The Sharblog

Supreme Decisions

This week, the Texas Supreme Court ruled on the case challenging the constitutionality of the Texas business franchise tax (aka, Margins Tax). The Court decided that the tax is not unconstitutional, by a 7-2 vote.

Click here for the decision. 

The constitutional challenge to the law was filed by an insurance claims adjustment company – Allcat Claims Service. Allcat paid the tax in 2008 and 2009 under protest and then sued the Texas Comptroller to have the tax declared unconstitutional because it is unfairly assessed and imposes an illegal income tax on individual partners’ income. The Texas Supreme Court said the franchise tax is not an unconstitutional income tax because it is not assessed on individuals but on the business, which Texas law considers a separate entity. The Court said that lower courts would have to determine whether the tax was unevenly levied on Allcat.

So the overarching issue as to whether the franchise tax is constitutional has been decided. But that doesn’t mean the tax is well liked or concerns about it are going to go away. It has never raised the amount of revenue that many speculated it would when it was enacted by the legislature in 2006. Many small businesses don’t like it, feeling that it is too costly and complex. 

The current Speaker of the Texas House has charged the Ways and Means Committee with evaluating the franchise tax to determine whether it should continue to exist in its current form, a revised form or be repealed. The key questions then become: what are you going to replace it with to raise the necessary revenue for the state, and can you get enough political agreement on an alternative that will pass in the legislature? 

Meanwhile, another Supreme Court – this time the big one (U.S.) – will be deciding the constitutional fate of the Affordable Care Act (ACA) in its current session, most likely before next year’s election. Oral arguments for the case are expected in the spring. The law is being challenged by 26 states. The states are objecting to the ACA on a number of fronts, but opposition to the individual mandate to purchase health care coverage is the main thrust of their argument. They argue this violates the Commerce Clause of the Constitution. The Obama administration argues it does not. The administration petitioned the Supreme Court to take the case after an appeals court upheld a lower court ruling that the individual mandate is unconstitutional. Several other appeals courts have upheld the ACA as being constitutional. So there is divided opinion on the issue and the Supreme Court, as the final arbiter, will have to decide.

Cases of this magnitude in Texas and the U.S. bring our court system into greater light as the third branch of government. Some people don’t like that branch, but it is part of our governing structure, established by our founders. I guess that is why they put that word “Supreme” in the name, to help describe its importance. On cases like this, they certainly earn the label.

Global Playing Field

The stock market has been on a wild roller coaster ride in recent months with wide swings in value often from one day to the next. Most of the explanation lies in one word – “Greece.” Is it just me or is anyone else amazed that such a small country can have such a dramatic effect on U.S. and world markets? The population of Greece is about 11 million and its GDP is about $300 billion. 

The effect of Greece is just further proof that we are now in a global community where we are all interconnected  and what happens anywhere on the planet tends to reach us all eventually, whether it is business/economics, an outbreak of influenza or environmental factors. And the global community is changing. The U.S. and Europe used to be the “top dogs” in the global community, but now we are being challenged by some new up and comers in the likes of Brazil, Russia, India and China, commonly referred to as the BRIC countries. In 2000, the GDP of the BRIC countries was $2.7 trillion. In 2010, it had grown to $18.17 trillion. And future projections have the BRICs outpacing the GDP of the G-7 countries in about 20 years. So the playing field and playing conditions have changed drastically from what they used to be. As Dorothy said, “we are not in Kansas anymore” and we are not likely to go back.

That’s why I am amused when I hear people talking about how we need to go back to what it was like in the 1950s when the U.S. ruled the world in manufacturing and there were lots of great jobs for working-class people to earn a decent wage. While that all sounds good, we aren’t in the 1950s anymore. In the 1950s, the world had recently come out of World War II. Most of the developed world – Europe and Japan especially – had been devastated by the war. They had to rebuild their entire infrastructures, and they did so thanks to billions of dollars from the U.S. under the Marshall Plan and thanks to lots of “stuff” that we sold to them. During this time, we really didn’t have any competitors in building and manufacturing things. We dominated the world markets. Most of the BRIC countries were “third world” or close to it.

No matter how much we long for the 1950s – they aren’t coming back. We have to compete in the world in which we now live, and it includes other major players, including our new BRIC competitors. We are living and competing in a global economy with global markets, driven to a large extent by new technologies that did not exist 50 years ago. That doesn’t mean we can’t be competitive, just that the world is different and it will require new ways of effectively competing. The first step is acknowledging that fact and then setting out to do the hard work to be successful in that new environment.

