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CPA january 2014

The Arizona Society of Certified Public Accountants

Business Valuation/Forensic Focus

Avoidance of a Secured Loan as a Fraudulent Conveyance Misconceptions About Community Property

Succession Planning


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Volume 30 Number 1

Protect Your Retirement Income Through Succession Planning


CPAs who fail to create a succession plan may end up losing a large portion of their retirement income. by Cindy Gordon, CPA, CA, (Canada License Only)CPCC

Avoidance of a Secured Loan as a Fraudulent Conveyance

Business Valuation/Forensic Focus


A discussion of Bankruptcy Code §548 and case study. by Jeffrey Sumptor, CPA

Features Misconceptions About Community Property


Advance planning can mitigate community property disputes. by David Cantor, CPA/ABV

Conflicts of Interest Still Cause Trouble for CPAs


A case study and loss prevention tips help to clarify the most common conflicts of interest. by Duncan B. Will, CPA/ABV/CFF, CFE

Columns & Departments 6

Chair’s Message by Karen Abraham, CPA


Focus on Members


A Dash of SALT by James Busby, CPA

22 Classifieds 23 Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, Arizona 85034-2021


In the Black ... Adventures in Accounting

GET YOUR CLIENTS IN THE BLACK Take Charge America is an Arizona-based nonprofit that can help your clients pay off personal debts and create a secure financial future.






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The Arizona Society of Certified Public Accountants

President & CEO

Cindie Hubiak


Patricia Gannon

Copy & Advertising Deadline The first of the month one month prior to publication date. Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 Fax (602) 252-1511

Board of Directors Chair Chair-Elect Secretary/Treasurer Directors


Karen Abraham Anita Baker Rob Dubberly Diane Groover Sandra Hieb Debra Johnson Jimmy Lovelace Adam Miller Molly Montgomery CW Payne George Raysik Andy Spillum Leslie Stackpole Jared W. Van Arsdale Craig Van Slyke


Chapter Presidents Southern Chapter Northern Chapter Southwest Chapter North-Central Chapter

Flo Zenblu Jennifer Nordstrom Jayne Wright Richard Joliet

AZ CPA is published by the Arizona Society of Certified Public

Accountants (ASCPA) to provide information, news and trends in the profession of accounting. It is distributed 10 times a year as a regular service to members of the Society. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in advertisements within this publication. Opinions expressed by correspondents and contributors are not necessarily those of the ASCPA.

Immediate Past Chair Armando Roman AICPA Council Members Jim Buhr Rick Goldenson



Chair’s Message

by Karen Abraham, CPA

A New Year: Resolutions and Strategic Planning Accountants tend to work in the past. We are always working on taxes from prior years, closing the books for year end, working on the audit from the past year or generally looking at historical performance. It is sometimes hard to look ahead. Also, as we age, time seems to move faster so we never seem to get to act on our future goals. As 2014 approaches, I think about the typical New Year’s resolutions: I’m going to lose weight, work out more frequently, get a new outlook on life, stop smoking or manage money better. I read an article that said that after six months, only 46 percent of resolutions are maintained and then we are back to our old habits.

Putting together your resolutions I find it helpful to write out my plan. I try to answer questions such as, how am I going to accomplish the resolution? What tactics will I employ to get me to a positive outcome? How will I maintain once I get to the final objective? To help ensure I can accomplish my goal, I aim for specifics rather than a vague objective like “I’m going to work out more.” For example, you might say, “I’m going to work out three times a week at the gym,” or “I will walk two miles every-other day and lift weights on the opposite days.” Tracking your progress is also helpful. My husband bought me a Microsoft Fitbit this summer and an electronic scale that has a phone and computer app that gives a complete daily record. I am never without my Fitbit. It tracks


my steps, stairs, sleep, weight, fat percentage and calories every day. I get little reward badges and congratulations notes when I reach desired goals. It really has been a great addition to my daily routine and helps me stay on course with goals.

It seems to me that

ASCPA Strategic Plan

a strategic plan.

It seems to me that keeping a resolution is a lot like putting together a strategic plan. The ASCPA board recently met to put together our 2014 strategic plan. Defining how we will spend the Society’s resources in the most efficient manner, and working on objectives that are the most important to the success of our members and the Society as a whole, is a big effort! For help, the Board worked with a facilitator to keep us on track to determine what goals will advance the Society and its members. To level set, we brainstormed about the future and agreed on a set of assumptions including professional structure and competition, global business and economic climate, legislation and regulation, demographics and social values, and technology and science. We thought about these broad categories and how they affect the profession.

