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Today’sCPA JULY/AUGUST 2012

T E X AS S O C IET Y OF

C E RT I F I E D P U BL IC AC C OU N TANT S

A Texas CPA

MEET FRED TIMMONS, TSCPA’S INCOMING CHAIRMAN

SOX Quarterly Certifications: What’s Your Comfort Level? Time to Take Advantage of Cloud Technologies Transfer Pricing: Concepts & Practices

Also: A Trip Down Memory Lane


TIED UP?

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Austin • Collin County • Dallas • Houston • New York • Washington, D.C. • Mexico City - Strasburger & Price, SC


CHAIRMAN Fred Timmons, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

Contents 24

JULY/AUGUST 2012 VOLUME 40, NUMBER 1

EDITORIAL BOARD CHAIRMAN Arthur Agulnek, CPA

Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR

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cover story 24 A Texas CPA

Wayne Hardin whardin@tscpa.net

CONTRIBUTORS

Meet Fred Timmons, CPA-San Antonio, TSCPA’s Incoming Chairman

34 34 CPE: Transfer Pricing – Concepts & Practices

Failure to address transfer prices can have serious tax consequences: a follow-up.

Ali Allie, Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Kelly Hardwick; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Heather O’Connor, AICPA; Catherine Raffetto; Dianne Rollin; Avery Roth; Katey Selph; Patty Wyatt

society features

columns

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton

14 Spotlight on CPAs

5 Chairman’s Message

Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

21 Capitol Interest

© 2012, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

Today’sCPA

| JULY/AUGUST 2012

It’s Runoff Time

technical articles 28 SOX Quarterly Certifications What’s Your Comfort Level?

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Ty Moore, CPA-Houston; Jan Taylor Morris, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-East Texas; Paul Willey, CPA-Dallas.

A CPA Travels Down Memory Lane: Accounting Then and Now

It’s been a decade since Section 302 became law. Companies should take a fresh look at their certifications.

6 Tax Topics

By now, “the cloud” should be a familiar concept – and one all companies are preparing to join.

My Buddy Said ...

8 Business Perspectives

Look Before You Leap

9 Accounting and Auditing

How’s Your Skepticism

10 Emerging Issues Eyes on Texas

12 Chapters

32 Time to Take Advantage of Cloud Technologies

One of a Kind State

TSCPA Chapter Officers for 2012-2013

departments 16 Take Note 42 CPE Calendar 44 Classifieds

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Business income or (loss). Attach Schedule C or C-EZ .

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If you did not get a W-2, see instructions.

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Capital gain or (loss). Attach Schedule D if required. If not required, check here

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Other gains or (losses). Attach Form 4797 .

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Enclose, but do not attach, any payment. Also, please use Form 1040-V.

IRA distributions . 15a b Taxable amount . . . Pensions and annuities 16a b Taxable amount . . . Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E

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Farm income or (loss). Attach Schedule F . Unemployment compensation . . . . Social security benefits 20a

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Educator expenses . . . . . . . . . . 23 IRA deduction . . . . . . . . . . . . . 32 Certain business expenses of reservists, performing artists, and Student loan interest deduction . . . . . . . . 33 fee-basis government officials. Attach Form 2106 or 2106-EZ 24 Tuition and fees. Attach Form 8917 . . . . . . . 34 Health savings account deduction. Attach Form 8889 . 25 Domestic production activities deduction. Attach Form 8903 35 Moving expenses. Attach Form 3903 . . . . . . 26 Add lines 23 through 35 . . . . . . . . . . . . . Deductible part36 of from self-employment tax. Schedule gross SE . income 27 Subtract line line 22. This is Attach your adjusted Self-employed SEP, SIMPLE, and qualified plans . . 28

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Self-employed health insurance deduction Penalty on early withdrawal of savings . .

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Alimony paid b Recipient’s SSN ▶ IRA deduction . . . . . . . Student loan interest deduction . . Tuition and fees. Attach Form 8917 .

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Adjusted Gross Income

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Other income. List type and amount Combine the amounts in the far right column for lines 7 through 21. This is your total income

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Domestic production activities deduction. Attach Form 8903 35 Add lines 23 through 35 . . . . . . . . . . . . . Subtract line 36 from line 22. This is your adjusted gross income

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

36 37

Cat. No. 11320B


Chairman’s Message By Fred Timmons, CPA | TSCPA Chairman

One of a Kind State In this first Today’s CPA issue of the Society’s new fiscal year, incoming TSCPA Chairman Fred Timmons, CPA-San Antonio, discusses the upcoming 2012-13 year. Next issue, Timmons and TSCPA Executive Director/ CEO John Sharbaugh, CAE, will continue to provide a joint Chairman’s and Executive Director’s Message. My life as a native Texan has been important to me, so I decided to open each of my board meetings as TSCPA chairman during 2012-13 with a story about the state that may or may not be news to some members. And I think Form 1040 I’ll do(2011) the same with you in the magazine each issue. Did you know Texas is the only state that’s allowed to fly its flag at the same height as the U.S. flag? That’s because we were a sovereign nation at the time we opted for statehood. We’re one of a kind. Ours is probably the only state that you can ask a child in another country to point out on a map of the U.S. mainland … and they can. So I would find it meaningful to have my year as TSCPA chairman be the year of the Texas CPA. Whether you’re a native or a lucky transplant, I hope you find value in whatever part of the Lone Star State in which you find yourself … the piney woods of East Texas … the international hubs of Dallas or Houston … the echo of the wild west lingering in Midland/Odessa … the heritage of old Mexico that flavors San Antonio and El Paso. And of course, the hundreds of charming and singular small towns that dot our sprawling landscape. As accounting professionals, we also play a special role on the national

landscape. Because of our hefty numbers, and our active and effective chapter network, the contributions of Texas CPAs to national organizations such as the American Institute of CPAs (AICPA) have been significant, and there is every reason to assume this will continue with your help. There are important issues facing us. Of course, we must deal with the evermounting tide of standards, particularly if and when we implement International Financial Reporting Standards (IFRS). Keeping current on tax changes is also an ongoing challenge for CPAs, both nationally and at the state level. In Texas, the franchise or margin tax is being evaluated to determine if the tax structure should continue to exist in its current form or in a revised form, or whether the existing tax structure should be repealed and replaced with a different business tax. Private company reporting is another issue. In 2010, a Blue-Ribbon Panel was formed by AICPA, the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy (NASBA) to address how accounting standards can best meet private company financial statement users’ needs. FAF received over 7,000 comment letters, including a letter from TSCPA in support of the Blue-Ribbon Panel’s recommendations. In May, 2012, the FAF Board of Trustees established the new Private Company Council (PCC).

The goal of the PCC is to help improve the process of setting private company accounting standards. We must also be prepared to respond when other matters arise that impact us, such as audit firm rotation. Last year, the Public Company Accounting Oversight Board (PCAOB) issued a concept release that proposed requiring public companies to change their auditing firms after a certain number of years. After receiving considerable input opposing the audit firm rotation requirement, it appears PCAOB is backing away from it, but is looking at other ideas that would help enhance auditor independence, objectivity and professional skepticism. In addition, our efforts to support public financial literacy are more critical than ever in this economic climate. TSCPA offers the 360 Degrees of Financial Literacy program and consumer website, ValueYourMoney.org, which are designed to educate consumers on personal finance issues. So I would encourage you to be as active and vocal as possible as we face these challenges – as Texas CPAs. We’re always looking for new leaders and fresh blood in the TSCPA volunteer ranks. You can make a difference both for your profession and your own career. The next time you drive past a home or business flying both the Texas flag and the U.S. flag, check out the levels. One doesn’t have to fly them at the same height, but you can. Only in Texas. ■

Fred Timmons can be contacted at ftimmons@tbsacpa.com.

