would not have the current fiscal mess that we face as a country.

Generally, as Americans, we like to complain about our government. But when you take the time to visit a member of Congress, you realize that we are fortunate to live in a country where we can do that kind of complaining and where we can visit with our elected officials to discuss the issues we care about.

A Good Start

The Private Company Council (PCC) recently held its third public meeting since being appointed by the Financial Accounting Foundation (FAF) last fall. The PCC was established by FAF to work with FASB to determine whether and when to modify GAAP for private companies. From this latest meeting, they appear to be making progress. (See my previous blog post Filling the GAAP for details on the purpose and formation of the PCC.)  

At this meeting, the PCC approved exposure of proposals to:

• allow alternatives that would provide relief for private companies when recognizing intangible assets in business combinations,
• allow for the amortization of goodwill and a simplified goodwill impairment model, and
• allow two simpler approaches to accounting for certain types of interest rate swaps when a private company intends to economically convert the interest rate on its debt.

The proposals must be endorsed by FASB before an exposure draft can be issued. The PCC plans to seek quick endorsement from FASB and issue the exposure drafts in the near future. The PCC would like to receive comments on the exposure drafts in time for review at its October 2013 meeting, so the matter is on a fairly fast time track.

The FASB and PCC have already issued an exposure draft of a proposed “private company decision-making framework” (framework). The framework identifies six differentiating factors between public and private companies for financial reporting purposes: (1) types and number of financial statement users; (2) access to management; (3) investment strategies; (4) ownership and capital structures; (5) accounting resources; and (6) learning about new financial reporting guidance.

The framework also identifies five areas where financial accounting and reporting guidance might differ between public and private companies. These include: (1) recognition and measurement; (2) disclosures; (3) display (presentation); (4) effective date; and (5) transition method.

Input on the exposure draft is being sought through June 21, 2013. Then FASB and the PCC will review the feedback received and finalize the framework for adoption. When finalized, the framework will be used by FASB and the PCC to identify unique needs of users of private company financial statements, and it will help in identifying appropriate ways to reduce the cost and complexity of preparing financial statements for private companies and improve their relevance for users.

I recently heard the Chairman of the PCC, Billy Atkinson (a TSCPA member from Sugarland, Texas), speak at a Dallas CPE conference where he highlighted the activities of the PCC. Billy emphasized that the PCC is working to “change the culture” at FASB, where the historical focus has always been on public companies. As we all know, cultural changes in organizations are never easy. But they are possible if the desire to change is actually present and promoted by leaders. It sounds like Billy and the other members of the PCC are off to a good start in helping FASB make that cultural shift. Let’s hope they succeed on their mission.

Fairness Fight

Last week, the U.S. Senate moved one step closer to approving legislation to help states force online retailers to collect state sales taxes. The legislation, S.743, is called the Marketplace Fairness Act and the Senate voted 63-30 to approve a cloture vote which ends debate on the bill.  The Senate is expected to vote on the final passage of the bill on May 6. Passage in the Senate seems likely. But then the legislation will have to go to the U.S. House where passage is not necessarily assured.

What does this legislation do? Basically, it grants the states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a transaction, exactly like local retailers are required to do. There is a caveat, however, and that is the states are only granted this authority after they have simplified their sales tax laws. And there is also an exemption for small businesses with less than $1 million a year in online sales.

Under the legislation, states have two options for simplifying their sales tax laws:

One – join the 24 states that have already voluntarily adopted the Streamlined Sales and Use Tax Agreement (SSUTA) (note: Texas is not currently part of SSUTA);

or

Two – meet five simplification mandates listed in the bill. They are:

1. Notify retailers in advance of any rate change within the state;
2. Designate a single state organization to handle sales tax registrations, filings and audits;
3. Establish a uniform sales tax base for use throughout the state;
4. Use destination sourcing to determine sales tax rates for out-of-state purchases;
5. Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.

 

The legislation has bipartisan support, including sponsorship from 96 members of Congress (30 senators and 66 representatives), 27 governors (15 Republican, 11 Democrat and one Independent), and a large number of national and state trade associations and businesses of all sizes. The biggies on the list are Amazon and Wal-Mart.

