The Sharblog

In Good Hands

It has been a busy few weeks of meetings. First, I attended the AICPA Leadership Conference and Council Meeting in Phoenix and then closer to home, I attended a session of our Young and Emerging Professionals Committee where they strategized about future direction and activities for TSCPA to serve this growing and important member segment.

A major impression I was left with after participating in these various sessions was that the accounting profession is in good hands (apologies to Allstate) and is preparing well for its future. Sure, everyone is sort of down right now because of the bad state of the economy and fear of what the future might bring. But while we can’t absolutely predict or shape our future, we can certainly try to be prepared for it, and that preparation is taking place on several levels within the profession.

At the AICPA meeting, we were updated on the AICPA Horizons 2025 Project. This effort was designed to look out into the future (15 years) and provide a roadmap for the profession to help maintain and achieve success. The Horizons Project, with input from thousands of CPAs from around the country, identified the core values and core competencies of the profession.

Core Values: integrity, competence, lifelong learning, objectivity, commitment to excellence, and relevance in the global marketplace.

Core Competencies for CPAs to thrive in the future: communication skills, leadership skills, critical thinking and problem-solving, anticipating and serving evolving needs, synthesizing intelligence to insight, and integration and collaboration.

Some of the key learning points from the Horizons Project are:

• It is a small world after all – every business is becoming global.
• The future is here – embracing the future now will ensure viability in the long run.
• Change is inevitable – technology already is changing the way we work – and will continue to do so.
• Generations are working side by side – Baby Boomers are not retiring and Millennials are bringing a new set of skills and ideals to the workplace.

I got to see some of these Millennials in action at a strategic planning session of TSCPA’s Young and Emerging Professionals Committee this week. They spent a day talking about the strengths and weaknesses of this generation and how TSCPA could utilize their talents to make the Society a better organization that more appropriately serves their needs. The dialogue and brainstorming that took place at this session was impressive. It is clear that this generation is bright and motivated to succeed.

In sports, you need to have a good game plan and good players to win. I think the same applies to the profession. The Horizons Project is the game plan for the profession and our young CPAs are the players we will have to execute it. In looking at both, I like our odds for the future.

(As I write this blog, it is the afternoon before game six of the World Series. So I would be remiss if I did not give a shout out to the American League Champions. Go Rangers!)

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.

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. 

 

Financial Fantasy

The White House recently declared April to be financial literacy month and called upon Americans to boost their understanding of their personal finances. TSCPA and AICPA have been promoting financial literacy for several years as a public service project to help the public better understand how to manage their financial affairs and plan for the future. TSCPA hosts a great website, www.valueyourmoney.org, and we also provide other free information and communications to help promote financial literacy to the public.

I am happy that the government is promoting the benefits of financial management to the public. But I find it quite ironic that a federal government that is now over $14 trillion in debt is counseling its citizens to better manage their financial affairs. I guess the idea of demonstrating the benefits of proper financial management through actual action on their part never dawned on our political leaders. It’s the classic – do as I say, not as I do – scenario.

More than six years ago, TSCPA pushed our elected leaders to work toward solving the impending problems facing our largest entitlement programs – Social Security and Medicare. We produced a white paper to lay out the details of the problem and to encourage action to avert an even bigger problem down the road for our children. We didn’t recommend a specific solution, as there are various approaches that can be used. Our call was just – get together as policy-makers and come up with a solution before the problem gets even bigger. Unfortunately for the country, nothing has been done during the intervening years, and these programs have continued to grow and the problem just keeps getting bigger.

I continue to be amazed that there are people – political figures, pundits and others – who claim that there is no problem with Social Security or it is really a simple fix. Really? If it was simple, then why haven’t we fixed it? The last time I checked, most people go ahead and solve simple problems. It’s the complex ones they take a little more time on. And the folks who claim there is no problem, that the Social Security Trust Fund is fine for another 30-40 years and the securities it is holding are backed by the full faith and credit of the U.S. government, exactly how do you envision a government that is $14 trillion in debt paying that tab?   