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Tax Topics By Greta Hicks, CPA | Column Editor

My Buddy Said …

When a client receives a court settlement, there are times when an attorney or a buddy might say it is not taxable. If it is a judgment paid versus a settlement received, the client is sometimes told it’s deductible. We (the CPAs) are often the bearers of bad news and have to tell the client something opposite of what they were previously told by an attorney, their barber or their best buddy. For example, a broker worked for a firm that declared bankruptcy. When the broker signed on as an employee, he was “given” a sign-on bonus that the firm treated as a loan (employee forgivable loans or EFL). Payments were made on the loan based on commissions in excess of a stated percentage. When the firm declared bankruptcy, the trustee via FINRA (Financial Industry Regulatory Authority) required the broker to repay the loan. The issue went to arbitration. In the end, the broker paid interests and legal fees in addition to compensatory damages, and the assumption is that it equaled the outstanding note balance. What to do with the compensatory damages, interests and legal fees paid? The

broker wants to deduct the whole $250,000 on his personal tax return. He’s learned that if it is an employee business expense, much of it is limited by the AGI and even worse, the $250,000 comes back into income for AMT purposes. His next plan is to deduct it as a casualty loss, with the bankruptcy being defined as a casualty. With these facts, Code Sections 162, 163, 165, and 212 are possibly applicable.

DEDUCTIBILITY OF DAMAGES

The determination of whether a litigation or settlement expense is deductible under Sec. 162(a) depends on the “origin and character of the claim” with respect to which the expense was incurred. Commissioner v. Tellier, 383 U.S. 687, 6898

(1966). To the extent that the payment is determined to represent a settlement of threatened claims for compensatory damages, the payment would be deductible. Treas. Reg. Sec. 1.162-21(b)(2). The deduction of a payment will be disallowed under Sec. 212 if the payment is of a type for which a deduction would be disallowed under Sec. 162(c), (f), or (g) and the regulations there under in the case of a business expense. Reg §1.212-1(p). Sec. 165(c)(1) provides that in the case of an individual, there shall be allowed as a deduction any loss incurred in a trade or business during the taxable year, not compensated for by insurance or otherwise. Since the amount of liquidated damages paid by the taxpayer to his employer in this case is attributable to compensation received for services rendered, such amount qualifies as a business loss under Sec. 165(c)(1) of the Code. The deduction is allowable in the year paid, but only if the taxpayer itemizes his deductions. Rev. Rul. 65-254, C.B. 1965-2, 50. Petitioners believed that the loss of their savings account due to the bankruptcy of the credit union was due to a casualty or a theft and, accordingly, claimed their deduction as a casualty or theft loss. In this case, however, petitioners presented no evidence establishing that the bankruptcy of the credit union was caused by a casualty or theft. Smith, Robert Lee, (1979) TC Memo 1979-76, PH TCM ¶79076, 38 CCH TCM 322. Advance commissions received by a cash basis salesperson are includible in gross income in the year received. Repayments of portions of such commissions are deductible business expenses in the year repaid, subject to Sec. 1341. Rev. Rul. 7278, 1972-1 CB 45.

DEDUCTIBILITY OF INTERESTS

The broker stated that he used the proceeds of the “loan” to buy and sell stocks. Any interest associated with an award or settlement is always taxable. IRS Market Segment Specialization Program

Greta P. Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.

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Audit Technique Guide on Lawsuit Awards and Settlements, Training No. 3123-009. If applying the tracing rules, the interests would be investment interests. Interest expense allocated to an investment expenditure, as defined in paragraph (b) (3) of this Sec, is treated for purposes of Sec. 163(d) as investment interest. I.T. Reg. §1.163-8T(a)(4)(i)(C).

DEDUCTIBILITY OF LEGAL FEES

No legal fee deduction will be allowed for legal fees allocable to non-taxable awards or settlements. IRC Sec. 265(a). Absent strong support to the contrary, legal fees relating to an award or settlement that is partially taxable will be allocated based on the ratio between the taxable award/ settlement and the total award/settlement. IRS Market Segment Specialization Program Audit Technique Guide on Lawsuit Awards and Settlements, Training No. 3123-009. A deduction is allowed for the legal fees and court costs that are related to the taxable portion of the proceeds. Generally, legal fees and court costs are allowed as a miscellaneous itemized deduction subject to the 2 percent AGI limitation on Schedule A. IRS Market Segment Specialization Program Audit Technique Guide on Lawsuit Awards and Settlements, Training No. 3123-009. The amount of a fine or penalty (Sec. 162(f)) does not include legal fees and related expenses paid or incurred in the defense of a prosecution or civil action arising from a violation of the law imposing the fine or civil penalty, nor court

costs assessed against the taxpayer, nor stenographic and printing charges. I.T. Reg. §1.162-21(b)(2). The tax court properly determined that attorney’s fees paid directly to attorneys out of a taxpayer’s wrongful termination settlement with a former employer had to be treated as a miscellaneous itemized deduction subject to AMTI rules, not “above-the-line.” Sec. 62(a)(2) … : (The) fees failed Sec. 62(a)(2)(A)’s restrictive business connection requirement. BIEHL v. COMM., 92 AFTR 2d 2003-7280 (351 F3d 982), 12/12/2003. Non-business expense deduction was allowed for amounts spent by the taxpayer attributable to defending against, or settling, claims against him for return of fees paid him as an investment advisor or claims against him by a purchaser of stock from a stock syndicate in which the taxpayer participated. These activities of the taxpayer were conducted for the production or collection of income within Sec. 212, and the deductions here were for ordinary and necessary expenses of such activities. DITMARS v. COMM., 9 AFTR 2d 1269 (302 F.2d 481), Code Sec(s) 162; 212; 262, (CA2), 04/13/1962.

SUSTAINABLE POSITION

Do your own research and make your own decision. To avoid IRS preparer penalties, you must have substantial authority for the position taken and to sign the tax return, you must be reasonably sure that your position will be sustained by a court of law.  ■

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Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor

Look Before You Leap! The financial crisis and the recession that followed were a blessing in disguise for many companies. To preserve cash, liquidity and margins, executives renewed their focus on expense reduction, helping to trim excesses. But top-line growth did not improve, due to at best a tepid recovery, meaning elusive sales and profits in future quarters. Impatient shareholders, who want improved performance now, are increasing the pressure on CEOs. As such, temptations abound to gain growth through an acquisition or merger, which has been a proven strategy in past economic cycles. The conditions are favorable for M&A activity today. Companies are flush with cash, interest rates are low, and lower economic activity has resulted in cheaper values. The supply of cash is abundant as emerging markets, such as China and India, look to invest in developed countries, and sovereign wealth funds such as Norway and United Arab Emirates, and private equity houses in the likes of Blackstone and KKR, try to boost their returns. And deal-making means revenues to M&A advisory firms! Companies pursue an M&A strategy for good reasons. Companies choose an expansion objective to increase market share and market power. Expansion could mean increasing existing market share or moving into new markets. Market power refers to buying power – consider Wal-Mart, for example. A defensive objective is chosen when a company is fighting off an acquisition or if it is enhancing its “moat” to increase barriers to entry. Diversification is another objective undertaken when a company expands into a new industry or sector. A resource and capabilities objective is undertaken to acquire new knowledge, critical resources or other key assets. But moral hazard problems can lead to deficiencies in management’s responsibilities to shareholders with the use of M&A activity. Investing in extravagant projects happens