With these assumptions in mind, we looked at the goals for the society, including advocacy/awareness, professional development, image of the profession, and membership. Within each of these goals, we reviewed and prioritized tactics to acheive the goals. Like a resolution, it is important to document goals in writing, continually consult the plan, and make adjustments when necessary. Keeping a record, reporting at board meetings, and holding staff accountable for performance of the strategy helps ensure that goals and objectives will be met. The ASCPA team, under Cindie Hubiak’s leadership, works hard at the stated objectives and always make sure that the members are well represented and that the Society continues to uphold our mission. Here is wishing you a successful and Happy New Year! AZ CPA

keeping a resolution is a lot like putting together

Focus on Members Financial Executives International (FEI) Arizona Chapter and AZ Business Magazine recognized the following members at their CFO of the Year Awards: Winners: Thomas B. Fischer, CPA, and Tom Harris, CPA. Finalists: Bradley C. Anderson, CPA, Dan Behrendt, CPA, Jerome Bruggeman, CPA, Christina Cancino, CPA, Ed Czemerych, CPA, Joseph Ivenz, CPA, and Richard Skufza, CPA. Debra A. Hunter, CPA, of Hunter Hagan & Co., Ltd., has been admitted as an arbitrator for the American Arbitration Association. Charles Davidson, CPA, is tax manager at Fender Musical Instruments Corporation. Ross Grainger, CPA, has been promoted to accounting manager at Apollo Education Group.

Barbara Noel, recently retired from working with Ullmann & Company. She celebrated with Peggy Ullmann, other CPAs and clients at a recent retirement party.

Jeffery W. Patterson, CPA, MBA, is now audit supervisor at Henry & Horne, LLP.

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Honor Dr. Huizingh—

Donate to Celebrate his 95th Birthday!

No one has had a greater impact on accounting students in Arizona than Dr. William Huizingh. You can honor Dr. Huizingh’s commitment to his students on his 95th birthday with your own gift to Arizona accounting students. Please consider donating $95 or $950 (or any amount) to the Arizona CPA Foundation for Education & Innovation. We will recognize donors in a future issue of AZ CPA. You can donate online at or mail your donation by using the form below. The Arizona Foundation for Education & Innovation is a 501(c)(3) organization. Donations are tax deductible. “I have had several mentors in my life but the one who was very instrumental in my “passage to success” was Dr. William Huizingh who I first met as my ASU accounting professor and counselor in 1965. Even though I was a good student, he always encouraged me to excel and to do the best in every school assignment. This attitude carried into my adult life, and I always applied myself fully to any job. Now that I am retired, it gives me satisfaction of having done my best in my profession and having made a difference in my community. I thank Dr. Huizingh for my attitude to always do my best and more importantly, for the positive impact he had in my life and the lasting effect he had on me. Bill, Wishing you a Happy 95th Birthday!” Tony Astorga Retired SVP & CFO, BCBSAZ

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Please return this form and payment to: Arizona CPA Foundation for Education & Innovation 4801 E. Washington St., Ste. 225-B Phoenix, AZ 85034

Fax credit card donations to: (602) 252-1511

Method of Payment: ❒ Check ❒ VISA ❒ MasterCard ❒ American Express Name on Card _______________________ Card Number ________________________ Exp. Date ________________ Signature of Cardholder _________________________________

A Dash of SALT

How to Get Taxpayer-Specific Advice from the Arizona Department of Revenue This month’s state and local tax (SALT) column explains how to get advice from the Arizona Department of Revenue (Department) relative to a particular taxpayer and examines whether, and to what extent, the taxpayer can rely on such advice. The Department publishes instructions for tax returns, publications regarding particular issues, and even issues tax rulings and tax procedures that apply to taxpayers generally. Taxpayers who reasonably rely on such instructions, publications, rulings, and procedures are not subject to penalties or interest (but, taxpayers who only rely on a publication are subject to interest) if such reliance results in an underpayment of tax. But, taxpayers generally are subject to the tax if the underpayment is discovered during the course of an audit. However, even after reviewing the Department’s instructions, publications, rulings, and procedures, taxpayers (and their tax advisors!) often have questions about how Arizona’s tax laws apply to particular situations. Fortunately, in addition to collecting taxes and enforcing Arizona’s tax laws, the Department also is charged with helping taxpayers comply with the law by providing them with information and advice. Taxpayer-specific advice comes in three basic forms: oral advice, taxpayer information rulings, and private taxpayer rulings. As discussed below, each of these forms of advice have their pros and cons.

Oral Advice Although one may be able to get oral advice from a Department employee almost instantaneously after asking a question of them, by statute, oral ad-

vice is not binding on the Department. Therefore, if it turns out that the advice was incorrect, the taxpayer will be liable for tax, interest, and maybe even penalties. Nevertheless, if one does get oral advice from the Department, it would be wise to make note of: (1) the advice received, (2) who provided the advice, and (3) when they provided the advice. That way, if it turns out that the advice was incorrect, one could at least try to get the Department to abate the penalties.

Taxpayer Information Rulings Taxpayers who are concerned about a potential tax liability but who do not want to call attention to themselves may ask their CPA, attorney, or other tax advisor to request an anonymous taxpayer information ruling (TIR) for them. Then, if the taxpayer likes the Department’s answer, it can provide its identifying information within the time allowed by the Department. Upon doing so, assuming that the information provided to the Department was accurate and complete, and assuming that the taxpayer reasonably relies on the ruling, the taxpayer will not be responsible for tax, interest, or penalties if the Department subsequently audits the taxpayer and changes its interpretation of the law. The Department will not issue TIRs on issues that are the subject of existing audits, appeals, or refund claims for the taxpayer requesting the ruling, and the

rulings only apply prospectively.