Governor Perry is not on the list of governors supporting and neither are either of our two U.S. senators from Texas. But there are four Texas congressmen on the list – Joe Barton (R), Mike Conaway, CPA (R), Eddie Johnson (D) and Marc Veacy (D). 

Internet commerce is now a big deal. Last year, Internet sales were $226 billion, up nearly 16 percent from the previous year according to the Commerce Department. Supporters say it is a matter of fairness and assuring a “level playing field” between brick and mortar retailers and online retailers. And it is also a concern to most states that support themselves off sales taxes. The National Conference of State Legislatures estimates that states lost $23 billion last year because they couldn’t collect taxes on out-of-state sales.

So what’s the opposition? Well some (like Americans for Tax Reform and the Heritage Foundation) say it’s a tax increase that they can’t abide. Other opponents are also concerned about the increased bureaucracy, future expansion of state-level collection authority and because it is full of unintended consequences that could in the end be bad for business and bad for jobs.

I guess like beauty, fairness is in the eye of the beholder. Stay tuned to see which version of fairness prevails.

Integrity Still the Essential Ingredient

I have had the opportunity over the last month to speak to accounting students in Corpus Christi and Dallas. I was impressed with how bright these young people are who will soon be joining the CPA profession. While intelligence is certainly an advantage to those pursuing careers as CPAs, I reminded these students about an even more critical ingredient to being successful and a leader in their field. That is integrity.

Intelligence can be measured. There are various means of testing for it and the CPA Exam is certainly the hallmark of demonstrating one’s competency and command of the basic principles of accounting. Integrity, on the other hand, is not as easy to measure or describe. It tends to be a more subjective matter – like good art – we can recognize it when we see it, but describing it in detail is a little harder.

Yet it is a cornerstone of the profession. It is one of the basic rules of the Code of Conduct for CPAs(ET Section 102 – Integrity & Objectivity), and it is one of the top five values of the profession identified through the CPA Horizons Project.

According to a recent Robert Half Management Resources survey, one-third of CFOs said that, other than technical or functional expertise, “integrity” is what they look for most when grooming  future leaders. And according to a recent survey by CPA Consultants Alliance, the most important leadership characteristic in CPA firms is “having integrity.” Integrity was viewed as the most important characteristic by CPAs in all levels of the firm from partners down to associates.

Is integrity something that is innate within us (you either have it or you don’t) or is it something that can be learned? Personally, I think it is a combination of the two. Each of us develops some sense of integrity based on the way we are raised and our life experiences as young people. But integrity is also something that can be learned and nurtured. That’s why it is important that students get exposure to the concept of integrity and ethics in general as part of their formal education to become a CPA.

And even more important is the “continuing education” young people receive once they leave school and pursue their CPA career. They need to hear about and learn about integrity where they work. Employers – both firms and companies that employ CPAs – have an obligation to reinforce and support the idea of integrity every day. That is what will help the most in moving integrity from a nebulous concept to a value or professional principle.

The word integrity is derived from the Latin word integer, which means “whole or complete.” Integrity is certainly what completes the CPA professional and it is a character or value that is fundamental to earning the public trust that the profession is dependent upon. Every decision that a CPA must make should be evaluated through the lens of integrity. It is the ultimate ingredient that defines the profession.

To badly go...

It has not been a great time of late for the IRS. In case you missed it, the IRS produced some training videos based on several old television series, including Star Trek. When this news got out, as you would suspect, some members of Congress did not think it was a great use of taxpayer money. I actually watched the Star Trek one and it was pretty bad. (You can find it on the web.) Even Captain Kirk himself (William Shatner) was critical of the Star Trek takeoff – where the IRS actors go on a voyage to the planet “Notax.”

The criticism from Congress was bi-partisan in nature – amazing in light of our highly political environment in D.C. But I guess both parties can agree on lousy acting when they see it.

The Chairman of the House Ways & Means Committee (Rep. Charles Boustany, R-LA) and the Senate Finance Committee Chair (Max Baucus, D-MT) weighed in criticizing the use of taxpayer money to produce the videos. They admonished the IRS noting that in light of our current problems with debt, deficits and sequestration, these kinds of videos do not help the federal government’s image. 