when management has excess cash to spend. Evidence has shown that building empires via mergers and acquisitions gives rise to skepticism of shareholders, which reflects a reduction in share price. Entrenchment is another strategy. It is used by managers to keep their jobs. The managers invest in an industry or product line to display their prowess as a capable manager, but the investment itself is marginal at best with a negative impact to share price. Much has been written about M&A activity and its associated performance, and the results have been mixed. But it is clear that the success, or the lack of, has been centered on the planning and execution of the deals. There is a reason why IBM has been successful with its acquisitions, compared to the debacle between America Online and Time Warner. There is no “one size fits all” formula, and every circumstance is likely different. M&A failures, such as America Online/ Time Warner and Bank of America/Merrill Lynch, have been connected to barriers to integration, such as failed strategies, poor integration planning, reduced customer loyalty, government regulations, poor people engagement, talent loss and lack of strategic risk. Human behavioral biases, such as confirmation bias and overconfidence, have also played a major role in failed strategies. So what makes some companies such as IBM

and Disney so successful in their acquisition forays? A successful M&A strategy revolves around four key points: insightful planning; highquality strategic due diligence; an unbiased assessment of the company’s capabilities and competencies; and a successful and effective implementation. The planning phase spells out the rationale for the deal to include answers to all the following questions. Is it possible to do? Does it fit our corporate strategy or is it a diversion? Why do we need to do this? Is this alterative with its costs and risks better than all other alternatives? What is the new vision for both companies? What does each bring to the table? Do both agree to this? Is the business strategy aligned with the operational strategy? High-quality strategic due diligence assesses the heart of the deal – is there really the bang for the buck? Is the potential realizable? Is the overall goal attainable? And do we have a “walk away” price? The capabilities and competency area is about having adequate resources and the appropriate expertise to make it happen. This is an area of danger for overconfident and enthusiastic managers to underestimate resources required for effective implementation. You need specific persons to be involved with planning or executing or closing the deal with no competing demands. Effective implementation is critical to overcoming issues such as communication, people and culture. Companies use mergers and acquisitions as a way to expand operations and remain competitive globally. These involve very complicated processes and take a substantial amount of time and energy to execute. They also require significant and diverse skill sets and substantial resources to execute well. They provide a good strategic choice for those who pursue this with a clear vision and the right price. A very sound “look” should help you deliver on the bold promise of your “leap!” n

Mano Mahadeva, CPA, is executive director with U.S. Oncology in Plano. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at mano.mahadeva@usoncology.com.

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Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor

How’s Your Skepticism? Success in auditing is all about exercising sound professional judgment. Experienced auditors know that exercising judgment is perhaps as much an art as a science, applying subjective evaluation techniques to evidence to form an opinion on fairness. The key to making good audit judgments is maintaining professional skepticism, which is a naturally questioning frame of mind that includes understanding the risks, asking the right questions, gathering sufficient appropriate evidence, and suspending final judgments until all relevant evidence is evaluated. Why not give yourself a mental evaluation of your professional skepticism on your last audit engagements? Read through the five-step model for applying audit judgments below. For each step, there are questions to ask yourself. With no one looking, be honest with yourself to determine whether your skepticism is on track or whether it needs a tune-up. These are designed to be answered for each of your audit clients.

STEP 1. IDENTIFY THE ISSUES AND OBJECTIVES. Did I take steps to understand my client and the risks inherent in the business and industry in which they operate? In the course of dealing with the client, did I discover anything that might reflect on my client’s integrity? Do they have a reputation of “pushing the envelope” and taking too many risks? How did these risks influence the possibility that the financial statements could contain a material misstatement? Did I identify those risks with particular account balances and management assertions? Did I develop appropriate overall and individual account balance materiality thresholds? What factors influenced my materiality judgments? How did I justify the decisions I made?

STEP 2. COLLECT RELEVANT EVIDENCE. Did I perform both preliminary and final analytical procedures? When doing so, did I

thoroughly analyze key relationships between balance sheet and income statement variables in light of what the non-financial data were telling me? Did I take steps to understand the business story behind those relationships? Whenever the relationships reflected in the numbers didn’t make sense, did I consider all of the possible reasons why they didn’t? Did I link possible errors to key financial statement assertions? Did client responses to my questions make sense in light of other evidence I obtained? In understanding the client’s internal controls, did I start with the errors that could occur in key assertions from Step 1? Did I consider controls that should prevent those errors, and did I ask whether those controls have been implemented? Did I conduct the proper tests to determine if implemented controls were working as planned? Did I use the results from planning and internal control risk assessment properly in design and performance of substantive tests?

STEP 3. EVALUATE THE EVIDENCE AND CONSIDER ALTERNATIVES. Did I consider the reliability, validity, certainty and accuracy of evidence that I gathered? Did I keep an open mind to alternative explanations for results of the evidence-gathering process? Did I avoid the following “mental shortcuts” that lead to biased judgments: • the “availability tendency” – the tendency to consider information that is

easily retrievable from memory as being more likely, more relevant and more important, without digging deeper; • the “confirmation tendency” – forming a snap judgment too early in the evidencegathering process, and limiting evidence merely to the type that confirms the snap judgment; • the “overconfidence tendency” – being closed minded and failing to acknowledge the actual level of uncertainty that exists; or • the “anchoring tendency” – making assessments starting from an initial value (such as a prior period amount, a client estimate or an unaudited amount) and failing to make sufficient adjustments for changes that may have occurred.

STEP 4. DEVELOP CONCLUSIONS AND COMMUNICATE RESULTS. Before making final judgments, did I discuss the results of my audit with other knowledgeable people within my firm, including both persons who worked on the engagement and those who didn’t? When others challenged my judgments, did I welcome and adequately consider their opinions? Did I clearly communicate my findings to persons charged with governance of the client?

STEP 5: DOCUMENT THE RESULTS. Did I adequately document steps 1-4? If I had to present evidence to justify my judgments for any step along the way, do I feel confident that I could in a way that others would agree with me? Only by answering “yes” to all or most of these questions can you be assured that your professional judgments are guided by an adequately professionally skeptical frame of mind, which is the key to remaining an effective auditor! ■

C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

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Emerging Issues By James F. Reeves, CPA | Column Editor

Eyes on Texas As the November elections draw closer, Texas, for better or worse, will be pushed into the national spotlight once again … and in a good way.

“Rich States, Poor States,” where he analyzes the effect of state taxes on jobs, economic output, state-to-state population migration, and capital flow. Laffer concludes: “Georgia, Kansas, Missouri and Oklahoma are now racing to become America’s 10th state without an income tax. All of them want what Texas has (almost half of all net new jobs over the last decade, for one thing).”

THE FACTS, MA’AM

Absent some unforeseen event derailing the current political trajectory, the essential debate will come down to one of “economic efficiency” versus “progrowth policies” and which philosophy will provide the better economic framework for the next four years. And the pro-growth crowd will suggest that voters look no further than what’s happening in the 50 state laboratories already at work, incubating policies and competing for business and investment that will drive economic growth and an improved standard of living for their citizens. In particular, they will point to the current economic situation in Texas as a shining example of what happens in a low-tax, pro-business environment where government policies are specifically designed to attract capital and business investment.