 

One Size Syndrome

Last week, the Financial Accounting Foundation (FAF) issued a proposal to create a new Private Company Standards Improvement Council (PCSIC) responsible for determining whether exceptions to GAAP should be allowed for private companies in appropriate situations. Any recommendations from this new PCSIC would have to be ratified by FASB before they would become effective. 

This proposal runs counter to what was recommended by a Blue-Ribbon Panel on Private Company Financial Reporting (BRP), sponsored by AICPA, NASBA and FAF. The BRP recommended a separate board be established under the auspices of FAF, but with standard-setting authority independent of FASB. TSCPA was also supportive of a separate board and along with thousands of CPAs and financial statement users, encouraged FAF to adopt the BRP’s recommendations.

In issuing the proposal, the FAF trustees concluded that “creating a separate standard-setting board for private companies would likely lead to the establishment of two separate sets of U.S. accounting standards—a so-called “little GAAP” for private companies and a “big GAAP” for public companies, which is not a desired outcome.”

So let me see if I have this right. If we create a new PCSIC under the control of FAF to recommend to FASB when and where there should be exceptions to GAAP for private companies, then we will preserve the purity of GAAP. But if we have a separate board under the control of FAF, do the same thing without getting FASB approval, then all bets are off; GAAP will be diminished and the world will end as we know it?

Talk about form over substance. It is hard not to read this proposal and think anything other than “politics and turf protection for FASB.” The logic is otherwise elusive.

FASB has always had the authority to allow exceptions to GAAP for private companies, but they have chosen not to do so – in the name of uniform GAAP purity I presume. So why would I think a lot is going to change under this proposal, especially if the driving motivator is to avoid the appearance of different standards?

One size rarely fits all. And to force all companies – public and private – to use the same standards, whether they make sense or not, is myopic thinking. The focus should be on developing the best and most appropriate standards for the different types of business entities and the users of their financial information. Likewise, it is difficult to serve more than one master. In the case of FASB, the primary focus should be on public companies. It will be a challenge for them to do that well and also give fair consideration and attention to private companies. A separate board with a separate focus could. It’s too bad that FAF did not see it that way. 

FAF is accepting comments on this proposal until Jan. 14, 2012. If you are interested, please provide your input. You can get a copy of the full report by going to the FAF website at:  www.accountingfoundation.org.

Survey Says

How much of your tax dollar do you think the government wastes? According to the results of a Gallup survey issued last week, most Americans think the answer is 51 cents of every dollar. This is the first time since Gallup started asking this question in 1979 that Americans believe more than half of federal spending is wasted. The low point was 38 cents in 1986. And most Americans believe that the federal government is the biggest “waster” compared to state and local governments, where they estimate the waste at 42 cents and 38 cents respectively, reinforcing that most Americans have greater trust in government the closer it is to them.

This Gallup survey correlates with another survey done last year by the Pew Research Center where just 22 percent of Americans said that they can trust the federal government almost always or most of the time. This is among the lowest such measures in half a century. A dismal economy, an unhappy public, partisan-based backlash and discontent with Congress and elected officials in general have created what Pew called "a perfect storm of conditions" associated with distrust of government.

Moving to approval ratings of President Obama and Congress, we don’t see much better results. The president’s latest Gallup job approval numbers are at 41 percent approval and 50 percent disapproval. Congress comes in at an amazing 15 percent approval and 82 percent disapproval. 

So this is where we are now. Most people don’t trust their government and they think it’s wasting a significant amount of the money we send it as taxpayers. This is not a good place to be as a country. And I don’t care what party you support. While I don’t have any survey results to back it up, my hunch is that things aren’t a whole lot better in other countries around the globe. From reading the newspaper and watching TV, our European counterparts don’t seem to have a high level of public admiration either, and if you move to other parts of the globe – like the Middle East – outright insurrection and revolution are taking place. So the whole world population is in a funk right now about their governments and the leaders in charge. The current economic mess has a lot to do with it.

Yet, in this dismal environment we still have people who are willing to run for office in this country. Look at what’s happening with the race for the Republican nomination for president. It’s a huge field of candidates. (I personally hope it will get narrowed soon as it is difficult to keep them all straight. You almost need a scorecard!) It shows that no matter how bad it gets in America, there are always some men and women who believe things can get better, and who want to try and make it happen by serving in leadership positions. And that includes the current president. Let’s hope they are right and it happens soon. It can’t get much worse.