The Star Trek spoof was used as the opening of a training and leadership conference in 2010, meant to set the stage on tax issues like employee management and safety issues. While “well intentioned,” the video “did not reflect the best stewardship of resources,” the IRS admitted in a statement after the recent flack. Ya’ think? 

And if the Star Trek debacle wasn’t enough for the IRS, the Service also suffered a defeat last week in its court battle about regulating tax return preparers. The U.S. Court of Appeals for the District of Columbia Circuit denied the IRS motion to stay an injunction halting its return preparer regulation program, pending appeal of a lower court’s decision. (See my 2/5/13 blog for details.)

This means the injunction stays in place and the IRS cannot reinstate the mandatory preparer regulation program, although the lower court said it could do so on a voluntary basis. Oral arguments in the appeals court have not yet been scheduled and it will probably be a while until this case is heard. 

Meanwhile, the two leaders of the Senate Finance Committee are taking steps to try and ensure that the IRS will ultimately end up with the authority to regulate the nation’s tax preparers. Committee Chairman Max Baucus, D-MT, and ranking Republican member Orrin Hatch, R-UT, have begun developing proposals for reforming the U.S. Tax Code (they released some discussion papers last week), and part of their reform efforts include giving the IRS the clear statutory authority to regulate tax preparers. But since this is just a part of a much larger package of tax reform proposals, the chances of it passing anytime soon in the current Congress are about the same as leaving our solar system.  

In the words of Mr. Spock – “Live long & prosper.” 

Snakes on a Plane

I heard that the TSA was liberalizing some of the rules on what you can take on airplanes. Great, I thought. Now maybe I can carry shampoo and toothpaste larger than three ounces onto the plane. Wrong. Instead, the TSA plans to allow knives that are of certain dimensions. Under the new rules, knives with blades that are 2.36 inches (6 centimeters) or shorter and less than a 1/2-inch wide will be allowed in airline cabins as long as the blade is not fixed or does not lock into place. Razor blades and box cutters, on the other hand, are still prohibited. I guess since that is what the terrorists used on 9/11, they are still considered “bad.”

The new rules will also allow passengers to carry two golf clubs, toy bats or other sports sticks – such as ski poles, hockey sticks, lacrosse sticks and pool cues – aboard in carry-on luggage. Great, now maybe I can practice putting down the center aisle or we can play some eight ball. I think a pool table on the plane would be interesting.

Needless to say, the proposed rule changes have caused a stir. Some people actually don’t think it is a good idea to let people carry knives or bats on planes, regardless of the size. The TSA, in response to this criticism, says it is making the change because it is taking a "risk-based security" approach that will allow screeners to focus on items such as liquid explosives and improvised bombs that pose a greater threat to aircraft. Well how about the threat to the people riding on the plane? I guess we don’t care about them.

But then I never really got the whole TSA approach. My wife, who is a knitter, can carry knitting needles onto the plane (I believe a lethal weapon in the hands of the right person) yet I try to carry on a pair of nail clippers and all of a sudden I am a security threat. I am not following the logic.

A few years ago, there was a horrible movie called Snakes on a Plane. I never saw the movie but did see enough parodies, jokes and outtakes about it to get the drift. Somehow some snakes get on a plane and all “you know what” breaks loose. Fortunately, Samuel L. Jackson is there to save the day. I wonder if snakes qualify as a “risk” under the TSA guidelines? Hey people take dogs on the plane, why not snakes?

Anyway, what I really hope is that the TSA does not allow cell phone use on a plane. I understand that is under consideration. Can you imagine a three-hour flight if everyone on the plane could use their cell phone? At that point, someone with one of those knives might just cause an incident.

One Size Doesn't Always Fit

I read with interest a recent study done by an economics professor at the University of West Georgia which looked at the effects of “mark-to-market” accounting rules on the Georgia banking community, especially smaller community banks (a copy can be found here).

The banking community in Georgia was especially hard hit during the recent financial meltdown and real estate crash. More than 80 banks have failed in Georgia since the banking crisis began, many of them small community banks. And Georgia accounts for over 17 percent of the closed banks in the U.S. So it is no surprise that folks in Georgia are pretty interested in exactly what happened.