THE WORD ON THE STREET In fact, the conversation has already begun. In adjacent articles in its April 21 issue, the Wall Street Journal first contrasted the current state of affairs in California and Texas in an interview with demographer Joel Kotkin titled “The Great California Exodus.” Kotkin pointed to the Golden State’s restrictions on development and its cap-and-trade law, steeply progressive tax structure, and public unions as responsible for the high price of real estate and energy, businesses leaving the state, low job growth, and a growing class of welfare recipients. He says wistfully, “California used to be more like Texas – a jobs magnet. What happened?” And he compares California to Greece. Right below the Kotkin interview was an op-ed titled “A 50-State Tax Lesson for the President” by conservative economist and Reagan advisor Arthur Laffer, who recently published the fifth edition of his report

So with that backdrop, let’s take a deeper dive into the current economic environment in the Lone Star State via information provided by Susan Combs, the Texas comptroller. In her Weekly Economic Outlook at www.thetexaseconomy.org, Combs is keen to point out that job growth, sales tax collections, international trade, and automobile sales indicate that Texas has emerged relatively well from the recent recession. In addition, Texas added more people – 421,000 – than any other state from 2010 to 2011, nearly 19 percent of the nation’s population growth. Further, and importantly, Texas’ gross state product (GSP) grew 23.5 percent from 2001 to 2010, while the national GDP grew 16.8 percent for the same period, a 40 percent differential. From a jobs standpoint, Texas is well ahead of the national jobs market, having already replaced all the jobs lost during the recession, compared to a 41 percent recovery rate for the country, according to Combs. Where are the jobs coming from? Texas job growth in the goods-producing industries was 5.2 percent year over year, while growth in the service sector was 1.9 percent. Oil and gas drilling and related manufacturing led the way in terms of job growth, while the information industry (broadcast media, telecom and Internet services) showed the greatest decline. Another bright spot for Texas has been global trade. Texas has been the nation’s top exporting state since 2002, resulting

James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at jim.reeves@thomson.com, or visit his blog at http://jamesfreeves.blogspot.com.

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from both its own output and from its status as a national transportation hub. The International Trade Association reports that Texas’ annual merchandise exports top $200 billion, and international trade is responsible for more than a quarter of all Texas manufacturing jobs. Interestingly, over 90 percent of companies – approximately 25,000 – that exported goods from Texas are small and medium-sized businesses with fewer than 500 employees. Anyone who thinks globalization has not reached Main Street ought to think twice.

TEXAS CITIES IN THE SPOTLIGHT Kotkin recently completed and published a study in Forbes of the top cities for jobs. In all, he looked at 398 MSAs, 65 of which were large cities (populations greater than 450,000); 91 were mid-sized cities (150,000 – 450,000), and 242 were small cities (less than 150,000).

In an accompanying interview on Forbes. com, he described his findings. “Instead of government, the big drivers of growth now appear to be three basic sectors: energy, technology and, most welcome of all, manufacturing. Energy-rich Texas cities dominate our list – the state has added some 200,000 generally high-paying oil and gas jobs over the past decade – but Texas is also leading in industrial job growth, technology and services. In first place in our ranking of the 65 largest metropolitan areas is Austin, which has logged strong growth in manufacturing, technologyrelated employment and business services. Houston places second, Fort Worth fourth and Dallas-Plano-Irving sixth.” Looking at Kotkin’s list of top small and mid-sized cities for jobs, Texas continued to be well represented. Corpus Christi (2nd), McAllen/Edinburg /Mission (3rd), and El Paso (4th) represented the Lone Star State

among top mid-sized cities, while Odessa (1st), Midland (2nd), San Angelo (4th), Lubbock (9th) and Laredo (10th) rated highly among the 242 small cities.

POSITIVE ECONOMIC MOMENTUM We Texans are fortunate to live and work in a state with a positive economic momentum. Other states are trying to emulate our success and good fortune. Some will no doubt suggest that we were merely lucky due to the favorable climate and abundant natural resources. Whatever the case, I’m sure our elected representatives will be prideful, as they should be, when Texas is once again thrown into the national limelight as a shining example of what can happen with an entrepreneurial spirit, strong work ethic, pro-business and investment policies, hard work, and yes, a little bit of sunshine and good fortune along the way. ■

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9/12/11 10:03 AM

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Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative

TSCPA Chapter Officers for 2012-2013 Jeffrey Blanks, President Lori E. Herrick, President-elect Robert R. Womack, Vice President Gerald A. Reid, Secretary/Treasurer

AUSTIN CHAPTER

Guy Draper, President Michele M. Heyman, President-elect Katy Avenson, Vice President Connie B. Clark, Vice President Jeannette M. Cortinas, Vice President Ansley S. Carruth, Secretary/Treasurer Kristy K. Holmes, Secretary/ Treasurer-elect

BRAZOS VALLEY CHAPTER

Rodney J. Horrell, President James M. Larkin, President-elect/ Vice President

Amy N. Restivo, Secretary Jennifer M. Fox, Treasurer

CENTRAL TEXAS CHAPTER

Bryan E. Sweeney, Treasurer-elect

EAST TEXAS CHAPTER

Kristy A. Everitt, President Gina G. DeHoyos, President-elect Michael S. Thomas, Vice President Randy L. Turner, Vice President Rose M. Blakely, Secretary/Treasurer

Michael L. Brown, President Sally W. Wolfe, President-elect Shelly R. Spinks, Vice President Teri Lynn H. Meyers, Secretary Angela M. Ragan, Treasurer

EL PASO CHAPTER

Tony Benitez, President Teri A. Reinert, President-elect Thania D. Gonzalez, Vice President Christopher A. Parker, Vice President Jennifer Hennessey, Secretary Belen D. Briones, Treasurer

CORPUS CHRISTI CHAPTER

Natalie K. Klostermann, President Paul A. Damerow, President-elect Amy W. Twardowski, Vice President Anita Cadena, Secretary/Treasurer

DALLAS CHAPTER

Kirby H. Jackson Jr., Chair John N. Perkins, Chair-elect Arthur M. Agulnek, Treasurer

FORT WORTH CHAPTER

Keith A. Hollar, President Robin T. Christian, President-elect

GR WTH It’s what CGMA stands for. Officially, of course, it’s Chartered Global Management Accountant. A new designation representing accomplished professionals that drive and deliver business success, worldwide. Find out more at cgma.org

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Copyright © 2012 American Institute of CPAs. All rights reserved.

ABILENE CHAPTER

1/26/12 4:01 PM

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Steven G. Newcom, Vice President Lacey A. Riley, Vice President Jeremy C. Sweek, Vice President Susan I. Adams, Secretary/Vice President Adam M. Lawyer, Treasurer Amanda F. Johnson, Treasurer-elect

HOUSTON CHAPTER

Mark D. Lee, President Thomas J. DeGeorgio, President-elect Carol G. Warley, Vice President Debra D. Seefeld, Secretary Paul A. Vanek, Treasurer Gerrad Heep, Treasurer-elect

PANHANDLE CHAPTER

J. Mark Fields, President Anne M. Carpenter, President-elect Alicia M. Pickens, Vice President Tomi D. Kerns, Secretary Stephanie M. Fitzgerald, Treasurer

PERMIAN BASIN CHAPTER

Billy Kelley, President Ryan G. Bartholomee, President-elect Jimmy Hudson, Vice President John May, Vice President J. Byron Tuck, Secretary/Treasurer

RIO GRANDE VALLEY CHAPTER

Cheryl A. Bellamy, President Carol B. Collinsworth, President-elect Fernando Terrones, Vice President Bill Ruppert, Secretary David Segovia, Treasurer

SAN ANGELO CHAPTER

Jerry Ramirez, President Emily A. Knopp, President-elect Patti B. May, Secretary Curtis A. Holtman, Treasurer