Private Taxpayer Rulings Taxpayers may request private taxpayer rulings (PTRs) themselves, or through a CPA, attorney, or other tax advisor. The process of requesting a PTR is similar to the process of requesting a TIR, but taxpayers must provide their identifying information at the time that they initially request a PTR. Assuming that the information provided to the Department when requesting a PTR was accurate and complete, and assuming that the taxpayer reasonably relies on the ruling, the taxpayer will not be responsible for tax, interest, or penalties if the Department subsequently audits the taxpayer and changes its interpretation of the law. As with TIRs, the Department will not issue PTRs on issues that are the subject of existing audits, appeals, or refund claims for the taxpayer requesting the ruling, and the rulings only apply prospectively.

Practice Tip! Because taxpayers who identify themselves in a timely fashion are now afforded the same protection whether they obtain a TIR or a PTR, taxpayers who are concerned about a potential tax liability but who do not want to call attention to themselves should ask their CPA, attorney, or other tax advisor to request an anonymous TIR for them. Then, if the taxpayer likes the




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Business Valuation/Forensic Focus

Misconceptions About Community Property by David Cantor, CPA/ABV So exactly what is considered community property in Arizona? There are a few misconceptions about this, such as: • If it is acquired during marriage, it is community. • Everything becomes community when two people get married, even if they owned it before marriage. These are two of the biggest “myths” that can lead to confusion when two people get divorced in Arizona. While there is some validity to these myths, taken as a whole they are incorrect. Basically, the presumption is that all assets are in fact community, unless the person claiming separate property can prove and trace these amounts. A few examples of this separate property are assets brought into the marriage, assets acquired during marriage via gift or inheritance, or earnings and/or proceeds from separate property assets (rents for example).



Separate property can lose its character if the party knowingly gifted the funds to the community for things such as living expenses, asset purchases or merely commingling accounts without even trying to keep the funds separate or account for them.

In re Marriage of Cooper (130 AZ 257; 635 P.2d 850; 1981 Ariz.) states: “Where community property and separate property are commingled, the entire fund is presumed to be community property unless the separate property can be explicitly traced.” Additionally, the Court went on to state: “The burden is upon the person claiming that the commingled funds, or any portion of them, are separate to prove that fact and the amount by clear and satisfactory evidence.” In addition, as indicated In Re Marriage of Nace (104 Ariz. 20, 448 P. 2d 76, 1968), the mere fact that assets have been commingled does not result in the conversion of those assets to community. In Re Marriage of Porter (67 Ariz. 273, 195 P. 2d 132, 1948) goes even further by stating “In any event, the loss of the separate property results from the presumption in favor of the community in the absence of identification of the separate property, and not from the mere fact of intermixture.” In other words, the burden is on the person claiming separate property to utilize Family Law accounting methods to make their case. Usually this involves what is known as a Tracing. A tracing is a complicated and detailed task wherein every transaction

12 AZ CPA y JANUARY 2014

in the commingled account(s) in question is analyzed, summarized and apportioned between community and separate property. Simply showing bits and pieces, such as specific deposits, transfers or withdrawals will usually not meet that burden of proof. Take the case where a wife received a $20,000 gift from her parents (clearly separate property) five years before divorce and deposited those funds into a joint account (still separate property), but over the next five years community funds were deposited into the account as well as community expenses were paid. This $20,000 is now wholly commingled and the burden is on the wife to show that the $20,000 in question still exists. For the wife to claim any part of the $20,000, she must show to the Court that the $20,000 is still intact within the account. The only way to do this is to Trace and allocate all of the transactions subsequent to the deposit. Simply going in and saying that the account balance is now $35,000, therefore the first $20,000 belongs to the wife is not sufficient. What if, for example, two years after the deposit, the balance in the account was only $5? Then, via deposits of community wages, it is back up to $35,000. How

can that $20,000 even still exist, let alone belong to the wife? One of the terms often used during these types of disputes is “intent.” What was the intent of the spouse claiming separate property when certain transactions occurred? Separate property can lose its character if the party knowingly gifted the funds to the community for things such as living expenses, asset purchases or merely commingling accounts without even trying to keep the funds separate or account for them. The flipside is if the spouse opened accounts in their respective name only, never deposited community funds into that account, always used community funds for community expenses, then there is the appearance of intent to keep the property separate. When you have separate property, some simple steps can help protect those assets: • Keep those funds in separate bank accounts and don’t commingle them with community assets • Keep detailed accounting records related to the claimed separate property assets • Consider how transactions during marriage are handled when separate funds or commingled funds are used. Ultimately, the determination of separate property is up to the court, if a case makes it that far. However, a lot of these issues can be avoided by judicious planning and consulting an expert experienced in these matters … even before there is a contemplation of divorce. Planning in advance can not only protect your separate property assets but also save time, aggravation and fees should there ultimately be a AZ CPA divorce. David Cantor, CPA/ABV has been practicing Family Law accounting almost exclusively since 1990 and is the managing director of Family Law Services for Epps Forensics Consulting PLLC. He can be reached at (480) 620-8486 or dcantor@

By Duncan B Will, CPA/ABV/CFF, CFE

Conflicts of interest have long been a major factor in professional liability claims against CPAs. Part of the problem is that potential conflicts of interest are hard to recognize or identify until something goes wrong. When clients are satisfied, they tend to perceive the CPA as a competent advisor who has their best interests at heart. It’s not until clients become disappointed that their perception of the CPA begins to change. The CPA appears to no longer have the client’s best interests in mind. Sometimes the CPA may even appear to have sacrificed the best interests of his client to benefit himself or another party to the detriment of the client. One common claim scenario is that of the CPA advising both parties to a transaction, or helping the parties resolve a dispute. For example, the CPA will sometimes agree to represent both the husband and the wife in a divorce when they are still friendly and cooperative. Many times, though, the relationship in a divorce will deteriorate rapidly, and the CPA is then caught in the middle. The same is true for dissolutions or disputes between business partners. Disputes between partners or owners often result in the CPA’s advice becoming perceived by one of them as favoring the other partner.



