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AZ CPA November 2016


Your Way to Success Remain Compliant with Peer Review Beneficiary-Controlled Trusts Reasonable Compensation in Business Valuation - Pt. 2

The Arizona Society of Certified Public Accountants y

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AZ CPA The Arizona Society of Certified Public Accountants President & CEO

Cindie Hubiak


Patricia Gannon


Heidi Frei

Board of Directors Chair Chair-Elect Secretary/Treasurer Directors

Greg Nelson Molly Montgomery Mike Allen Jared Van Arsdale Brenda Blunt Michael Chesin Virginia DeSanto Marcus Feder Teresa Finley Julia Miessner Mark Patton Jeffrey Quick Curtiss Smith Nancy Thomas Char Woodall

Immediate Past Chair Rob Dubberly AICPA Council Members

Karen Abraham Armando Roman

Chapter Presidents Southern Chapter Northern Chapter

Cathy Poore Bethany de Alva Southwest Chapter Jennifer Sullivan North-Central Chapter Ellen Carpenter

The Right Call in Estate Controversy and Financial Exploitation.

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 articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA.

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AZ CPA Volume 32 Number 9

November 2016



Improv Your Way to Success Learn how these five techniques borrowed from improvisation skills can help you succeed in the workplace. by Peter A. Margaritis


How to Steer Clear of (T)reasonable Compensation in a Business Valuation — Pt. 2 Part 2 of this article addresses the owner’s education and experience in determining reasonable compensation. by Kevin R. Yeanoplos, CPA

Compliant with Peer 19 Remaining Review in Arizona

Columns & Departments

Chair’s Message by W. Gregory Nelson, CPA


Member News


A Dash of SALT by James G. Busby, Jr., CPA


Quick Quiz


Classifieds 26

Discover details to assist you and your firm in remaining compliant with the Arizona Accountancy statutes regarding peer review. by Linda McCrone


Rethinking the Way We Look at the Revocable Living Trust

Beneficiary-controlled trusts are becoming a popular tool in trust planning. by Douglas Wood, CPA, Esq.

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



ASCPA Chair’s Message

The Rewards of Mentorship At age 24, Buck was struggling to find a calling for his life’s work. Buck, as he was nicknamed by his family, was armed with a master’s degree in business administration from Stanford University and the small business he’d started. But he needed guidance to sort out his future. Fortunately, he found some helpful advice. He met with a family friend, who was the CEO of Pacific Gas and Light, and was advised to, “Pursue your CPA; that certification, along with your MBA, should put a solid foundation under your career.”

by W. Gregory Nelson, CPA I’ve had the opportunity to be a mentor at various times during my career. It’s been rewarding to become part of someone’s success and growth.



Buck followed the friend’s advice and later worked for Price Waterhouse. He continued to nurture his fledgling business from the basement of his home. Along the way he found a helpful mentor in a seasoned audit manager who was fond of him. With his manager’s guidance, Buck learned the nuances of running a business. But he resigned after three years to teach accounting at Portland State, which allowed him more time to grow his business. Buck continued to develop his business with help and advice from friends and colleagues, many of whom came to work with him during the formative years leading up to Nike’s public offering in 1980. In his book, Shoe Dog, Buck (also known as Phil Knight) is quick to give credit to the many people whose advice and assistance helped him launch one of the most successful, iconic brands in history. We can all likely think of individuals who have helped us grow in our careers. I have personally been fortunate to have had many wonderful mentors providing advice and counsel during my career. That advice has proven to be valuable, and the process has been a great learning experience. Likewise, I’ve also had the opportunity to be a mentor at various times during my career. It’s been rewarding to become part of someone’s success and growth. Currently, the ASCPA is launching a mentor-mentee program that will match interested members with other CPAs willing to help them navigate through their business and careers. Through the “Connect” portal on the ASCPA website, you will have the opportunity to register as either a mentor or mentee. Mentors and mentees can find a match based on their profiles and the criteria they desire in the relationship (see page 10 for more information). If you are interested in this new benefit, part of your ASCPA membership, I hope you will consider registering as either a mentor or mentee. I am certain you will enjoy the experience and the opportunity to either provide or receive advice and counsel. And as the saying goes, “A problem shared is a problem halved.” n

Member News Caryn G. Horvitz-Strauss, CPA, owner and president of CHS Tax & Business Services, PLLC, was elected chairperson of the board of directors of First Credit Union. Thomas M. Wheelwright, CPA, founder of ProVision, was recently quoted in two articles in the September issue of Accounting Today. Roman H. Kepczyk, CPA, director of consulting for Xcentric, was once again listed as one of the 100 Top Most Influential People by Accounting Today. Hunter Hagan & Co., Ltd., was ranked 41 in the top women-owned businesses by the Phoenix Business Journal. Heinfeld, Meech & Co., P.C.’s partner, Brittney Williams, CPA, was recently appointed to the AICPA’s Governmental Audit Quality Center Executive Committee.