The research noted that the failure of a bank can happen for a variety of reasons, but the risk facing many community banks in Georgia during the housing market crisis was primarily a regulatory failure when the banks fell below the required capital ratio. This then pushed the banks into a “negative feedback loop” and a “vicious cycle” of negative re-valuation leading in many cases to their demise.

The report did not try to put all the blame on mark-to-market accounting. In fact, it stated that the accounting rule normally provides investors with information they need to make important decisions. But it also went on to say that under certain conditions, mark-to-market can make an already existing problem worse. And the report commended the FASB change in 2009 to liberalize the application of the rule.

While we think that more information is better, the report noted that may not always be the case. As an example, some investors might like to know what banks are on the FDIC “Watch List,” but making that information public would probably cause a rapid loss of deposits in those institutions,
erode confidence in their viability and as a result, increase the likelihood of their failure. The report noted that this was also one of the reasons all the large banks (even those that were relatively healthy) were forced to take money under the TARP (Trouble Asset Relief Program) a few years ago. Treasury and Federal Reserve Bank officials were worried about creating a panic among investors and depositors. If only some banks took the TARP funds, they were likely to have failed due to investor panic and loss of confidence.

The conclusion of the research was that mark-to-market is probably the appropriate way to estimate value for assets when you have normal or typical market conditions. But when you are in a situation where there isn’t a “normal” market, you have the likelihood of a vicious cycle problem and flexibility is required. The conclusion of the research was that the recent experience in Georgia shows that inflexible implementation of mark-to-market valuations standards is not an accounting panacea.

So I guess the takeaway in non-accounting terms is that “one size doesn’t always fit” and as Albert Einstein said, “the measure of intelligence is the ability to change.”

Not So Fast

Just when you think you know what is going on, life has a way of changing. An example is what recently happened to the new IRS program for the regulation of tax return preparers. Recently, the U.S. District Court for the District of Columbia granted a permanent injunction to stop the IRS tax return preparer regulatory program. The court’s ruling was in response to a lawsuit filed by three independent tax return preparers who claimed the IRS did not have the legal authority to implement such a program. You can read the court’s opinion in the case (Loving v. Internal Revenue Service) here.

This ruling was a shock to the IRS and as expected, the IRS is filing an appeal and also asked the judge (Judge James E. Boasberg, appointed by President Obama in 2010) in the case to suspend his recent ruling claiming it would be harmful and disruptive to the tax filing season. The judge didn’t buy the IRS’s arguments and last week, he denied the IRS request to suspend. But he did make some clarifications to his original ruling.

The judge made it clear that no tax return preparer may be required to pay testing or continuing education fees or be required to complete any testing or continuing education while the injunction is in place. But he said the IRS could operate the testing and CPE functions on a voluntary basis for preparers who might want to distinguish themselves.

He also made it clear that the injunction did not affect the PTIN (Preparer Tax Identification Number) registration process, so all return preparers (including CPAs) will still have to get and maintain a PTIN with the IRS. And the IRS has noted that the ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries. So for CPAs, things are pretty much the same as before the ruling.

I have to admit I have mixed emotions about this court decision. On the one hand, I agree that the IRS should have the ability to regulate paid tax return preparers, who if incompetent or unscrupulous, can cause great harm to the public. That position is also supported by the National Taxpayer Advocate, Nina Olson. 

Yet as worthy as the program may be, another part of me says, the IRS needs to go about setting it up in the proper manner. If they do not have the statutory authority to implement the program, then go and get it from Congress.  

Obviously, the IRS thinks it does have the authority and I am sure they will argue that point in their appeal. And different courts have been known to issue different rulings, so before this matter is  over the IRS may well prevail. I hope they do, but I also want them to prevail the right way and by following the rules. As an agency that expects us as taxpayers to follow the rules, it is an important principle for them to follow as well.

I Surrender

The recent release of the movie about the killing of Osama bin Laden (Zero Dark Thirty) appears to have reopened the whole argument about torture and its effectiveness. I raise it not to take a side in that debate. And I haven’t seen the movie yet, but want to try and catch it while it is still in the theater. But I was thinking about it recently as I was wallowing on my couch and bed in my own world of hurt shivering violently as I battled the flu bug or some other strain of evil I picked up while out of town at a meeting.