Participating in business deals or investments with clients is another common scenario where everyone is happy as long as the investment performs well. But as soon as it takes a downturn or falls apart, the client’s perception of the CPA begins to change. Participating in business deals or investments with clients is another common scenario where everyone is happy as long as the investment performs well. But as soon as it takes a downturn or falls apart, the client’s perception of the CPA begins to change. Case Study Consider the following case study (the names have been changed): For decades, Paul Noble, the founder and managing partner of his CPA firm, had served as a trusted financial advisor to his clients. Like many CPAs, he also had his own personal financial advisor—stockbroker Rich Arrington. Noble frequently shared advice he received from Arrington with his firm’s clients and partners. Chad Pennyworth, a junior broker at Arrington’s brokerage house, worked with some of Noble’s clients and took on many of Arrington’s accounts when Arrington retired. Noble trusted Arrington’s judgment in Pennyworth’s training and development. Though Noble did not refer any of his clients or acquaintances to Pennyworth, he did inform a number of them that he had elected to work with him. Because of Noble’s reputation, many of his clients chose to engage Pennyworth as their own broker when they learned that Noble had done so. Almost immediately after Arrington left, Pennyworth sold Noble some bonds, based on incorrect information that misidentified the bonds’ guarantor as the state, when the bonds were actually guaranteed by a financially challenged local school district.

14 AZ CPA y JANUARY 2014

Pennyworth acknowledged the mistake to Noble, and the brokerage firm agreed to repurchase the bonds from Noble’s portfolio, subject to a nondisclosure agreement, which Noble signed. Within a couple of weeks Noble was pleased to see that a safer alternative was substituted for the bond investment. Two years later, though, Noble had mixed feelings when he read of the financial disaster that was all over the news: the failure of a local school district and the worthlessness of the bonds it had guaranteed. A number of pension funds and investors, including some of his clients, were hurt badly by the losses. Noble felt sorry for the investors but was relieved that he had been able to avoid a similar fate. His relief turned to dismay over the next few days, as some of his clients called him to discuss the impact of the losses they had sustained and their intentions to sue Pennyworth and the brokerage house. Noble’s hands had been tied because of the nondisclosure agreement. He had not warned his clients of the elevated risk of the bond investment, and his clients were now surprised to learn that he was not in their failed investment. During the course of the subsequent class action lawsuit against Pennyworth and the brokerage house, Noble’s initial investment, the reversal of that transaction, and the nondisclosure agreement became public knowledge. Noble’s reputation was ruined. He was now seen as a greedy, self-interested collaborator. Ultimately, Noble and his firm were added to the list of defendants in the class action lawsuit. His former clients

alleged that Noble and his firm had a duty to disclose the concerns regarding their investment, had ignored the apparent conflict of interest, and had prioritized their own interests over those of their clients. Loss Prevention Tips Recognize and communicate potential conflicts of interests. Project the scenario forward to anticipate what would happen if things go wrong. Juries tend to sympathize with clients—especially with the benefit of hindsight and all of the evidence laid out by a skilled attorney. Embrace “active ethics.” The CPA should recognize that his or her own personal interests can be adverse to client interests and should not agree to sign nondisclosure agreements without first being able to protect clients. Moreover, disclosing a conflict of interest with clients, while helpful, doesn’t solve the problem, even if the clients sign the disclosure. It can later be argued that the clients’ consent was not “informed” by a third party (such as an attorney). Don’t get too comfortable with disclosure as a form of protection. In the end, the question is whether there is a perception that the CPA no longer has unfettered loyalty to his or her clients. Recognize there are risks associated with providing referrals. Clients often link the CPA who gives a referral to the professional who ultimately performs the services. In instances where it may be perceived that a CPA is offering a referral, the CPA should be careful to name three or more qualified professionals to perform the service, and encourage the client to perform their own due diligence in assessing the suitability of the professional’s AZ CPA qualifications. Duncan Will is the loss prevention manager and accounting and auditing specialist with CAMICO (www.camico. com). He advises policyholders through the CAMICO Loss Prevention hotline and speaks to CPA groups on a wide range of topics.

Protect Your Retirement Income Through Succession Planning by Cindy Gordon, CPA, CA (Canada license only) CPCC

In the state of Arizona, more than 50 percent of CPAs are over 60 years of age. Many of those will fail to plan for their successor or create a succession plan and end up losing a large portion of their retirement income. According to the 2012 CPCS Succession Survey, a joint project between PCPS and Succession Institute, LLC, more than half of the 1,000 respondents of multiowner firms did not have a signed and documented succession plan. The CPCS Succession Survey cited a lack of leadership development as the main challenge facing succession planning within firms. In short, many firms are struggling to get the next tier of people ready to take over.