SAN ANTONIO CHAPTER

Melanie C. Geist, President Lynn S. Kupper, President-elect Joe M. Guerra, Vice President Maria A. Martinez, Vice President Janet E. Stigent-Burns, Vice President Mark J. Goldman, Secretary Martha C. Perez, Treasurer Charles T. Clark, Treasurer-elect

SOUTH PLAINS CHAPTER

Tony Riley, President Jeffrey L. Marshall, President-elect Linda C. Turnbough, Vice President Cindy L. Read, Secretary/Treasurer

SOUTHEAST TEXAS CHAPTER Chris W. Busch, President Laura J. Williams, President-elect Robert L. Bynum, Vice President Cecilia Jungen, Vice President Jamie L. Larson, Secretary Kristin A. Mattingly, Treasurer

TEXARKANA CHAPTER

Jay T. Hoy, President Ruth E. Allard, President-elect Mark R. Van Herpen, Vice-President Kristin L. Peeples, Secretary/Treasurer

VICTORIA CHAPTER

Christopher R. Janecek, President Brenda K. Roth, President-elect Diane R. Kliem, President-elect Nominee Billy H. Nguyen, Secretary/Treasurer

WICHITA FALLS CHAPTER

Jeffery A. Morton, President Timothy W. Norden, President-elect Mark A. Anderson, Vice President James K. Rowland, Secretary Shannon D. Adams, Treasurer 

Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at rledbetter@tscpa.net.

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Spotlight on CPAs By Carl S. Chilton, Jr.

A CPA Travels Down Memory Lane: Accounting Then and Now It recently occurred to me that I had passed the CPA exam in 1950 and have now been a CPA for 62 years. As I reflect back on those years, the changes in the accounting profession and the way accounting work is done have been nothing short of revolutionary. I have now been retired since 1988, but have good memories of my 37 years (almost four decades) in public accounting. During World War II, my college education was interrupted and I served three years in the Army Air Corps as a bomber pilot. Shortly after my discharge, I entered The University of Texas to complete my education. I took my junior and senior years at the university, majoring in accounting, and graduated in 1947. While at the university, I obtained parttime employment, working in what was then called the university auditor’s office, but which actually was the department that maintained the university’s accounting records. During my time there, I performed routine accounting work, which was done manually. I decided it was boring work, and it seemed to me many of the full-time employees did routine work day after day – nothing new, nothing

different, nothing challenging. I was not impressed with my job or with the work, and began to wonder if this was the career I wanted to pursue. I had been offered a job with a CPA firm in Corpus Christi, but decided instead to take a job teaching at Brownsville Junior College. I found I enjoyed teaching and liked the camaraderie with the students and fellow faculty members (of whom I was the youngest). The idea of following a career in higher education was appealing, but I realized that to succeed, I’d have to return to school for three more years to get a Ph.D. Having spent three years in the military and four years obtaining my BBA degree, I found it hard to warm up to the idea of three more years in school. By 1950, I passed all four parts of the CPA exam. When I reported this to the authorities of Brownsville Junior College, they placed an article in the Brownsville Herald, letting the community know they now had a CPA on the faculty. Soon after that, I received a phone call from a Brownsville CPA, Bill Long, who congratulated me and invited me to attend the monthly meeting of the Rio Grande Valley Chapter. He and I drove from Brownsville to Harlingen, attended

the chapter meeting, and began to get acquainted. His telephone call, and that first visit with him, turned out to have a lasting impact on my future. The Rio Grande Valley Chapter had about 20 members in 1950, most of whom attended the monthly chapter dinner meeting. The programs at these meetings helped practitioners stay up-to-date and provided an opportunity for exchanging ideas, along with telling a few stories about dealing with the IRS. I had gotten acquainted with quite a few people in Brownsville and some businessmen began asking me to help them with their accounting and tax work. Bill Long found himself with more work than he could handle at times and asked me to provide him with some help. Soon I found myself doing more accounting work while I continued to teach. I wasn’t sure at that point whether I wanted to continue teaching or enter public accounting, but I began to realize I enjoyed the accounting work. I found it brought a variety of challenges and diverse problems, as well as the opportunity to work with some interesting clients. As the months went by, I began spending more time working with Bill Long, and we began discussing the idea of going into partnership. After much discussion, we decided partnership was the way to go. The firm of Long and Chilton opened for business on Oct. 1, 1951. The firm’s personnel consisted of three people: Bill Long, Carl Chilton and Luci Colonell. Luci had a variety of jobs, which kept her busy. She answered the phone, greeted

Carl Chilton was active in the Texas Society of CPAs for many years, serving as president in 1979-80. He has enjoyed an active retirement, has written several books on Brownsville history and continues to play tennis at age 89.

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people coming to the office, did the filing, did the typing, made the coffee, kept our partnership books and did client bookkeeping work. She worked for us for many years. We wanted our office to be wellequipped and up-to-date. In those days, many people used manual adding machines and typewriters, but we were proud of our electric typewriter and three electric adding machines. Along with that, we were well equipped with pens, pencils, rulers, columnar pads, post binders, journal sheets, ledger sheets and carbon paper. All accounting work was done manually, so it helped to have legible handwriting. We balanced journals and ledgers manually, and recorded transactions in debit and credit columns, totaled the columns and checked to see if they balanced. If not, we went back and looked for the error. This was in the days before copying machines. If a copy was needed, it was copied by hand. Financial statements were prepared manually, then typed. Carbon paper was used to prepare extra copies. If the typist made an error, it had to be corrected on each copy. If more than about five copies were needed, it was necessary to type the statements again or send them to a printer. After the typing was completed, the figures had to be checked to be sure there were no typing errors. One client wanted 30 copies of a report, but didn’t want the financial information to go to a printer. The report had to be typed five or six times. Tax returns were prepared in pencil, on IRS forms, then typed. After a few years, new equipment came on the market. Calculators came into

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use that could add, subtract, multiply and divide. When multiplying, it was necessary to enter the number to be multiplied, then hold down a lever the number of times to complete the multiplication. When dividing, we entered the two numbers in the machine, then pushed a button and the machine would start dividing. We could go get a cup of coffee and when we returned, we checked to see if the machine had completed the division.

“WHEN I RETIRED IN 1988, THE FIRM THAT HAD BEGUN IN 1951 WITH THREE PEOPLE HAD THREE OFFICES AND ABOUT 75 PEOPLE. I FELT QUITE A BIT HAD BEEN ACCOMPLISHED DURING THOSE YEARS.” Then we obtained a multilith machine and began typing financial statements on a master and running multiple copies. Tax returns were written by hand on the master and copies were run. Much less typing, no more carbon paper, but operating the multilith machine was rather messy. There were few seminars or education courses, so keeping current was a challenge. We read The Journal of Accountancy and Commerce Clearing House tax updates. The Rio Grande Valley Chapter began holding a tax clinic each December, which was well attended. Our practice enjoyed pretty good growth, and we continued acquiring the

latest equipment. Burroughs Corporation came out with a bookkeeping machine that did the job for several years, but we continued to obtain more clients and doing more accounting work. It was difficult to keep up-to-date and get financial statements out on time. An IBM representative approached us about the idea of looking at data processing equipment – a punched card system. This system used three pieces of equipment: the keypunch machine that punched the cards; the sorter that sorted the cards into proper order; and the machine that read the cards and then printed journals, ledgers and financial statements. It took an entire room to house all this equipment. We also learned that storing an awesome number of punched cards required even more space. Also, we learned from painful experience that it was necessary to have more than one person capable of operating the system. We began with only one person, who left to take another job, creating a major problem for a while. A few years later, we heard about a new type of equipment called a computer. We were told that a computer had an internal memory, and financial transactions could be stored in the computer. What an interesting idea! Then I read an article by an Oklahoma City CPA who was using a computer. I found it so interesting that I went to Oklahoma City to visit with him about his experience. So we acquired one of those computers and put it to work, then upgraded to later models several times. Service bureau companies came into existence, using computers to prepare tax returns. We began using one of them and had continued on next page