In it For the Outcome - Not the Income — ASCPA young professionals joined Project CURE in “delivering health and hope to the world.” The mission of Project CURE is to identify, solicit, collect, sort and distribute medical supplies and services according to the imperative needs of the world. The group sorted and packed medical supplies at their Tempe location.

James R. Anderson, CPA, ABV, CFF, ASA, with James R. Anderson, CPA, P.C. Business Valuation & Litigation Support Services, has been appointed to a four-year term as a public member of the Board of Legal Specialization of the State Bar of Arizona.

The ASCPA is

Thankful for your membership!

We’ve Got Your Back — The ASCPA recently hosted a meeting about HB 2693, a bill proposed in the 2016 legislative session to authorize the taxation of services. While the bill didn’t pass, more than 20 organizations and lobbyists gathered at the Society to share their thoughts surrounding this type of tax policy.



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A Dash of SALT

Arizona’s New Sales Tax Reporting Requirements This month’s state and local tax (SALT) column explains how, although simplified sales tax reporting processes were to be implemented by January 1, 2015, they have not taken effect, and the state now requires location-based reports on new tax forms and some businesses must report electronically. Arizona, along with Alabama, Colorado and Louisiana, is one of just four states that allows municipalities to administer their own sales taxes.

Sales Tax Simplification Promised But Delayed To simplify the sales tax reporting process, the Arizona Legislature passed a bill in 2012 that required the Arizona Department of Revenue (Department) to implement a central, online portal by January 1, 2015 that would permit taxpayers who are required to pay municipal sales taxes that are not collected by the Department the option of reporting and paying the taxes online using the portal. Then, in 2013, the Arizona Legislature passed a more comprehensive sales tax reform bill. The portal and Arizona’s other sales tax reforms were to go into effect on January 1, 2015. Some of the changes did go into effect on that date, such as Arizona’s cumbersome new rules governing the taxation of construction contractors and the rule that prevents municipalities from initiating a sales or use tax audit unless the company is engaged in business in only one municipality or the municipality is authorized by the Department to conduct the audit. However, the most important simplifications — those that would have required the Department to issue all municipal sales tax licenses, process all municipal sales tax returns, and receive all municipal sales tax payments — did not go into effect on January 1, 2015, as planned because the Department’s computer system was not ready to accommodate the changes. Rather, these important reforms were delayed — first until January 1, 2016, and then indefinitely — although the Department now believes its computer system will be ready to accommodate these changes beginning January 1, 2017.

by James G. Busby, Jr., CPA

James G. Busby, Jr., CPA, is a state and local tax attorney at The Cavanagh Law Firm. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue. If you have any questions, please contact the author.  He can be reached at (602) 322-4146 or

New Tax Forms and Location-based Reporting Now Required On June 29, 2016, the Department announced that Form TPT-1, the state’s longstanding sales, use, and severance tax return, will not be accepted for reporting periods beginning on or after June 1, 2016. Businesses that only have one location in Arizona and only report to one taxing jurisdiction in Arizona may use Form TPT-EZ. The Department refers to this as a simplified form. While it is simplified compared to the new Form TPT-2, it is comparable to the Department’s old form, Form TPT-1. Businesses with more than one location in Arizona or that report to more than one taxing jurisdiction in Arizona must use Form TPT-2. Taxpayers now must report their gross receipts and deductions separately for each business location in Arizona, and for each taxing jurisdiction they report to. Thus, for example, a business that operates two separate retail stores in Arizona is now required to report



the gross income and deductions for each store separately, even if the stores are located in the same municipality.

New ASCPA Mentor Program The ASCPA is launching a new mentoring program and is looking for members who are interested in mentoring and/or being mentored. Why mentor? • Do you enjoy coaching and helping others? • Have you learned a lot of lessons throughout your career that you would like to share with others? • Is strengthening the future of the CPA profession important to you? Why would you want a mentor? • Do you often encounter situations that you would like to discuss with someone who has been there? • Are you thinking of a career change or are you feeling stuck and would like some guidance through your transition? • Have you taken over new responsibilities and could use more direction? The mentoring program is flexible with options for in-person or virtual mentoring. Each mentor/mentee match will determine when and how often they will meet. We recommend that you spend at least one hour each month with your mentor/ mentee and make a minimum six-month commitment to provide and receive the best experience. Fill out a short form at to express interest in the program.



Electronic Reporting Now Required by Some The Department encourages all businesses to file their sales tax returns electronically at And, as of July 1, 2016, businesses with two or more locations in Arizona are required to file Form TPT-2 electronically.

For Now, Non-Program Cities Still Collect Their Own Taxes Although the instructions for Form TPT-EZ and Form TPT-2 indicate that all city taxes should be reported on these forms, a June 29, 2016 email from the Department clarified that it will not begin collecting taxes for the state’s 14 non-program cities until some later point in time. Accordingly, for now, taxpayers must continue reporting taxes directly to Arizona’s non-program cities using the separate forms required by each city. Arizona’s non-program cities are Apache Junction, Avondale, Chandler, Douglas, Flagstaff, Glendale, Mesa, Nogales, Peoria, Phoenix, Prescott, Scottsdale, Tempe and Tucson.