The result of this survey is likely to be indicative of what CPA firms in Arizona are experiencing. Therefore, there is a major concern for the older CPA population. If they are not able to ready their clients for the transfer of responsibility, there may be a risk of client base attrition. Whether you’re a sole practitioner or a partner of a firm, the succession objective is the same – to get the highest buyout value for your practice. This means that your successor needs to retain your client base. What drives a client to stay with a CPA or firm? Most accountants will say that it is because of the quality of service (their technical skill) — when, in truth, clients stay because of the behavior and emotional connection they create with their CPA. Therefore, to help facilitate the successful transition of clients, the earlier a pool of potential successors can be created the better. This pool should make available to the exiting CPA not only the staff that possess the range of technical skills needed for their clients but the understanding of the consistent behaviors required to uphold the customer experience. By creating a pool of potential succession candidates, the exiting partner would be able to better allocate the clients to the appropriate people by



A good boss creates a strong emotional relationship and a sense of reciprocity.

looking at the mix of technical and emotional needs of each client. Firm members would be in a better position to ease into the transfer of responsibility, allowing both the client and successor time to build rapport while keeping the exiting partner in the equation. Clients would feel like they have a greater support network within the firm. The Challenges How do you get your succession pool candidates ready for that transition, especially where they might be moving into a stronger leadership position or a position of greater responsibility? There are two challenges that firms are experiencing: a lack of employee motivation and turnover of top talent. Lack of motivation A lack of motivation may arise because there has been no connection between the role of the employee and the

firm’s mission. When this connection is made, the employee gains a sense of fulfillment that drives intrinsic motivation. A recent Gallup poll showed that only 30 percent of the U.S. workforce is highly engaged (happy to go to work). This means more than two-thirds of the workforce isn’t engaged, and therefore need some help or direction from their employer to motivate them. Another cause for a lack of motivation is a poor relationship between the employee and the boss. People don’t leave their organization, they leave their boss. A good boss creates a strong emotional relationship and a sense of reciprocity. An employee who feels cared for at work will do whatever it takes to help their boss and show their appreciation. Where this type of relationship doesn’t exist, the employee acts in his or her own best interest first as he or she feels that if they don’t take care of themselves at work, no one else will.

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Cost Segregation Studies (480) 963-2872

16 AZ CPA y JANUARY 2014

Job stagnation is another cause for a lack of motivation. People thrive on challenges, especially when they feel safe to fail and have a support system to learn. Unfortunately within the CPA industry, firms tend to focus on keeping staff on the same clients doing the same work to try to maximize efficiencies. If the firm partners are not focused on providing staff with growth opportunities, motivation wanes. When a growth opportunity arises—like with succession—the employees have become so comfortable in their roles that the partners no longer see them as potential succession candidates. Turnover of top talent Talented employees look for new challenges and strive to gain a sense of satisfaction from their achievements. If the firm doesn’t provide opportunities for growth, these employees look for other firms that will. Some firms go to the opposite extreme and rely too heavily on strong performers — inundating them with work. It’s human nature for leaders to pass work on to people who are highly productive and autonomous. This can lead to burnout or stress as well as resentment by other employees as partners appear to favor certain employees. Using corporate culture to build a pool of successors Remember that clients stay with a firm not just for technical skills, but for the emotional and behavioral aspect they’ve come to expect. In order to create a skillful pool of successors, you must build the understanding of expected behaviors into your corporate culture. Here are some easy steps that can be followed and implemented to include this aspect into your culture. Start by assessing the ethos of each partner. What was the driving purpose of establishing their practice? Find and articulate the common purpose – the “why” of your firm. There needs to be a meaningful purpose beyond making money. Many CPAs say

2014 Arizona Tax Guide

Order the only comprehensive guide on Arizona taxes Authors: Ira Feldman, Pat Derdenger and Ed Zollars New legislation this year: The Arizona Income Tax Guide will provide updated information on significant changes in Arizona law first effective for 2013 returns including: •Arizona’s new subtraction for certain long-term capital gains •Arizona’s partial bonus depreciation rules •Arizona’s §179 conformity The Sales and Use Tax Guide includes new information on: •House Bill 2111 – Significant sales tax simplification changes and reporting, including new contractor rules •House Bill 2535 – Elimination of the “permanent attachment” test The Arizona Tax Guide includes the following guides: Arizona Income Tax Guide Arizona Sales and Use Tax Guide Arizona Personal Property Tax Guide Arizona Unclaimed Property Guide

Spiral-Bound Book:

❒ Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $89

❒ Nonmembers: $109 Electronic PDF:

❒ Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $79

❒ Nonmembers: $99 *Call (602) 324-4743 for special pricing on orders of five or more.