Reference Points

Each August since 1998, Beloit College in Wisconsin has been issuing the Beloit College Mindset List. It provides a look at the cultural issues, events and people that have shaped the lives of students who are entering college. It was originally created to remind faculty members that they should be sensitive to using dated references that their students would not understand.

I have experienced this phenomenon when I am talking with members of the younger generation, which nowadays includes a whole lot of folks since I have reference points that probably make no sense to many generations. This is driven home when I use a colloquial remark like “that’s cool” or “that’s far out” or reference a TV show from the 50s or 60s. While those terms or references might make sense to fellow baby boomers, they are generally lost on anyone under the age of 50 to 60.

I have also seen this dated reference issue at work whenever my wife and I play the board game Trivial Pursuit Collector’s Edition with our adult children, and they don’t know the answers to many of the questions because the reference points  are 20-plus years old. Our children comically refer to it as the “old fogies’” edition!

We each have our own reference points established by our interaction with friends and other contacts, and by the cultural and historical events with which we have grown up. We need to remember this when we interact with others. What makes perfect sense to us may be a complete mystery to someone with different reference points.

Today’s entering freshman class was born 18 years ago (1993). Here are just a few of the things that distinguish them. If you would like to see the complete Mindset List, click here.

• There has always been an Internet ramp onto the information highway
• Ferris Bueller and Sloane Peterson could be their parents
• The only significant labor disputes in their lifetimes have been in major league sports
• They “swipe” cards, not merchandise
• There have nearly always been at least two women on the Supreme Court, and women have always commanded U.S. Navy ships
• Amazon has never been just a river in South America
• Refer to LBJ and they might assume you’re talking about LeBron James
• Women have never been too old to have children
• The Communist Party has never been the official political party in Russia
• “Yadda, yadda, yadda” has always come in handy to make long stories short
• Music has always been available via free downloads
• They’ve always wanted to be like Shaq or Kobe: Michael who?
• Grown-ups have always been arguing about health care policy
• Nurses have always been in short supply
• Refugees and prisoners have always been housed by the U.S. government at Guantanamo
• PC has come to mean personal computer, not political correctness

Here We Go Again

I am a big fan of Yogi Berra of New York Yankees baseball fame, who was known for uttering “Yogi-isms” that while sounding dumb, actually made sense if you thought about them. One of his famous one-liners is “it’s déjà-vu all over again.” 

Well this week, PCAOB decided that it’s déjà-vu all over again by issuing a concept release that proposes requiring public companies to change their auditing firms after a certain number of years. Comments on the release are due by December 14, so if you have an opinion you would like to share with PCAOB, you have some time to write to them.

The PCAOB chairman stated, “I believe that the long association of the largest audit firms with their major audit clients is an issue that must be addressed in order to fulfill the mission of the PCAOB. One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor. That leads to consideration of firm rotation as a counterweight to that conflict.”

Mandatory audit firm rotation is not a new idea. It has been discussed and debated since the 1970s. And there are some other countries that require rotation of audit firms. So PCAOB is certainly not plowing new ground here. But it was just a few years ago (2003), after the Sarbanes-Oxley law was passed creating PCAOB, that the GAO conducted a study on the potential effects of mandatory audit firm rotation.  Read it here.

In the study, the GAO said that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and loss of institutional knowledge of the public company’s previous auditor of record. And audit failure rates have been demonstrated to be higher when the auditors are new and have not yet developed the institutional knowledge necessary for a comprehensive audit.

My concern is whether a mandatory audit firm rotation requirement will provide sufficient benefits for the costs involved. I also have a concern that if such a requirement was implemented, it would imply that PCAOB has solved the central conflict problem of the client paying the auditor. If you think an auditor can be compromised because the client is paying them, then I don’t understand how any term of service can overcome that concern. Couldn’t the audit firm be influenced at the beginning of the relationship as well as after a period of time?

Unless you eliminate the financial relationship between the client and the auditor, you will always have a conflict. But eliminating that conflict would be difficult unless you go to a completely new means of compensating the auditor. So there is no perfect solution. But then as Yogi said, “If the world were perfect – it wouldn’t be.” I look forward to seeing how this unfolds and where PCAOB ends up.