Practice Tip To h e l p t a x p a y e r s a n d t a x professionals familiarize themselves w i t h A r i z o n a ’s n e w r e p o r t i n g requirements, the Department set up a page on its website with links to tax reporting guides, forms, tax rates, deduction codes, information concerning location-based reporting, and more at: TransactionPrivilegeTax(TPT).aspx. In addition, the Department published instructional videos on its YouTube page at: mJBOsUFM8-U. n

2017 Arizona Tax Guide Order the only comprehensive guide on Arizona taxes Authors: Pat Derdenger, Steve Rodis and Ed Zollars

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New in the 2017 Arizona Tax Guide:

• Arizona becomes the first state to conform to the new partnership examination regime enacted by Congress • Major revisions are made to Arizona charitable tax credits, expanding those that can be made after Dec. 31, as well as separating the credit for contributions to certain charitable organization from the credit for contributions to foster care organizations • Status of sales tax simplification efforts

The Arizona Tax Guide includes the following guides: • The Arizona Income Tax Guide is a comprehensive reference that highlights the differences between Arizona and Federal income tax law and provides references to the Arizona Revised Statutes for a more in-depth analysis. It highlights the differences between individual, corporate, partnership and trust taxes, includes tax tables, and is arranged in a way that facilitates research on any topic. • The Arizona Sales and Use Tax Guide is a resource for anyone preparing or filing city sales and use tax returns. The guide details the various sales and use tax rates that apply to each type of sale or product as well as the many exceptions, administrative provisions and Model Cities Tax Code provisions. • The Arizona Personal Property Tax Guide outlines the nature of the tax, reporting requirements, analysis of forms, audit and appeal procedures and small business exemptions. • The Arizona Unclaimed Property Guide covers Arizona rules that apply to unclaimed property, how to report and pay, and how to file your claim.

Pre-order by Dec. 15, 2016 and save Guides will be available for delivery mid-January 2017. Name ___________________________________________ Company ________________________________________ Address ________________________________________ City ___________________State _____ Zip ___________ Phone __________________ Fax ____________________ Email ____________________________________________

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Order and learn more about the guides at

Pre-Order by Dec. 15, 2016 ❒ Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $85

❒ Nonmembers: $105 After Dec. 15, 2016 ❒ Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $95

❒ Nonmembers: $115 Electronic PDF:

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IMPROV to Success

Your Way

Five Simple Tips to Help you Succeed in the Workplace by Peter A. Margaritis Improvisation isn’t about being funny. That’s a surprising statement for many, but it’s true. Improvisation skills contain techniques that you can follow to help you overcome natural reluctance and self-consciousness in everyday interactions and conversations – funny or not. Overcoming those barriers to meaningful conversations – conversations that lead to better relationships and increased trust – is a challenge many in the workforce face. As a CPA, I know that networking can be a chore and small talk can seem draining.That’s where an understanding of improv can help. The principles of improvisation are respect, trust, support, listening, focus and adaptability. And the glue that holds those together is the principle of “yes, and …” Ultimately, these principles allow you to go with the flow, accept inevitable change, and adapt quickly all while perpetuating a positive intelligent outlook. You already have a wealth of knowledge that allows you to adapt to a variety of situations. Without that knowledge, you have nothing. It’s the same in the business world. You have to have knowledge and experiences in order to improv your way to success.

Replace Negative “Yes, but ...” with Successful “Yes, and ...” “Yes, and …” are words that keep conversations going. They inspire people and spur creativity. They help to overcome resistance and lead to a meeting of minds, and as such they are valuable words to use during negotiations. “Yes, and …” is about being agreeable.



It’s not about agreeing, rather finding a point of agreement and then moving onward from there. For example, if a colleague suggests an idea, you might say, “Yes, and we could explore that idea and see if we could get it in the budget next year,” rather than, “Yes, but there’s just no money to do that.” With that one small word, you have shifted the conversation from halting creativity and ideas to supporting them and building a positive atmosphere amongst your team.

Listen to Understand Think about the difference between listening to respond and listening to understand. (There is a difference, I promise.) Listening to understand requires you to park your agenda and really hear your client, co-worker or customer. This practice demonstrates respect and genuine interest, which cultivates deeper, more trusting relationships. This is about listening with your ears and also with your eyes. Look

for details that can become points of connection or visual signals and cues from the person with whom you are engaged in conversation.

even better next time. Train yourself to silence your inner critic and allow yourself the confidence to try with less fear of making a mistake.

Focus on Relationships


This applies to both new relationship opportunities and growing established ones. For current coworkers, clients or customers, build relationships beyond numbers to build rapport, comfort and trust. For new relationships, get to know people. Train your inner critic to say, “Yes, and …” And don’t forget to smile.