Order and learn more about the guides at

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28th Annual Governmental Accounting Conference Feb. 21 at the Arizona Biltmore Hear from two officials from the Governmental Accounting Standards Board at this year’s conference: David Vaudt, the new GASB Board chair, and David Bean, director of research and technical activities. Get the latest Arizona government news with a general session on the impact of new healthcare requirements and AHCCCS, and ASU President Michael Crow will discuss attracting businesses to Arizona in his luncheon keynote. The conference also offers you the ability to customize your experience with choices of three different sessions for each afternoon breakout. Some of the topics include: • Ethics • IT & Cloud Computing Security • New Pension Reporting Requirements • Panel on Alternate Funding Sources Special Thanks to Signature Sponsor: Heinfeld, Meech & Co., P.C.

Learn more at, click on CPE, then Conferences.

their purpose is to help people; however, this is too general to be meaningful. It’s important to communicate how you want to profoundly impact your clients. Look at key aspects of how each partner deals with and treats their clients. This will help in defining values and beliefs that will represent your firm going forward. This phase should capture the differentiating qualities the firm as a whole will embrace. Enroll the staff into the process of creating strategies to communicate, model and fully embrace the purpose and beliefs. Create awareness of how the purpose and beliefs align to the personal beliefs of each employee. Celebrate accomplishments of the firm members in relation to living the beliefs. Through this process, every member of the firm becomes devoted to the same objectives. The behaviours toward clients and the relationships that are created become uniform. From here, a partner who is considering his or her exit now has a group of peers and subordinates who are delivering the same customer experience as he or she would. Succession can begin— or probably has unconsciously begun as the clients begin to develop additional points of contact within the firm. More and more employees become top performers because their role becomes meaningful – they see their contribution to a strong purpose. The likelihood of client retention becomes very high as the transfer of responsibility is fluid. The partner’s goal of maintaining a high level of payout on retirement is now AZ CPA more likely to be achieved. Cindy Gordon, CPA, CA (Canada license only) CPCC is the owner of Culture Shock Coaching, LLC. She works with accounting firms and business owners to create a high of employee motivation through a conscious and meaningful corporate culture. She can be reached at

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Business Valuation/Forensic Focus

Avoidance of a Secured Loan as a Fraudulent Conveyance by Jeffrey Sumptor, CPA

Debtors frequently transfer property prior to filing for bankruptcy protection that diminishes their bankruptcy estate and unsecured creditors’ ability to recover on unpaid claims. Depending on the circumstances, this may be considered to be a fraudulent conveyance, which would allow the transfer to be avoided and the property recovered for the benefit of the debtor’s estate. Bankruptcy Code §548 details the requirements for a transfer to be considered fraudulent and differentiates between actual fraud, where the transfer is done intentionally to defraud creditors and/or thwart collection efforts; and constructive fraud, where fraud is determined by the circumstances surrounding the transfer. In the latter instance, the transfer can be recovered even if the debtor’s actions were not deliberately dishonest. The following example addresses the elements of constructive fraud in the context of the avoidance of a secured loan as a fraudulent conveyance under Bankruptcy Code §548. Debtor Management Company (the debtor) started doing business during 2001. Dr. A and his wife, Mrs. A, have been the owner/members and have contributed property to the company since its inception. The debtor’s primary source of annual income came from



the debtor received less than reasonably equivalent value in exchange for incurring the obligations to the bank.

leasing its commercial property, most of which was occupied by health care providers and medical-related businesses. Between May and July of 2008, Dr. A encumbered the commercial building owned by the debtor with $1.5 million in liens. The liens resulted from three loans from the bank for $500,000 each, secured by trust deeds. The loans came due between March and May of 2009. The debtor defaulted on the loans, which led to its filing for bankruptcy protection in 2010. In this example, the bankruptcy trustee commenced an adversary proceeding against the bank to avoid the liens against the commercial building as fraudulent conveyances. Prior thereto, the trustee engaged a forensic accountant to perform an investigation and ultimately testify as an expert witness relative these transactions and opine on the financial condition of debtor and consideration received, if any. Certain factors that led to the bankruptcy filing were that the proceeds from the bank’s loans were not paid to the debtor, but utilized elsewhere instead. The debtor’s financial condition was so debilitated from the creation of the liens, that repayment was very unlikely if not impossible, and the capital that remained with the debtor after the transactions was unreasonably small. This scenario resulted in funds available to pay unsecured creditors being significantly diminished. This article summarizes how the forensic accountant assisted the trustee

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in establishing that the debtor’s transfers to the bank met the relevant fraudulent conveyance elements of the Bankruptcy Code. (The focus for this case was on §548(a)(1)(B).) The avoidance of the transfers created by the recordation of the trust deeds would free up significant equity in the property for the benefit of the unsecured creditors of the debtor’s estate. Lack of Reasonable Consideration Based upon the forensic accountant’s review of the debtor’s business records, tax returns and bank records, none of the underlying loan proceeds were paid to the debtor. The evidence indicated that all of the loan proceeds were paid directly to Dr. A personally and/or to another entity owned by him. The loan proceeds were utilized in large part by Dr. A to fund his separate investment in a gas station business. Tracing of the loan proceeds illustrated that the debtor did not even receive an indirect benefit from the loans either. As a result, the debtor was stripped of any related equity, yet still strapped with the bank’s debt obligations. The net effect on the debtor’s estate was that funds that could have otherwise been available to pay unsecured creditors were significantly diminished, if not eliminated. There wasn’t any specific tangible quantifiable evidence of direct or indirect reasonably equivalent value being given to the debtor from the loan transactions with the bank. Therefore,