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MEMORY LANE continued from previous page

to manually complete their forms and send them in. When the returns came back, they had to be checked carefully. They were widely used before CPAs began preparing returns with their own computers. Finally, we reached the point where there was a personal computer on every desk. But at first there wasn’t one on my desk. I was nearing retirement age by then and was hesitant to take the time to learn to use a computer. I was managing partner of a firm with three offices and had a full load of clients, giving me plenty to do without taking time to learn this new equipment. I was providing the partners with reports that were prepared manually, and I got the feeling the younger partners thought I was too old to learn how to use a computer. This got my attention, and I decided to show them, so I took

the considerable time required for the learning process, during which I made several thousand mistakes. During these years, while we were working to keep up with all the changes and new developments, we also worked to put together a firm with resources and personnel to serve clients throughout the Rio Grande Valley. In the 1960s, 1970s and 1980s, we negotiated agreements with six other firms in Brownsville, Harlingen and McAllen to merge with us. When I retired in 1988, the firm that had begun in 1951 with three people had three offices and about 75 people. So I felt quite a bit had been accomplished during those years. The firm has always been involved in the activities of the profession, and I am glad to see that continuing today. Six partners have served on the TSCPA executive committee: Bill Long, Carl Chilton, Frank Hardin, Richard Witmer, Randy Sweeten and Jeannette Smith. Bill

Long and Carlos Barrera have served on the Texas State Board of Public Accountancy. Carlos is on the board now and is the presiding officer. These days, I go to the office occasionally to observe progress and get some help. I notice there are now computers on every desk, many with two monitors. I understand they use several different computer programs and I notice people using iPhones, printers, copying machines, fax machines and probably other things I never heard of. But with all that, for some reason partners and staff continue to complain about meeting deadlines, dealing with difficult clients, working long hours and feeling stressed out. I am tempted to comment that with all the equipment they use these days, it ought to be pretty easy to practice accounting. But I don’t say anything because they might not invite me to the next Christmas party. ■

Take Note PARTICIPATE IN THE 2012 NATIONAL MAP SURVEY How will you measure success? Participate in the CPA profession’s premier benchmarking study, the National Management of an Accounting Practice (MAP) Survey. The survey is sponsored by the American Institute of CPAs Private Companies Practice Section (PCPS) and TSCPA. It allows firms of all sizes to compare themselves to others around the country and by region. Participation is easy: 1. Click on the survey link, which can be found on AICPA’s website at aicpa.org (search MAP survey). 2. Take the survey. 3. Watch for final results in September. Additional information can be found on TSCPA’s website at www.tscpa.org/eweb/ DynamicPage.aspx?webcode=NWSmapSurvey. The survey closes July 20, so complete yours today! All participants receive a free summary report. If you have any questions, please contact Dianne Rollin at 800-428-0272, ext. 219; 972687-8519 in Dallas; or at drollin@tscpa.net.

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BV/FLS COMMUNITY OFFERS EXPERTISE, MENTOR ASSISTANCE AND TECHNICAL/ INDUSTRY RESOURCES While utilizing TSCPA’s online resources, find out why members of the Business Valuation, Forensics and Litigation Services (BV/FLS) community have enhanced their practices with current industry related news and topical materials. On the community page, you will find links to recent news articles on the web, a collection of TSCPA and AICPA information, member profiles, a list of relevant blogs, and upcoming CPE courses. Join the growing and active BV/FLS community today. To visit the community, go to the TSCPA website at tscpa.org. While on the site, you can also join the BV/FLS group on LinkedIn.

RENEWING YOUR MEMBERSHIP If you haven’t already renewed your TSCPA membership, now is the time! TSCPA dues renewal notices were sent out in April and paper statements were sent to members who had not yet renewed

their dues by the end of May. You can access and update your records and pay your dues online at tscpa.org; don’t forget to consider our affiliate contributions, if applicable. If you have a question regarding your member dues, please contact Member Services at 800-428-0272, Ext. 260. TSCPA looks forward to continuing to serve you in 2012-2013.

PRACTICE MANAGEMENT INSTITUTE If you need assistance with succession planning, TSCPA is here to help through the Practice Management Institute. The Practice Management Institute was developed in partnership with the Succession Institute, LLC. This membersonly resource provides free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management Institute CE. continued on page 19

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2013-2014 Leadership Nominations The nominations process is one of the most important activities affecting TSCPA Position Statement on Campaigning: Organized the success and future of the Texas Society of CPAs. Your input is vital! I letterwriting campaigns and/or other methods of urge you to complete this form and submit it by August 15, 2012. electioneering are NOT encouraged. Communiques from the general membership should not be sent to The Nominations Committee members are: Melanie Geist, Vice Chair, individual members of the Nominations Committee, Lyn Kuciemba, Randy Crews, Sheri DelMage, Michelle Downs, Robert Lindsey, Guy Draper, Nancy Mathews, Paul Willey, Robin Christian, and but rather to the chairman of the Nominations Larry Edgerton. They are not eligible for consideration for any positions Committee, in care of the TSCPA office in Dallas. for which they are nominating.

Please send your completed form to: Nominations Committee, TSCPA; 14651 Dallas Parkway, Suite 700, Dallas, TX 75254-7408; Attention: Ali Allie, Staff Liaison; or by e-mail at aallie@tscpa.net; or by fax: 972-6878602. Donna H. Wesling, Nominations Committee Chair

Chairman-Elect 2010-2011 Donna H. Wesling

Austin 2011-2012 Chairman

Treasurer-Elect 2010-2011 Tracy B. Stewart

Brazos Valley 2011-2012 Treasurer

Secretary 2010-2011 James F. Reeves Fort Worth

2011-2012 Fred J. Timmons

San Antonio 2012-13 Chairman

2011-2012 Stephen G. Parker

Houston 2012-2013 Treasurer

2011-2012 Dora J. Dyson Central Texas

Nominated by:_____________________________________ Chapter:__________________________________________ City/State:__________________________________________ E-mail:___________________________________________

2012-2013 William H. Hornberger Dallas 2013-14 Chairman

2012-2013 Jeannette P. Smith

Rio Grande Valley 2013-2014 Treasurer

2012-2013 Brenda R. (Roxie) Samaniego El Paso

Fill in nominations below: 2013-2014 _______________________ (2014-2015 Chairman) ______________________ (2014-2015 Treasurer) ______________________ (2013-2014 Secretary)

Executive Board Members Includes six Executive Board members for staggered terms. Four current members have unexpired terms. Two members for three-year terms will be selected by the Nominations Committee. Three members will be appointed by Chairman-elect William H. Hornberger for a one-year term, 2013-2014. The TSCPA Executive Director/CEO also serves as an Executive Board member. 2010-2011 Elected Anthony B. Ross, Sr.

2011-2012 Elected Mark D. Lee

2012-2013 Elected Jesse Dominguez, Jr.

(One-year term ending 2010-2011)

(Three-year term ending 2012-13)

(Three-year term ending 2013-14)

Austin

James R. Oliver

Lei D. Testa

(Three-year term ending 2010-2011)

(Three-year term ending 2012-13)

(Three-year term ending 2013-14)

San Antonio

Fort Worth

Mark D. Lee

Jesse Dominguez, Jr.