In the world of improv, people talk a lot about commitment. You need to be fully committed to your character. If you’re going to be the tree, be the best tree that you can be. If you’re going to be a crazy game show host, be the craziest. Be fully committed to that character. That’s a lesson for businesses, too. If you don’t have the passion for what you’re selling, then you’re not going to sell it. Every single one of these actions takes practice. By embracing this outlook, you will sharpen your creativity and communication skills, the business success skills that accountants often consider secondary. You will find that opportunities will start to arise that wouldn’t have before, you may notice reduced stress at work and a more positive, collaborative, and creative work environment.

Make Mistakes If you expect perfection, you are likely to be disappointed. Yes, you will make a mistake; probably more than one, and most of the time, unless it’s a real blooper, the only person who knows about it is you. It boils down to what you have probably heard many times since childhood – every mistake is an opportunity to learn and do

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So even if you don’t think you’re funny, remember comedians aren’t the only ones mastering improv to elevate their success. When applied in any business setting it’s a valuable training tool that can make anyone a more effective accounting professional. Employ improvisational techniques in your everyday experiences until it becomes second nature and you will be amazed at the positive results that will follow in both your leadership and life. n

Peter A. Margaritis, CPA (in Ohio and Georgia), is a speaker, educator, trainer, humorist and self-proclaimed chief “edutainment” officer for The Accidental Accountant™. Partnering with the Business Learning Institute, his firm helps accountants to increase their profitability by strengthening their business success skills. He is also the Author of Improv Is No Joke: Using Improvisation to Create Positive Results in Leadership and Life. For more information, go to www.

Accounting & Reporting Standards Conference — Jan. 11, 2017 Black Canyon Conference Center (and webcast) Come learn from the author of this article, Peter Margaritas, who will lead a session on Financial Storytelling. If you’re a CEO, CFO, financial analyst or a manager needing to communicate financial information in an impactful way, this workshop will give you the necessary tools to tell more effective stories with your financial data. Register at



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1. The owner’s qualifications and role in the corporation; 2. The corporation’s character and condition; 3. Compensation levels for comparable positions in similar companies; 4. The corporation’s salary policy; and 5. The independent investor standard.


How to Steer Clear of (T)reasonable Compensation in a Business Valuation — Part 2* by Kevin R. Yeanoplos, CPA/ABV/CFF, ASA In determining the reasonableness of compensation, Tax Courts have considered the owner’s experience and education to be particularly important. The Courts have responded favorably in cases where the taxpayer presented strong evidence of formal education directly related to the business of the company and technical or managerial experience to the company. While there have been a number of relevant cases dealing with reasonable replacement compensation, many consider the definitive case to be Elliots, Inc. v. Commissioner.1 In the 1983 case, the Tax Court set forth a standard consisting of five criteria to determine the reasonableness of compensation for owners of closely held corporations: *Part one of this article was published in the Sept. 2016 issue of AZ CPA.

The fifth criterion was a judicially created analysis that determined how a hypothetical third-party purchaser of the corporation would compensate the executive position at issue. This independent investor standard has received a large amount of attention in other cases as a meaningful way to indirectly measure the propriety of owner/ employee compensation through an analysis of the returns provided at the enterprise investor level. The concept is that if an independent investor in the enterprise receives an arm’s length return on his or her investment, then the amounts paid to the owner/employee(s) must be reasonable in relation to the remaining returns available at the investor level. The Mad Auto Wrecking, Inc. v. Commissioner2 decision indicated that the following factors could be considered in determining reasonable compensation: • The employee’s qualifications; • The nature, extent, and scope of the employee’s work; • The size and complexities of the employer’s business; • Comparison of salaries paid with the employer’s gross and net income; • The prevailing general economic conditions; • A comparison of salaries with distributions to shareholders and retained earnings; • T h e p r e v a i l i n g r a t e s o f compensation for comparable positions in comparable concerns; • The salary policy of the employer as to all employees; • The amount of compensation



paid to the particular employee in previous years; • T h e e m p l o y e r ’s f i n a n c i a l condition; • Whether the employer and employee dealt at arm’s length; • W h e t h e r t h e e m p l o y e e guaranteed the employer’s debt; • Whether the employer offered a pension plan or profit-sharing plan to its employees; and • Whether the employee was reimbursed by the employer for business expenses that the employee paid personally. While locating information on a comparable associate (i.e., a non-owner professional) may require extensive research, it may provide the most comparable replacement compensation for use in establishing a benchmark for reasonable compensation. Look for an associate working in the same city, with similar experience and training. Analysts can often use personal and business contacts in order to determine such numbers. An analyst should be aware that various sources may define “income” or “earnings” differently. In addition, the characteristics of the underlying professional sample often vary significantly, even within the same profession or industry. It is vital, therefore, to take steps to ensure “apples to apples” comparisons. Even if the valuation analyst is able to identify reasonable replacement compensation, there may be a need for additional adjustments to the compensation, particularly with professional practitioners. The potential for a productivity adjustment to the reasonable compensation figure is particularly important to consider. In some cases, this can be addressed by scaling up or back the actual compensation of the subject professional by a work hour factor to compare the actual compensation to the norm (assuming there is a reported work hour figure for the mean, median, or other measure of compensation determined to be fair compensation for normal work hours).