Don't Do it Charlie Brown

I am sure you all remember the Charlie Brown comic strip and one of its reoccurring themes of Charlie Brown going to kick the football, only to have Lucy pull it away at the last second, thus causing poor Charlie to miss and fall flat on his back. I thought of Charlie Brown this past week when I got an e-mail from FASB announcing that it had launched a web portal dedicated to providing information pertaining to its activities that focus on issues related to nonpublic entities. The e-mail said it was part of the board’s efforts “to better serve the private company and not-for-profit sectors.”

Funny, it seems to me that FASB has not been real focused on serving the needs of private companies. They, and the CPAs who serve them, have been clamoring for years that an alternative to GAAP was needed for private companies. And the FASB response to that has been a long history of completely ignoring the issue or merely paying lip service to it. Every time FASB says they understand and the profession thinks that maybe this time it will be different, it ends up being the old “Lucy pulls the football” routine and we never see any change.

But things are finally looking different. Over the past year, through the efforts of a Blue Ribbon Panel (BRP) developed by AICPA, NASBA and FAF, there is the most concerted effort ever to get action on this issue of standards for private companies. The idea is to use GAAP as the base standard and allow exceptions to GAAP where they make sense for private companies. A separate board – apart from FASB – would be appointed to make the decisions on these standards. The board would be made up of individuals with knowledge and experience in the private company world. The new board would be responsible to, and receive oversight from, the FAF.

Clearly the efforts of the BRP have aroused the attention of FASB. They are not keen on a new board coming into existence. Now they are suddenly taking an interest to act like they care about the private companies that have been complaining and asking for relief for decades. It’s sort of like now that Charlie Brown has picked up his football and is heading for home, Lucy is crying out – no Charlie; this time I will let you kick it!

All I can say is – don’t do it Charlie! Don’t be fooled again. This time stay the course – AICPA, NASBA and FAF. Carry the football across the goal line and get a new system in place that can adequately serve the needs of private companies. Members who feel likewise and support this cause can weigh in and write to the FAF to express their support. Here is a link to information on ways you can do that: http://www.tscpa.org/Content/51861.aspx.

This is the moment. The time to act is now. Go Charlie Go!

 

 

Scare Tactics

Have you seen the new warning labels for cigarettes that the FDA is rolling out? You can’t get any more graphic than some of these. They will go into effect next year.

I remember when the first warning labels on cigarettes came out in the 1960s. They were a rather mild statement of “Cigarettes may be hazardous to your health.” Then in the 1980s, the warning got upgraded to “Smoking can cause lung cancer, heart disease and other illnesses.” These warnings took up a tiny portion on each pack of cigarettes. You really had to look hard to see them. 

Now the FDA has taken the warning labels to Def Con Level 5. First, these new warning labels are big – they take up the entire top half, both front and back – of each pack of cigarettes. And they are not just a written phrase. They are actual pictures of things like rotting teeth and gums, diseased lungs, smoke coming out of the tracheotomy of a man’s neck, and a sewn-up corpse of a smoker. You would have to be pretty dense to not get the message “Smoking will kill you.”

I am not opposed to trying to make sure people understand the dangers of smoking. But do you really think the majority of people don’t know that smoking is bad for them? I think our schools have worked pretty hard at delivering that message to kids. Talk to any young children about smoking and they will immediately repeat a mantra to you about its ill effects.

These new warning labels remind me of those films they used to make us watch in high school that showed all the graphic pictures of car wrecks, trying to convince us that we should not speed and drive like crazy people on the highways. Based on my experience, I don’t think they worked very well. Most teenagers – especially boys – think they are invincible, and we convinced ourselves that the dead people in the films probably were not as good a driver as we were.

Most people who still smoke are probably not going to be deterred by these warning labels. They are either physically addicted to cigarettes/nicotine, or they have convinced themselves that dying of cancer isn’t going to happen to them. Let’s be serious, if you are willing to pay the going rate for a pack of cigarettes (in New York City, it is around $11 a pack) you must really enjoy them or be hooked. And for full disclosure, I did smoke when I was in my 20s and the cost is what did me in – thank goodness.

I won’t hold my breath that these warning labels are going to work. But if it would deter just a few people, it is worth a try since it is estimated that smoking is the leading cause of preventable and premature death in the U.S. (one in every five deaths) and costs us around $200 billion annually in diminished productivity and medical costs, according to the Centers for Disease Control and Prevention. Those are sobering and scary facts in themselves. 

Irrational Debt

It’s been a busy few weeks since my last blog. During that time, I have had the opportunity to hear a number of great speakers.