On the positive side, members of the public started to recognize they had a problem with finances several years ago and have changed their behavior. A few years ago, the personal savings rate in the U.S. had dropped to near zero and at one point was actually negative. Today, the personal savings rate has been hovering around 6 percent for the past year. Basically when people are feeling good about their personal situation, they spend more. When they are worried about their future, they save more. Sad for us our elected leaders do not seem to operate under these same impulses.

 

 

Nearing the Finish Line

This weekend marks the start of spring.  Each year this change in the season provides a belief that we will shake off the effects of winter and find better days ahead.  And after the winter we had this year in Texas, it will be especially sweet to see the flowers and trees in bloom and hear a chorus of birds in the air.

This spring also provides us with a sense of renewed hope that we may see progress on the issue of financial reporting for private companies.  I wrote about this issue in a blog post about a year ago (“Groundhog Day for Standards”) when the announcement was made that the AICPA , Financial Accounting Foundation (FAF), and the National Association of State Boards of Accountancy (NASBA) had collectively appointed a Blue Ribbon Panel (BRP)to study the issue.

The BRP has done a lot of work and held a lot of meetings over the past year, and it issued a report and recommendations in January.  The FAF reviewed the BRP’s report, and, at a meeting earlier this month, announced it was forming a Trustee Working Group to address standard setting for private companies as well as nonprofit organizations, which were not part of the BRP’s charge.  This new Working Group will conduct outreach to stakeholders in various ways over the upcoming months, so be on the lookout for news and your opportunity to weigh in.

In case you missed the BRP’s report, they are making two major recommendations.  First, that a separate standard setting board be created for private companies that would operate under the oversight of the FAF, similar to the FASB.   Second, that there be changes and modifications to existing GAAP, where appropriate, for private companies to reflect the needs of their financial statement users.   There would not be an entirely new GAAP for private companies, but rather appropriate exceptions from GAAP in areas that do not make sense or provide value for users of financial statements.

It is critical that CPAs and the clients/users of financial statements for private companies (and now nonprofit organizations) let the FAF and this new Trustee Working Group know how they feel about this issue.  TSCPA did that back in January when our Executive Board adopted a resolution saluting the work of the Blue Ribbon Panel and encouraging a new approach to standards for private companies that better serve their needs.  You can read the resolution here.

 The FAF Trustee Working Group will be seeking input over the upcoming months.  If you or your clients have an opinion on this issue, you need to take the time to write to the FAF and share it.  We are getting close to the finish line now, and it will require a grassroots effort to carry this issue to fruition.  This is your opportunity to make a difference and help secure a new approach to financial reporting for private companies.  Please make your voice heard.

Ready, Set, Govern

There is an old saying that no man’s life, liberty, or property is safe while the legislature is in session. This dates to a late 1800s court case in New York. So I guess things haven’t changed much in the last 100 years or more. Since the Texas Legislature recently convened, it is time for everyone to batten down the hatches!

While all legislative sessions can bring excitement and concern, this one is likely to exceed most. Texas, like many states around the country, is looking at a sizeable budget shortfall. The Texas comptroller issued her official estimate this week, and it shows Texas will have $77.2 billion for general purpose spending over the next two-year budget cycle. That’s nearly $8 billion less than the last state budget. In addition, Texas will not have $7 billion in federal stimulus money like it did last year, so we are talking about at least a $15 billion hole to plug since our state constitution requires a balanced budget. (Who says our forefathers weren’t smart!)

 But some would argue that if the state wants to provide the same level of programs and services that it did in the last budget cycle, we are really talking about a budget shortfall in the range of $24-28 billion. That’s because the state’s population has grown, resulting in more children to educate and greater utilization of services like health care, etc.