Mean/median compensation survey data does not necessarily represent the mean/median compensation of professionals working mean/median hours. Professionals working various numbers of hours are included in the mean and median income numbers. This is true even when the studies are stratified based on some broad range of hours worked. A valuation analyst may thus be mixing apples and oranges by computing a productivity adjustment when applying work hour adjustments to mean or median compensation figures. Compensation paid to an owner/ employee above a reasonable amount can arise from a number of factors, including: • Working more hours than the peer average while producing more than the peer average, such as a physician performing 40 office visits in a 50-hour work week when the peer average is 32 office visits in a 40-hour work week; • Working an average number of hours but producing more than the peer average, such as a physician performing 40 office visits in a 40-hour work week when the peer average is 32 office visits in a 40-hour work week; • The personal goodwill of the owner/employee; • “Leveraging” the various services provided where possible by using a dental hygienist, physician’s assistant, staff accountant, law clerk, or similar; and • Developing a more cost effective or efficient way of performing a procedure or providing a service, in essence making it more profitable. An analysis of the first two factors may give rise to the need for a productivity adjustment. A productivity adjustment focuses primarily on the relationship between productivity and compensation. The general concepts can be applied to virtually every industry sector, including those that are outside the recognized professions of healthcare, law, engineering, accounting, consulting services, performing arts, and dentistry.

Productivity is an integral part of many compensation systems for both employees and owners in professional firms. It has implications for staffing a practice, workforce planning and other issues, and forms a basis for comparison between professionals. Productivity is the result of a professional’s labor. A professional is considered to be more productive when producing greater results as compared to peer averages. P ro d u c t i v i t y i s a s i g n i f i c a n t “ c o m p e n s a t i o n d r i v e r. ” S o m e professionals make the mistake of simply looking at hours worked. Taking this position has significant flaws, as it tends to ignore what is done during the worked hours. A variety of productivity measures have historically been used. One traditional measure of professional productivity is dollars generated for the firm. This may take the form of professional charges for services rendered. However, it may also take the form of collections, as a more accurate measure of dollars generated to the firm. As stated in Part 1, the adjustment for reasonable compensation is critical. It is therefore vitally important to consider productivity adjustments, understand the factual underpinnings of utilized resources, and consider all other necessary factors that are determinants of reasonable replacement compensation. n

Endnotes 1. Elliots, Inc. v Commissioner, 716 F, 2d, 1241, 1983, U.S. App. 2. Mad Auto Wrecking, Inc. v. Commissioner, TC Memo, 1995-153, 69 TCM 2330, April 5, 1995.

Kevin R. Yeanoplos, CPA/ABV/ CFF, ASA, is an ASCPA member and a shareholder and the director of valuation services for Brueggeman and Johnson Yeanoplos, P.C. The AICPA Business Valuation Hall of Fame inductee has been a faculty member of the AICPA’s Business Valuation School for more than 20 years and was recently appointed to the Arizona Commission on Judicial Performance Review by the Arizona Supreme Court.

Remaining Compliant with Peer Review In Arizona by Linda McCrone Firm management is responsible for their peer review and must understand the process and timeline to ensure that their peer review is completed timely and in accordance with professional standards. This article will provide details that will assist you and your firm in remaining compliant with the Arizona Accountancy statutes and rules related to peer review. In Arizona, firms that perform attest services or full disclosure compilation services must have a peer review performed and reported on within the three years immediately preceding the firm’s registration date. Firms that only issue preparation engagements under SSARS 21 (AR-C 70) or non-disclosure compilations are not required to have a peer review. Rules are currently being reviewed to require peer review for firms that issue non-disclosure compilations. Firms that perform audits under the Statements on Auditing Standards (SASs), audits under Government Auditing Standards (GAS) and/or examinations under the Statements on Standards for Attestation Engagements (SSAEs) will have a system peer review, while those who perform services under Statements on Standards for Accounting and Review Service (SSARs) or services under SSAEs not included in system reviews will have an engagement review. The California Society of CPAs (CALCPA) administers the peer review program for firms with home offices in Arizona. Firms that audit publicly held companies, broker dealers or similar entities use the National Peer Review program administered by the AICPA. Enrollment Firms are required to submit an enrollment form by the report date of the firm’s initial accounting or auditing engagement. In Arizona, the due date for an initial peer review is 18 months from the date of the first report. The enrollment form may be found in the peer review section of the CalCPA website ( Once CalCPA receives the completed form, a firm