My thought was, right now I would probably say or do anything if they told me they would make my pain and ache stop. That’s how bad I felt. Forget water boarding; just tell me you can make my nose stop running before it falls off my face from my constant blowing. What names and information would you like? And I like to think I am a tough guy when it comes to being sick.   

First off, I don’t get sick (ha!). At least that was my theory. I hate being sick so much I just talk myself out of being sick. It’s like the Seinfeld episode where he knows the exact date of the last time he ever threw up because he hated throwing up that badly. That’s my approach to being sick. The last time I was anywhere close to this sick was about 20 years ago, not that I am counting.

Again, my theory is just never accept that you may be sick and you won’t be, and it will go away. It’s that mind over matter thing. Put your head down, pop a vitamin and keep charging forward. Now I am sure that part of this is a genetic thing. Growing up in my household, being sick was frowned upon once you got past grade school. It was a sign of some kind of inner weakness on your part. You could not fake my parents out about being sick. Are you really sick? Go get the thermometer. I’ll give you something to be sick about. Remember, these were pre-boomer parenting days.

For the record, I did get my flu shot back in November. I started doing that kind of stuff 20 years ago after the last time I was really sick. But flu shots are not perfect – supposedly they are effective about 60 percent of the time. So this year, I am in the unlucky 40 percent I guess. I did go to the doctor. That is another habit I started after that episode 20 years ago. She gave me some antibiotics to take. I have no idea if they will be effective, but I will take any pill or medicine if I think it has a shot.  

I have started feeling better the last day or so. My wife noticed as my silent whimpering has ended and I started talking again. She is probably wishing for a relapse on my part!

Rational Reform

As I write this blog, we are still heading for the infamous “fiscal cliff” and we are just a few days now from the start of a new year. Will Congress and President Obama find a way to reach an agreement before the end of the year? Who knows? I have pretty much given up hope of seeing any rational activity out of our elected leaders. It’s actually sort of sad.

On the bright side, I am thankful that within the CPA profession we have some young people on their way up who can think and act rationally. An example of this is the team of students from the University of Texas at Dallas who recently won AICPA's 2012 Accounting Competition, beating out a host of teams from other schools around the country. Teams from UT-Dallas have won this national competition before, so it is clear that this university is producing some real accounting “winners” in north Texas. More information about the competition is available at this link: https://community.thiswaytocpa.com/competition/cc/2012_aicpa_accounting_competition/default.aspx.

This year’s AICPA competition, which started several months ago, focused on the U.S. presidential election that was coming up in November, and the student competitors were asked to assume that they had joined a team running an election campaign for the next president of the United States. Their task was to help develop their candidate’s proposed solutions to address current issues. In the case of the UT-Dallas team, they chose tax reform, and they developed some specific proposals for how to make the tax system more effective and efficient.

You can watch a short video where the students present their ideas here: https://community.thiswaytocpa.com/competition/cc/2012_aicpa_accounting_competition/teamdashboard/496.aspx.

The title of the entry from the UT-Dallas team was “Working Capitol.” In their entry, they outlined ways the current tax system could be improved by making the tax code simpler and easier for taxpayers to understand. Their plan also would raise more tax revenue.

At the heart of their proposal was a call for a 5 percent value-added tax that would apply to the gross profits of businesses. They estimated, based on statistics from the IRS, that this would raise an additional $440 billion in revenue each year. They would couple with this new value-added tax the elimination of the corporate income tax, which would reduce tax revenue by an estimated $181 billion. They also proposed lowering the individual income tax rates that apply to all individuals and joint-filers. Those whose gross income falls below $50,000 a year would pay no income tax at all.

They would limit the home mortgage deduction and charitable contribution deductions for higher income filers to 23 percent and would have the long-term capital gains tax rate set at one-half of the marginal rate of the taxpayer based on income.

When all of the details of their proposal are factored in, the new system would raise an additional $330 billion for the government. They also propose that the changes stay in place for at least five years to allow taxpayers and businesses to plan for the future.

While one can always argue about the details of the UT-Dallas team’s proposal, you cannot argue with their willingness to develop a plan to reform the current tax system in a rational and straightforward manner. Now if we could only get our elected officials to follow their lead.