From the early signs, it appears our legislative leaders intend to deal with this challenge by cutting spending and living within the revenue available. Recently, the Lt. Governor said the first draft of a budget for Texas will eliminate about 8,000 state jobs. He also said he was open to tapping the state’s $9 billion rainy day fund – that requires approval by two-thirds of the legislature. He ruled out any new taxes and said, “We must live within our means.” While that is a fairly normal assessment for most people, it is considered a novel idea in many political circles.

Meanwhile, up in Illinois, the legislature took a much different tack. There, elected officials voted to increase the individual income tax by 66 percent and the corporate income tax by 46 percent. This action was immediately pounced on by neighboring states like Indiana and Wisconsin, who are now courting Illinois citizens and businesses with calls of “come on over!”

Of course, there are lots of arguments about the right way to deal with budget shortfalls. Supporters on both sides argue their particular viewpoints about cost cutting or taxing or some combination of the two. It would all be theoretical except that states really have to deal with these challenges/crises. So in the near future, we will get some answers about the results of various approaches. That’s one of the benefits of our “federal” system. The states are test tubes for ideas and over the long haul, we will see which ideas work and which ones don’t. I am not putting any of my money on the Land of Lincoln.

Taxing Times

You would think that our elected leaders ought to be able to get our tax rates and related extender issues squared away before the clock runs out on 2010. But here we are in the final weeks of December and there is still no resolution in sight. This situation is giving a whole new meaning to the term “lame duck Congress.” It’s pretty lame alright.

So now we have the IRS Commissioner writing letters to the Chairmen of the House and Senate tax writing committees saying that the IRS  is reprogramming its computers to reflect what it “hopes” ends up being the AMT exemption. And he also advised them that if the necessary legislation isn’t passed by the end of the year, then the IRS will have to reprogram its computers again to reflect the current law. Also in a holding pattern is the publishing of the new tax-withholding tables. Normally, the IRS publishes those in mid-November, but this year they aren’t saying what they plan to do or when they plan to do it.

And this follows the inaction of Congress last year to deal with the estate tax so that in 2010, it went to zero – thus allowing the heirs of super rich folks like George Steinbrenner of Yankees fame to pay nothing in estate taxes this year, before it goes back to 2001 rates next year unless Congress chooses to enact an alternative in the next few weeks. Thus far, that hasn’t happened. I guess they have been too busy not doing other things.

Is there anyone who really wonders why our Congress has the lowest approval ratings in the history of the poll question being asked? This is no way to run an army – or a government.

I understand that there are very real differences of opinion when it comes to tax policy questions. Who should be taxed how much, what should be taxed, what kinds of deductions, etc. I get that everyone does not agree on these matters and that they can have fiercely held opinions. I get it and I don’t want to argue any of those points. But what I cannot abide is that those issues cannot be resolved within a timeframe so that the people – including those tasked with administering the law (IRS) – can have adequate notice to plan and move forward.

I saw a program on TV recently about the ancient Mayans. Seems the leaders of their city states would only allocate a specific time of the year for warfare with neighboring cities. Everyone agreed to conduct their wars within this timeframe, because the rest of the year it was critical to plant and maintain crops and harvest. It made no sense to let warfare interfere with the really important aspects of their lives.  Otherwise, what were you fighting the war for? I know it seems like crazy-logic, but maybe there is a lesson there for our elected leaders. Let’s hope they get it before the clock runs out.

Who Do You Trust?

Seems there is a good reason that U.S. currency has “In God We Trust” emblazoned on it. As a people, we apparently do not trust anyone or anything else, including the government that prints the money. A recent Associated Press – National Constitution Center poll shows that a majority of Americans are not very confident in anyone or any institution. 

At the top of the list of distrust are blogs and other citizen media; 54 percent have little or no confidence in them. (I guess I may want to reconsider what I am doing here!) In addition, 52 percent said the same about banks and financial firms, and 49 percent said so about Congress.