Financial Condition Establishing that a debtor’s poor financial condition is evidence of constructive fraud can be done by proving that the debtor was insolvent at the time of the transfer, or by showing that the debtor was undercapitalized and/or intended to incur debts that it would be unable to pay. The first method, insolvency, can be proven by showing that the value of the debtor’s liabilities exceed the value of their assets. Under the second method, the trustee needs to make the case that a transfer left the debtor undercapitalized or unable to pay its debts as they came due. One of the challenges faced by the forensic accountant in order to establish insolvency in the debtor’s case, was that the value of the debtor’s assets, which were primarily real estate, most likely changed dramatically between the transfers in 2008 and the bankruptcy filing in 2010. The expert would have had to determine the value for this property at the date of transfers, and because of inflated property values, the evidence may not have supported an insolvency opinion. Because of this, the expert decided that focusing on the debtor’s capitalization and ability to make debt payments would be the most effective way to establish the case. In proving that the debtor’s financial condition was evidence that the transfers were avoidable, the expert chose to focus on two alternative determining factors. First, the debtor had debts, or should have reasonably believed that it would incur debts, between the date the obligations to the bank incurred and the bankruptcy petition date, that would be beyond its ability to pay as they matured. Second, when the debtor incurred the obligations to the bank, the debtor was engaged in (or was about to) business or a transaction for which any property remaining with the Debtor was “an unreasonably small capital” throughout the period from 2008 through the Petition Date.

In Moody vs. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1070 (3d Cir. 1992), the Court stated: “[A]n ‘unreasonably small capital’ would refer to the inability to generate sufficient profits to sustain operations. Because an inability to generate enough cash flow to sustain operations must precede an inability to pay obligations as they become due, unreasonably small capital would seem to encompass financial difficulties short of equitable insolvency.” To determine a debtor’s ability to pay its debts as they come due, one can look to evidence of the creditors’ claims from the debtor’s historical records and the bankruptcy pleadings, compared to the debtor’s cash flow and liquid assets, from the date of the initiation of the debt through the bankruptcy petition date. In the debtor’s case, after reviewing their tax filings, financial statements, bank statements and other business records, it was obvious that the debtor would not be able to pay the $1.5 million debt due to the bank when it came due a year later. In 2007 and 2008, the debtor had net income of approximately $26,000 and $30,000, respectively, and from Nov., 2008 through June, 2009, the debtor’s ending bank balances ranged from $0 to $23,149 and averaged less than $7,700 per month. Due to Medicare limitations on related party lease transactions, the debtor’s lease agreement with its medical tenants provided that the monthly base rent payment was only an amount sufficient to cover the debtor’s costs of owning the premises (for ex., insurance, real property taxes, utilities and maintenance costs). As a result, the debtor’s ability to generate positive cash flow from operations was significantly restricted. The debtor’s only liquid asset then available to pay obligations was a minimal amount of cash on hand. As of May 21, 2009, the debtor had accumulated only $9,000 in cash on hand, and as of June 17, 2009, the debtor’s cash on hand had declined further to only $5,000. As of May 2009 the bank’s loans were in default and the amount due on the bank’s liens exceeded $1,525,000.

As you can see, the debtor didn’t have sufficient cash flow, or capital, to cover the bank’s monthly loan payments, which exceeded $30,000, let alone the $1,525,000 due to the bank as of May, 2009. As a result, the debtor’s subsequent bankruptcy filing was not only likely, but reasonably foreseeable. Based on the forensic accountant’s analysis, it was obvious that the debtor received insufficient consideration in exchange for the bank’s obligation and it was, or should have been apparent that, based on the debtor’s poor financial condition, the debtor would be unable to pay this debt as it came due. Finally, the debtor was engaged in business or a transaction for which any property remaining with the debtor would be an unreasonably small capital throughout the period from the initiation of the loan through the petition date. Based on the expert testimony in this case, other evidence submitted and the arguments of the trustee’s counsel, the court granted the trustee’s motion for summary judgment, and the bank’s secured lien were avoided thereby freeing up equity for AZ CPA unsecured creditors.

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Jeffrey Sumpter, CPA, is a director at CBIZ MHM, LLC. He can be reached at

Behind the Scenes with … Central Arizona Project Have you ever wondered why we have all those big canals running throughout the Valley? Who maintains them? What purpose do they serve? Well, wonder no more, because all those questions and much more will be addressed as the ASCPA goes Behind the Scenes with Central Arizona Project. Space is limited to 25 attendees, so register soon.

To register or for more information, go to JANUARY 2014 y AZ CPA


Classifieds is becoming

Their name is changing, but their team is still committed to providing the great customer service and workers

Business Opportunities/ Practices for Sale Want to sell your CPA Practice without a commission? — Are you interested in selling your Phoenix CPA practice under $200K billlings? No sales commission. Cash purchase. CPA has over 25 years’ experience in his CPA practice. Low client turnover. Contact Jeff at or (602) 292-2009.

compensation expertise you’ve come to expect. Make CopperPoint a part of your team. Call 602.631.2600 or 800.231.1363 and put CopperPoint to work for you.