number and final date for the peer reviewer to submit the working papers will be assigned. This process takes about two weeks. Due Date In the initial peer review, a firm determines its peer review year. The due date for subsequent reviews will always be three years and six months after the year-end of the prior review so it is important to select a year end appropriate to the firm’s workflow. For example, if the peer review year-end is May 31, 2016, the next review will be for the year ending May 31, 2019 and the peer review will have a due date six months later, November 30, 2019. Years ending between May 31 and August 31 are often best, as those year-ends allow the peer review to be performed outside of tax season. Scheduling In the sixth month before the due date, your firm will receive a scheduling form with a peer review number from CalCPA. Firms should start the peer review process at this time. One of the most important tasks is to engage a peer reviewer, especially if you will need to have a system review. System reviews take longer and usually involve the peer reviewer visiting the firm’s office(s) to perform the peer review. Peer reviewers are in demand, and if a firm procrastinates, it often results in difficulties in finding a qualified reviewer. The scheduling form will require the firm to provide information concerning the types of accounting and auditing engagements the firm performs and also the levels of service and industries that they know they will perform, even if they have not yet started the engagements. Finding a Reviewer Most firms ask for referrals from other firms who have undergone successful peer reviews. There is also a directory of reviewers that is updated annually on CalCPA’s website, and the AICPA peer review website also has resources in this area. Technical Review After receiving the peer review, the working papers go through a technical review process and are then sent to a Report Acceptance Body (RAB), consisting of at least three



members of the administering entity’s Peer Review Committee. The technical review may result in questions for the peer reviewer, and this may require additional communication with the firm. After the RAB teleconference, it takes a week to process the review, at which time an acceptance letter or a request for corrective actions will be sent to the

reviewed firm. The technical review and acceptance process may take up to 120 days. Cost for Peer Review A processing fee is charged to Arizona firms in the year of their review, which would be every three (3) years. The current fees can be viewed at the CalCPA website.

Other Peer Review Information If the firm undergoes a merger or dissolution, the firm should complete the peer review change form at the CalCPA website. In general, the firm that has 51 percent or more of the accounting and auditing practice is considered to be the surviving firm, which means it would keep its prior peer review and maintain the same year end. In dissolution, the minority firm will need to enroll when it performs its first accounting or auditing engagement. If a firm performs audit work for another firm and that firm issues the report on its letterhead, it is assuming responsibility for the work, and this engagement would not be included in the assisting firm’s peer review. However, if a firm operates more than one firm, each of those firms that perform accounting and/or auditing engagements must be peer reviewed. For example, if a person operates as a sole proprietor and is also a partner in a partnership and both firms issue reports, there should be two peer reviews.

What are the Best Practices to Ensure a Successful Peer Review? •

Start early to make sure you get the best peer reviewer. • Carefully complete the scheduling form, especially the sections dealing with industries and practice areas where the firm performs engagements. • Provide information to the peer reviewer timely. • Resolve peer review issues as soon as possible, and consult with the AICPA peer review resolution hotline to settle disputes. • Communicate any changes to the firm’s address, emails, and key personnel to the administering entity during the period between peer reviews. Follow these steps and your firm will remain in compliance with the Arizona peer review requirements. n

Linda McCrone is director of technical services for the California Society of CPAs. Find out more at peer-review.



Rethinking The Way We Look At

The Revocable Living Trust T h e E m e r g e n c e Of

Beneficiary-Controlled Trusts by Douglas Wood, CPA, Esq. Planning for the future includes planning for the day you leave this earth. Post-mortem planning is not a topic that people like to face. In fact, we often push it to the side because the tasks for today seem more important and pressing. Unfortunately, the lack of planning sometimes results in no plan, which leaves your assets to be handled by someone other than yourself. If you want to maintain control during your lifetime over the assets you plan to leave to others, yet provide flexibility and built-in asset protections for those beneficiaries, you should consider incorporating beneficiary-controlled trust provisions into your existing or future estate plan.



One of the most popular mechanisms for creating a beneficiary-controlled trust is to include these provisions as part of a revocable grantor trust. These types of trusts are usually created by spouses to hold the family assets and are often referred to as a revocable family trust. Upon the death of the last surviving spouse, the family trust is deemed irrevocable and the provisions for the beneficiary-controlled trust are administered for the beneficiaries of the family trust. Like many other types of trusts, there are cost savings, incapacity management, tax savings and beneficiary protections available for those who choose this option. All of these benefits make this trust a great way to protect and pass on your assets with the added assurance that your beneficiaries will have in place proper mechanisms to protect those assets from creditors or ex-spouses.