On the plus side, 43 percent said they were extremely or very confident in the military, and small business and science were the only others to garner solid trust from about 30 percent of the people polled. Organized religion only polled at 18 percent (extremely or very confident in it), so it appears even God has some work to do on the trust front. But at least religion beat out print and broadcast media, which came in at just 13 percent.

The public’s trust in major institutions has declined steadily over the last decade or more. Some feel this recent survey reflects anger and discontent that has been fed by the prolonged economic downturn over the past few years. But three-fourths of these same respondents called the Constitution “enduring” and not outdated. Most supported laws being followed even when there is a short-term public safety risk and that a minority’s rights should be protected from a pure majority.

So I think at our core, Americans still understand and support the ideals of our country and our various institutions. The problem is that many people don’t see leadership coming from a lot of them. Part of that is driven by the 24/7 news media environment we live in today, where any bad news is immediately and continuously communicated. But a lot of it is also deserved. There are plenty of examples of elected officials, religious leaders, business executives, sports figures, etc. doing bad things. And in many cases, instead of accepting responsibility for their actions and owning up, they lie about it or try to make excuses for their behavior. Instead of acting sorry for what they did, they act sorry that they got caught. And they issue the standard non-apology, apology. 

I don’t think most Americans expect perfection in their leaders or institutions. Most of us understand that people can make mistakes. We are all human. In fact, I think Americans are quite a forgiving people. We believe in giving people second chances.

So I am not willing, just yet, to write off our whole country and all of our institutions based on this recent poll. But I think it should be a wake-up call to all of us about just how precious and fragile trust can be. As the saying goes – “Trust is the hardest thing to find and the easiest thing to lose.”

 

 

 

 

If I Had a Hammer

Abraham Maslow, considered the father of modern management (remember Maslow’s “hierarchy of needs” from your management class?), was quoted as saying, “When the only tool you have is a hammer, every problem begins to resemble a nail." I was reminded of this recently when reading about the current IRS plans to regulate tax return preparers. It seems the IRS wants to use its regulatory hammer on everything in sight as it tries to improve the quality of tax return preparation and cut down on fraud.

In case you missed this story, the IRS started investigating and proposing new methods for improving tax return preparation over a year ago. While there was some interest in making sure the public was afforded quality service by tax return preparers, it appeared the main motivation of the IRS was to cut down on the fraud involved in taxpayers claiming the Earned Income Tax Credit (EITC), as well as some other tax credits, thus shortchanging the government of tax revenue. Seems some tax return preparers encourage their clients to embellish their returns in order to qualify for the EITC and sign off on returns they know are false.

As the IRS considered various ways to implement a regulatory regime to make improvements in this area, both TSCPA and AICPA were supportive of the general concept of enhancing the quality of tax compliance and elevating the ethical conduct of those who prepare tax returns. Both groups supported the implementation of a requirement that all signing return preparers obtain a PTIN (Personal Tax Identification Number) from the IRS and be subject to minimal continuing education requirements, ethical requirements and oversight by the IRS.

What neither TSCPA nor AICPA supported was the expansion of these new registration and compliance requirements to non-signing employees who work within CPA firms. They explained to the IRS that CPAs and CPA firms are already licensed and regulated at the state level and that the CPA firm is responsible for the employees who work in the firm and assist with client service – be it tax return preparation or anything else. Therefore, there was already an adequate regulatory oversight of those employees and the IRS requirement for them to obtain PTINs (at the current annual rate of $64.25) was overkill and served no meaningful purpose. That is, I guess unless your purpose is to raise revenue for the IRS.

And what would the IRS do with all of those PTINs for people who don’t sign the returns? I have a vision of the giant warehouse from Raiders of the Lost Ark except now it will be a giant computer with millions and millions of PTIN numbers that will never be used anyway. I think the IRS has its hands full trying to police the return preparers who actually sign the returns. That would be a nice place to start before expanding the universe to non-signers. In this case, the IRS should put down the hammer and focus on effective and efficient problem solving.