OUR CPA FIRM IS LOOKING TO BUY BUSINESS CLIENTS — With 30 years in the valley, we are a well-established and growing practice who seeks business clients of every level. While our main firm is in Scottsdale, we have satellite offices in Phoenix and Glendale. Our firm is experienced at transitioning new clients after a sale and welcome CPAs looking to retire. Contact or call (480) 990-2727 with any questions about how we can help you.

Employment ACCOUNTANT/TAX PREPARER—East Phoenix CPA firm seeks permanent accountant/tax preparer. Experience/qualifications: minimum 3 years preparing tax returns for individuals and business, tax preparation software (e.g. GoSystem), QuickBooks, CSA, tax research, ability to work with minimal supervision. Email resume to Controller—Tucson Professional Services Company—We are seeking a CPA with a minimum of four years’ experience for the position of controller that will work directly with the CFO. Public accounting and private accounting experience a plus. Financial analysis experience a plus. Human resources experience a plus. Send resume to: Controller, PO Box 30460,Tucson, AZ 85751.

Get a Quote 1.888.706.4070

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GOVERNMENTAL AND NONPROFIT STAFF I OR II AUDITOR — William Dobridge, CPA, PC, a Governmental and nonprofit audit firm based in Mesa, Arizona, is looking for a motivated, customer service orientated individual to grow with our firm. Experience in Governmental and Non-profit

accounting is preferred. Competitive salaries and excellent benefits are provided. In-state travel is required. Contact Dallas Siler at SENIOR TAX ACCOUNTANT — Continue your career with a market-leader firm in beautiful Western Colorado! Dalby, Wendland & Co., P.C. is seeking a Senior Tax Accountant to join our Glenwood Springs office. Qualified candidates will have solid skills in income taxation and a strong accounting background; 2-5 years experience in public accounting desired. CPA or EA preferred, but not required. DWC’s strong team culture and quality-focused work environment provides challenging opportunities and growth throughout your career. Our firm provides a good work/ life balance, competitive compensation, a comprehensive benefits package, and opportunities for advancement. To apply, email your resume to SENIOR TAX ACCOUNTANT— Mesa, AZ CPA firm seeking a senior tax accountant to prepare individual, partnership, trust and corporate returns. Strong income tax, accounting, analytical and communication skills required. Minimum of five years recent income tax experience with a CPA firm desired. A working knowledge of Lacerte, Quickbooks and Excel preferred. CPA license required.Full-time preferred, but will consider part-time (four days a week). Flexible work hours, competitive salary, health and retirement benefits, paid vacation and CPE. E-mail resume to or fax to (480) 464-1465. Staff Accountant — Full time Staff Accountant for non-smoking CPA office in Scottsdale, Arizona. Associate degree required, Bachelor degree in Accounting preferred. New graduates to 2 years experience. Job duties include preparation of business and individual tax returns and various accounting functions. Salary DOE. Please send resume with a minimum of 2 references to TAX ACCOUNTANT — Growing CPA firm in Scottsdale seeks a Tax Accountant with 2-5+ years of recent CPA firm experience to join our team for preparation of business and individual income tax returns.

We offer a paperless work environment, opportunity for growth and advancement, and competitive salary and benefits. Experience with ProSystems fx and QuickBooks a plus. Interested candidates may submit a resume to TAX MANAGER—Local Tucson, CPA firm is seeking a tax manager. The position requires seven+years of recent tax experience in public accounting and a CPA license. Strong technical, communication, customer service, sales and marketing skills are highly desirable. You will review and prepare individual, partnership, trust and corporate tax returns; research tax issues and provide tax consulting services for small to medium sized businesses and wealthy individuals. We offer a competitive salary, flexible work schedule and comprehensive benefits package. Please apply by sending your resume to

TAX SENIOR: The Next Step in Cultivating Your Career - The Tax Senior Accountant position offers the opportunity to develop your career in public accounting and make a difference to clients. As a Tax Senior Accountant, you will oversee the entire Tax process with guidance from department leaders. This collaborative involvement gives you the opportunity to participate in all areas of the engagement. This role includes a high level of client interaction and the contribution to the development of staff accountants. Applicants need 2+ years of experience in public accounting, must have passed or been qualified to take the CPA exam. Learn more at

In the Black ... Adventures in Accounting

My New Year’s resolution is to get up to speed on the COSO Report.

Office Space EAST CAMELBACK OFFICE SPACE —Space available with CPA Firm near 32nd St. & Camelback Rd. Amenities include: conference room, client reception area, kitchen, security system, and covered parking. Two suites available, (218 SF and 158 SF). Year round per diem work available, if desired. E-mail

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Walter Haig scared me into it!

Don’t miss Walter Haig’s CPE seminars Jan. 14-16 and Feb. 11-14. See for more details. JANUARY 2014 y AZ CPA


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As the health care landscape changes, Blue Cross Blue Shield of Arizona is committed to empowering members and delivering the service that continues to earn your confidence for years to come.


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Trust 24 AZ CPA y JANUARY 2014




AZ CPA January 2014  
AZ CPA January 2014  

The official publication of the Arizona Society of CPAs