Michael L. Brown

(Three-year term ending 2012-2013)

(Three-year term ending 2013-14)

(Three-year term ending 2014-15)

Houston

Austin

Central Texas

James R. Oliver

Lei D. Testa

Kathryn W. Kapka

(Three-year term ending 2012-2013)

(Three-year term ending 2013-14)

(Three-year term ending 2014-15)

San Antonio

Fort Worth

2011-2012 Appointed Charlotte M. Jungen

2012-2013 Appointed Charlotte M. Jungen

Jeannette P. Smith

Kathryn W. Kapka

Jacquelyn E. Kuciemba

Brenda R. (Roxie) Samaniego

Keith Reeger

Michael W. Young

Rio Grande Valley El Paso

| JULY/AUGUST 2012

Southeast Texas East Texas

South Plains

_______________________ (Three-year term ending 2015-2016)

_______________________ (Three-year term ending 2015-2016)

East Texas

2010-2011 Appointed Kelly J. Parr Wichita Falls

Fill in nominations below:

Austin

Michael W. Young Panhandle

Today’sCPA

Houston

Southeast Texas Brazos Valley Panhandle

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2013-2014 Leadership Nominations Directors-At-Large Terms Expiring 2013

Terms Expiring 2014

Terms Expiring 2015

East Texas

Dallas

Abilene

C. Wayne Barton

John E. Baines

E. Leroy Bolt

Michael L. Brown

Allyson B. Baumeister

Bradley D. Brown

D.D. Holmes

Nancy E. Foss

Sandra Kay F. Brown

Penny Dear

Sidney P. Glandon

Susan S. Roberts

Melanie C. Geist

Ruth S. Gonzalez

Toni McBee Joyner

Mary Pat Jones

Kerry B. Lore

Donna P. Tadlock

Treba A. Marsh

Kelly J. Parr

Donna H. Hugly

Lisa M. Ong

Richard Pitre

Keith Reeger

Martha C. Perez

James F. Reeves

Diane DeCou

Marshall K. Pitman

Cameron M. Talbert III

Jerome G. Kotzur

Joan E. Schwartz

Oran J. Tsakopulos, Jr.

William L. Patton

Kimberly F. Turner

Michael W. Young

Ryan G. Bartholomee

Central Texas Fort Worth Austin

San Antonio

Southeast Texas East Texas Dallas

San Antonio San Antonio San Angelo

South Plains

Fort Worth Austin

Southeast Texas Brazos Valley

El Paso

Rio Grande Valley El Paso

Fort Worth

Brazos Valley

Central Texas

Wichita Falls

Dallas

Houston

South Plains

Fort Worth

Corpus Christi

Central Texas San Antonio Panhandle

Fill in nominations below: (Terms expiring 2016)

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________

Victoria

San Antonio

Permian Basin

Nominations Committee Member (Terms expiring 2014)

Members of the Committee on Nominations shall have been members of the Society for at least five years and may not serve two succeeding years. Terms Expiring 2012 C. Jeff Gregg, Chair Wichita Falls Amelia N. Proctor, Vice Chair East Texas Harry I. Harelik Central Texas Keith A. Hollar Fort Worth Iliana Jaramillo Wichita Falls Tracy L. Merritt San Antonio

Janice L. Keeling Austin John S. Misitigh Houston Jerry D. Spence Corpus Christi Antonio Villeda Rio Grande Valley Samuel Cheng Dallas Michael W. Young Panhandle

Terms Expiring 2013 Donna H. Wesling, Chair Austin Melanie C. Geist, Vice Chair San Antonio Jacquelyn E. Kuciemba Brazos Valley Sheri K. DelMage Southeast Texas Michelle R. Downs Central Texas Robert G. Lindsey East Texas

Aaron G. Draper Austin Nancy M. Mathews Houston Paul W. Willey Dallas Robin T. Christian Fort Worth Randy L. Crews Rio Grande Valley Larry D. Edgerton Permian Basin

Fill in nomination below: (One-year term)

______________________

AICPA Council

Ten members represent Texas. Three-year terms plus one one-year designee. The current TSCPA chairman-elect automatically fills the one-year designee vacancy, and the current TSCPA chairman automatically fills one of the three-year vacancies for AICPA Council.

Terms Expiring 2012

Terms Expiring 2013

Terms Expiring 2014

Permanent Member:

Houston

El Paso

Wichita Falls

Houston

Steven R. Goodman

C. Jeff Gregg

Patrick L. Durio

James F. Reeves

Joyce J. Smith

Jerry L. Love

Carol A. Cantrell

Allyson B. Baumeister

Nancy Carefoot

Marshall K. Pitman San Antonio Austin

Fort Worth (Board Member)

William D. Schneider Dallas (Board Member)

Donna H. Wesling

Austin (One-year designee)

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Kym Anderson Houston Abilene

Fort Worth

William L. Reeb Austin (Board Member)

Fred J. Timmons

San Antonio (One-year designee)

B.Z. Lee

Fort Worth

Fill in nominations below:

Houston

_______________________

Dallas (Member-At-Large)

_______________________

Jean M. Hobby

Terms Expiring 2015

(Terms expiring 2016)

Donna H. Wesling

_______________________

Tracy B. Stewart

_______________________

Austin

Brazos Valley

James A. Smith Dallas

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TAKE NOTE continued from page 16

FIFTH ANNUAL YOUNG CPAS AND EMERGING PROFESSIONALS CONFERENCE The Young CPAs and Emerging Professionals Committee held its fifth annual Young CPAs Conference in San Antonio on June 8. With a very successful turnout of CPAs, candidates and students from all over Texas, attendees listened to sessions on leadership, new business development, cloud computing, data mining and more. Some of the most popular sessions of the day were the practice development panel discussions, with seven of TSCPA’s 2012 Rising Stars serving on the panels. There were two panel discussions that catered to two different groups of attendees. Young CPAs and Emerging Professionals Committee member Ryan Johnston, Corpus Christi, moderated a panel consisting of Rising Stars Michael Brown, CPACentral Texas, Neely Duncan, CPA-Dallas, and Ben Simiskey, CPAHouston. They discussed topics relative to new CPAs, candidates and students, such as starting your new career, the road to becoming a CPA, and the benefits of mentorship and networking. Committee member John Wauson, CPA-Dallas, moderated the other discussion. The panel included Rising Stars Chip Adami, CPA-Dallas, Katy Avenson, CPA-Austin, Charlotte Jungen, CPA-Southeast Texas, and Joel Perez, Jr., CPA-San Antonio. They covered topics relative to young CPAs (five plus years of experience), such as career progression, struggles in balancing life and work, and the role of leadership in the workplace. The committee plans to meet later this summer to begin planning for next year’s conference and other initiatives for engaging and involving the young CPA members in the Society year-round.

San Antonio Chapter members Paul Meyer, CPA, and Ari Berlin, CPA, attended the Young CPAs and Emerging Professionals Conference.

SUBMIT YOUR ARTICLE TO TODAY’S CPA MAGAZINE

The editors of Today’s CPA magazine are actively seeking article submissions. If you’d like to see your name in print, consider sending your article for consideration. Today’s CPA is a peer-reviewed publication with an editorial board consisting of highly respected CPA practitioners. To submit an article or for more information, please contact managing editor DeLynn Deakins at ddeakins@tscpa.net or technical editor Bill Thomas at Bill_Thomas@baylor.edu.