How Beneficiary-Controlled Trusts Work In setting up a beneficiary-controlled trust, the grantors are generally the spouses of a joint revocable family trust. Title of assets is held individually in the name of the grantor or grantors and then transferred by way of retitling the assets into the name of the trust. Upon the death of the last surviving grantor, the family trust is considered irrevocable and the provisions for the beneficiary-controlled trust are administered upon the beneficiaries of the family trust, also called the primary beneficiaries. The beneficiarycontrolled trust can be designed so that the primary beneficiary, along with a “friendly” independent co-trustee, will manage the trust. The primary beneficiary has the flexibility to remove or replace the independent co-trustee. The primary beneficiary, acting as a co-trustee, may invest and acquire

assets under the trust using the trust principal. However, all of these assets still belong to the trust and should be kept titled in the name of the trust. The beneficiary’s assets owned individually in the beneficiary’s name must be kept separate from the trust and should not be comingled with the trust assets. A beneficiary-controlled trust can be used to protect a wide variety of assets. Assets in the trust may be used for just about anything. From everyday expenses to vacations, the assets are still protected by the trust to the extent they are still titled in the name of the trust and have not been transferred or transmuted into the beneficiary’s individual name. When the primary beneficiary of the trust passes away, the assets held in the trust may continue to be held by the trust or at the discretion of the terms of the beneficiary-controlled trust, be passed on according to another

602.631.2300 | 800.231.1363 testamentary instrument, such as a will or subsequent trust prepared according to the primary beneficiary’s wishes. In other words, a beneficiary-controlled trust allows the grantor to provide for the beneficiaries but also builds in asset protection to ensure the preservation of the grantor’s wealth down to the appointed beneficiaries. This can be very important if you have significant assets that you want to ensure stay in your family or beneficiaries who could be at risk to creditors.

Protection from Liability and Creditors Aside from the ability to keep assets in the family, a beneficiary-controlled trust can help protect the trust assets from creditors and potential ex-spouses of the beneficiary. If the primary beneficiary becomes a party to a lawsuit, the assets in the trust should be protected. The primary beneficiary will resign as a co-trustee, and as such, the creditor

can’t compel the independent trustee to make distributions from the trust. For similar reasons, assets in the trust should also be protected from the IRS, ex-spouses and creditors. Also, since the beneficiary doesn’t own the trust’s assets, the assets are protected from bankruptcy filings. To further protect the trust, secured loans from the trust to the beneficiary may be considered instead of taking distributions directly from the trust. This would ensure that the trust has priority in the event of bankruptcy by the beneficiary. In this case, the trust would be considered an additional creditor rather than an asset. It’s important to take steps to determine the details of how your assets will be handled now so that it isn’t handled by the default laws of your state. Depending on the state, this can mean significant taxes and creditor access. You also want to ensure that you make determinations about how

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property will be used. Society has become increasingly litigious and divorce happens regularly. A beneficiary-controlled trust should ensure that your assets don’t end up being owned by someone you never knew or intended to have control.

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Beneficiary-Controlled Trusts Provide Control Compared to other estate planning arrangements, a beneficiary-controlled trust is relatively simple to use, easy to implement, and is more cost effective. It’s a valuable vehicle for exercising control over the inheritance you want to leave to those you love. When you create a beneficiarycontrolled trust, you can design it with a wide or narrow discretion for implementing the control and flexibility afforded to your beneficiaries. Regardless, a beneficiary-controlled trust will help prevent your family assets from falling into the hands of creditors, ex-spouses, and other unintended sources – yours or your children’s. Again, your beneficiaries individually own nothing unless a distribution is made from the trust. Given the opportunity to provide the beneficiary with assets they can enjoy in a manner as close to outright ownership as possible, it’s no surprise that more and more people are beginning to incorporate the beneficiary-controlled trust provisions into their existing or newly created estate plans. With the tax benefits, creditor protections and access to family assets, a beneficiary-controlled trust will give you peace of mind and is a great option for those looking to pass their assets forward. n Douglas Wood, CPA, practices law at Burch & Cracchiolo in the areas of business and corporate law, estate planning and probate, and tax controversy. Prior to joining Burch & Cracchiolo, Wood practiced as a certified public accountant with a large national accounting firm focusing his practice on taxation. He is a member of the ASCPA and can be reached at dwood@



AZ CPA Quick Quiz You’ve Read It, Now Get Credit Take this quiz online or submit this hard copy on AZ CPA content. Receive a score of 70% or more and earn one hour of CPE credit in specialized knowledge. It’s that easy! Fees

Members $25 Nonmembers $40

Online Access Login to and go to CPE/OnDemand CPE Quick Quiz to access links to all active quizzes. Purchase quiz and the quiz link and password will be emailed to you. Your results will be sent immediately after completing, and certificates are emailed within two business days. Hard Copy Please select one answer for each question. Fill out registration/payment information below and mail or fax to the Society office. Quiz results and certificates will be emailed to the address provided on the registration form. *This quiz will be available until November, 2017. Please note that users have three attempts to pass the quiz with at least a 70% score.