First, we kicked off our new TSCPA year with our Leadership Day program in Dallas on May 18. Our keynote speaker was Rom Brafman, a psychologist and co-author (with his brother) of several books, including Sway – The Irresistible Pull of Irrational Behavior and Click – The Magic of Instant Connections. Brafman shared key points with the audience from both books.

Brafman discussed a number of unconscious biases and decision-making mistakes that can lead to irrational behavior. One is the phenomena of overreaction to loss (versus gain), which can lead people to hold onto stocks or other investments for too long in the hopes their values will rise once again and instead they ride them into the ground. Brafman was an enjoyable speaker, and I look forward to a new book he has coming out later in the year.

Last week, I had the pleasure of attending the Dallas CPA Society’s Education Conference where the luncheon speaker was David Walker, former head of the GAO, a CPA, and currently the president and CEO of Comeback America. I have heard David speak several times in the past and also had read his book last year called Comeback America, so I knew what his message was likely to be and he did not disappoint. In an energized and informative presentation, he laid out the case that the U.S. is going broke and that we are rapidly approaching a tipping point to take corrective action to set the country back on a proper financial course. He estimated we have no more than five years to find real solutions to our debt problem or we may reach a point of no return. 

Walker had plenty of slides and data to back up his key points. One statistic that was very telling is that the U.S. is currently spending about $1 billion a day more than we are taking in. With that information, it doesn’t take a rocket scientist to figure out we are behaving irrationally and are on a pathway to financial destruction. If you are interested, you can get lots of information and statistics on this issue by going to the Comeback America website at: www.tcaii.org.

 Walker also pointed out that the debt problem we are facing is the product of both political parties (sorry partisans). He showed that our spending and debt issues have been created by actions taken when either party has been in control of our government. So unfortunately, our debt creation may be one of the few bi-partisan actions we have seen in our country.

On the positive side, he said he was guardedly optimistic that the current Congress would get a deal done on the debt ceiling issue and that some of the recommendations of the Presidential Debt Commission would probably find their way into the solution. Let’s hope our elected officials are thinking rationally as they deal with this major issue and avoid the decision-making mistakes that Rom Brafman discussed. The stakes are too great for our country.

 

 

Focus on the Horizon

What can you imagine being different in the future that will have the biggest impact on your career, your organization and the CPA profession? What issues do you think will be confronting your organization and the CPA profession in 2025? How will the world at large and your place in it be different in that future? What can the CPA profession (and you) do now to prepare to deal with that world of the future? 

These are difficult questions to answer, but they are worth considering if you want to prepare for tomorrow. I recently got to spend some time along with about 45 TSCPA and AICPA members who gathered at a forum in Dallas to do this kind of thinking about the future for the CPA profession. The program is called CPA Horizons 2025. It is an extension of the AICPA Vision project started more than 15 years ago. I was joined at the program by Donna Wesling (Austin), our incoming Chairman, Fred Timmons (San Antonio), our Chairman-elect and Michael Brown (Waco), Chair of the TSCPA Young CPAs and Emerging Professionals Committee.

We, along with the other CPAs gathered, spent about three hours discussing various forces/issues that could affect the future of the profession. These included things like: political and regulatory issues, economic issues, sociological issues and technology. We ended up with a long list of issues and then, through a voting process, narrowed that list down to what the group felt were the “Top Six” that could affect the CPA profession over the next decade or more. The Top Six for our forum included:

• A growing scarcity of resources
• Redistribution of wealth
• Decentralization of the workforce/workplace
• A move to IFRS (International Financial Reporting Standards)
• Growing cultural diversity
• An aging population

These types of forums are being replicated by AICPA in eight cities around the country over the upcoming weeks. So there will be other Top Six lists generated by other groups of CPAs. I am sure in some cases they will identify some of the same issues we did, but my guess is they will also come up with issues we did not. 

Now here is the great news. You don’t have to go to a live forum to participate in this process and provide your input. If you are interested, you can do that by going to the AICPA website (www.aicpa.org) and completing a survey that the CPA Horizons 2025 project team has developed. Hopefully, thousands of members/CPAs will add their input to this process, and eventually the collective thoughts of a large number of members will be used to develop a new vision for the CPA profession to carry it to 2025.

The late management guru, Peter Drucker, was fond of saying “the best way to predict the future is to create it.” There is no guarantee that we can do that with absolute accuracy, but CPA Horizons 2025 certainly gives us our best shot.