November 2016 Issue of AZ CPA* 1. In the Chair’s message, Phil Knight benefited from having several mentors during the formative years leading up to this company’s public offering in 1980. m Adidas m Nike m New Balance

5. By embracing the five simple tips from Improv skills, you will: m Increase the stress level at work m Sharpen your creativity and communication skills m Create a negative work environment

2. Businesses with more than one location in Arizona or that report to more than one taxing jurisdiction in Arizona must use this sales tax form: m TPT-EZ m TPT-1 m TPT-2

6. On e of t h e f i ve c r i te r i a to determine the reasonableness of compensation is the corporation’s:

3. The AZ Department of Revenue encourages all businesses to file their sales tax returns: m By phone m Electronically m By mail 4. Parking your agenda and really hearing your client, co-worker or customer is an example of: m Listening to Understand m Listening to Respond m Listening to Argue

m Hiring policy m Promotion policy m Salary policy 7. On e t ra d i t i o n a l m e a s u re of professional productivity is: m Dollars generated for the firm m Number of hours worked m The amount of daily tasks completed 8. The due date for the initial peer review in Arizona is: m 18 months from the date of the first report m 12 months from the date of the first report m The date of the firm’s initial accounting or auditing engagement. 9. This is not a best practice to ensure a successful peer review: m Start early m Fail to provide timely information m Resolve peer review issues as soon as possible 10. Which option is not a benefit of a beneficiary-controlled trust: m Relatively simple to use m Difficult to implement m More cost effective

Quick Quiz Registration Name: ____________________________________________________ Email:_____________________________________________________ Telephone: _________________________________________________


m Member: $25 m Nonmember $40 Checks: Please make payable to: The Arizona Society of CPAs Credit Card:

m Visa m MasterCard m American Express

Credit Card #: _______________________________________________ Expiration Date: _____________________________________________ Name on Card. _____________________________________________ Mail to: ASCPA, 4801 E. Washington St. Suite 225-B, Phoenix, AZ 85034-2021; fax to (602) 324-6043; scan and send to



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picture and be team player. QuickBooks proficiency required and at least 3-5 years’ experience in tax & accounting. Preparing complex tax returns, ability to analyze data, prepare AJEs, balance accounts, payroll & reports and prepare tax return. Financial planning work will include gathering data, inputting, processing and analyzing calculations and recommendations. Big picture view is essential. Full-time position with possibility of less or flexible hours off-season. Salary DOE. Email resumes to with salary history/requirements and availability.

Office Space Employment Request for Proposal for Financial Audit Service —The Hopi Foundation seeks a multi-year engagement from qualified and independent Certified Public Accountants to perform annual financial and compliance audits for 2016-2018. The scope of the audit shall include A) Nonprofit 501(c)3 financial audit and 990 statements and B) Public Radio financial audit. Please include a proposal letter from a qualified CPA firm, a quote of all costs associated with Parts A & B separately, and credentials and references from tax-exempt charitable organization clients and public radio clients. Proposals must be postmarked by 5pm on October 10th. Contact Angie Harris at (928) 734-2380 or see full ad at www. PART-TIME CPA NEEDED IN AHWATUKHEE — Mountainside CPA LLC — Part-time CPA needed for yearround tax preparation work. Hours are very flexible. Proseries tax software experience a plus. Applicants should have 5+ years experience in individual and business tax preparation. Contact: Well-rounded CPA needed for small practice in Carefree. Must think analytically in complex tasks, see big



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Upcoming ASCPA Conferences Cyber Security: A Special Focus on Cloud Computing Michael Peters, Continuum GRC, Lazarus Alliance, Inc. What’s Hot in Excel Catherine Jennings, P3.World, The Focus Group Consulting, LLC

Emerging Leaders Conference

Finance and IT: Working Together More Effectively Bill Richardson, Richardson Management Consulting, LLC

Nov. 18

Cyber Fraud: Scary Stories and Then Some Bob Minniti, Minniti CPA, LLC

Tempe Mission Palms Hear from experts on leadership topics, get a complimentary professional headshot, and enjoy a networking social after the conference. Topics include: World Domination of CPAs: What, How and Why Future Technology Trends Impacting CPAs

Technology for Accounting Tips & Tricks Tanya Luken, Tanya Luken, CPA, PC & Kyle Grove, CloudIT Technology Overview and Policy Environment Affecting Accounting Steve Zylstra, Arizona Technology Council

Lead by Serving: The Personal and Professional Benefits of Volunteerism Pursuing Passion: The Art of Combining Work and Fire Career Development: Thinking Strategically to Emphasize Your Strengths Change Management: Moving Your Business from Actions to Results Economic Update

Accounting & Reporting Standards Conference Jan. 11, 2017 Black Canyon Conference Center (and webcast) This conference is designed to bring practitioners current with the accounting and reporting standards of the profession. Topics include:

Technology for Accounting Conference

Financial Storytelling

Dec. 7

Cyber Security

Desert Willow Conference Center

Complaints Against CPAs and How to Avoid Them: Real Life Examples From Complaints Filed With the AZ State Board of Accountancy

The Technology for Accounting Conference is focused on providing CPAs in all fields of accounting with the tools and skills needed to keep up to date with changes in technology. We have an amazing lineup of local and national speakers: How Bitcoin and the Blockchain will Revolutionize the Accounting Profession Doug Sleeter, The Sleeter Group

Accounting and Auditing Update

A Closer Look at the New Leases Standard How to Identify Red Flags in Asset Misappropriation Schemes

Learn more and register at conferences NOVEMBER 2016 AZ CPA


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AZ CPA November 2016