San Antonio Chapter members Bethany Eggleston, CPA, and Jose Garcia, CPA, networked during the conference luncheon.

Raymond Johnson, Janelle Hogan and Carly Cox from San Antonio networked during the conference luncheon.

WHAT’S NEW ON THE TSCPA WEBSITE Go to tscpa.org to learn more about … Fred Timmons, CPA-San Antonio, TSCPA’s incoming 2012-2013 chairman is highlighted. Please see “Meet TSCPA Chairman Fred Timmons” on the left side of the home page. What’s at Stake? A CPA’s Insights into the Federal Government’s Finances is a non-partisan video developed by AICPA. The video offers guidance to policymakers and the public on how the U.S. government’s financial statements can be used for greater understanding of the nation’s fiscal health. Access it from the home page of TSCPA’s website at tscpa.org. Link to AICPA’s Total Tax Insights calculator. It’s an online tool that gives a clearer picture of the types of taxes paid and their estimated amounts. Go to www.totaltaxinsights.org.

PEER ASSISTANCE PROGRAM SEEKS VOLUNTEERS The Texas State Board of Public Accountancy has asked TSCPA to befriend a number of CPA candidates around the state as an aspect of the Society’s Accountants Confidential Assistance Network (ACAN) program. Can you help? Please contact Craig Nauta at 800-428-0272, ext. 238; 972-687-8538 in Dallas; or at cnauta@tscpa.net. On behalf of John B: this is a 12th man doing a 12th step.

continued on next page

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Take Note

MEMBERSHIP SUSPENSIONS

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FOR TSCPA MEMBERS IN MANAGEMENT ACCOUNTING… HOW TO TALK TO YOUR EMPLOYER ABOUT THE CGMA DESIGNATION You’re a management accountant, so it’s a given that you take your organization’s success seriously. You deliver financial results and provide strategic advice to your employer, combining quantitative and qualitative data to guide more informed decision making and achieve long-term business objectives. You understand how the different parts of a business need to come together to create value; have the ability to communicate and influence colleagues to drive success; and have the agility and adaptability to manage the business opportunities and risks in today’s fast-paced business world. If your employer sponsors your professional development and memberships, it may be up to you to help them see the value of your Chartered Global Management Accountant (CGMA) designation. Following are some pointers to help you discuss the CGMA with your employer. 1. Stress the CGMA’s foundation in the CPA. In the U.S., the CGMA’s expertise is rooted in the U.S. CPA curriculum. CGMAs have met the education, examination, experience and ethical requirements needed to become a CPA and be a voting member of AICPA. 2. Be prepared to explain how your CGMA will complement your CPA credential. A CGMA allows you to showcase your expertise in corporate finance and management accounting. It also gives you access to extensive – and specialized – professional resources and a network of management accountants around the world. 3. Understand and be able to communicate concisely the unique value you bring to the organization, and how the CGMA helps you highlight your own career contributions. Before you meet with your employer, review

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your resume and make sure you can articulate your achievements. 4. Review the array of resources available exclusively to CGMAs on the cgma.org website. Get familiar with everything you’ll be able to access as a CGMA, including CGMA Magazine, thought leadership reports, and more, as well as investigate opportunities for developing management accounting knowledge and skills. 5. After you’ve seen what’s offered at cgma. org, think about how CGMA resources would also benefit your employer. For example, how would you improve operational efficiency if you had access to the latest CGMA performance tools? How would you help your company better understand market trends if you could download leading-edge CGMA research? 6. Finally, in case your management team is unfamiliar with the accounting profession, you might want to be prepared to explain that AICPA and CIMA are two of the most respected accounting bodies in the world, and that TSCPA keeps you informed on financial issues across Texas. AICPA is the world’s largest association representing the accounting profession, with nearly 370,000 members in 128 countries and a 125-year heritage. Founded in 1919, CIMA is the world’s leading and largest professional body of management accountants, with more than 183,000 members and students operating in 168 countries, working at the heart of business. TSCPA is a premiere professional organization representing Texas CPAs. The Society has 28,000 members, which is one of the largest in-state memberships of any state CPA society in the U.S. Employers need experienced professionals like you to help them understand that the CGMA is not only worth supporting, it’s valuable to the organization and to your career trajectory. By highlighting the value the CGMA brings to you and your employer, and reminding them of the connections you have with AICPA and TSCPA, you are helping to drive success at your organization. ■

As a result of a decision by the Executive Board of the Texas Society of CPAs, the following member has had his TSCPA membership: Suspended – • David M. Boatright of Corpus Christi for a period of one year, retroactive to February 15, 2012. The action was based on the one-year suspension of Boatright’s certificate by the Texas State Board of Public Accountancy. It will run concurrently with, and in addition to, a previous two-year suspension of his TSCPA membership by the Joint Trial Board for July 8, 2010 through July 8, 2012.

MEMBERS EXPELLED The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B)(1). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • • • • • • • • • • • • • • • • • • • • • • •

Robert C. Appel, Jr., Houston Kenneth D. Belt, Mesquite Nancy M. Buchanan, Austin John W. Creecy, Dallas Sheri D. Grams, San Antonio Roy E. Guinnup, Fort Worth Michael E. Hodge, Flower Mound Larry D. Jones, Jr., McAllen Frank E. Kiolbassa, Sugar Land Geneva M. Legg, Midland Terrell T. Philen, Jr., Irving Manuel A. Rangel, Laredo Roger A. Raymond, Houston Thomas A. Reedy, Whitney Eric I. Schachter, Houston Anna I. Wildenstein, San Antonio Philip J. Schubert, Abilene Sherri W. Schugart, Belliare Robert D. Sprinkle, Dallas George S. Stephens, Austin James R. Taylor, Jr., Fort Worth Richard A. Thompson, Garland Michael R. Trotter, Southlake

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Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

It’s Runoff Time When there are more political ads than car commercials, you know it’s an election year. In a normal (if there is such a thing) election year, the primaries are over by summertime so we can all have a thankful respite from the candidates telling us terrible things about their opponents. Not so this year. The redistricting debacle pushed the primaries back to May 29, which has thankfully come and gone, but now we have the primary runoffs, and we have more of them than usual. Say goodbye to a politically quiet summer, since the primary runoffs are July 31. First, let’s recap the primary elections. Almost 1.5 million Republicans voted compared to a little over half a million Democrats. When it was all over, there were still 37 undecided races (25 Republican and 12 Democrat), including congressional, statewide and legislative contests. Seven House members lost their re-election bids and four others find themselves in runoffs. No state senators lost in the primary, but Sen. Wentworth (R-San Antonio) finds himself in a runoff against a surprise opponent; more on that later. With seven House incumbents losing in the primaries, four more in runoffs and 30 state representatives who did not stand for re-election, the next session of the legislature will have many more freshmen representatives than normal. Couple that with the 28 returning representatives who were freshmen last session, and that means we could have as many as 62 legislators with limited experience. While the final figures weren’t yet in when this was written, the Texas Tribune reported that “Texas candidates spent more than $90 million to try to secure victories in the May 29 primaries.” That’s more than $44 for each voter. A few more specifics about the dollars as reported by the Tribune include: • The most expensive congressional loser spent $2.6 million for an average cost per vote of $1,277. • The most expensive state senate loser spent $76.03 per vote in a three-way race and failed to make the runoff. • Approximately $28 million was spent by the Republican candidates running for the U.S. Senate. Former Dallas

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Mayor Tom Leppert spent over $5 million, averaging $27.07 per vote and he didn’t make the runoff. Dewhurst, who did make the runoff, spent over $17 million and the average per vote was $27.34, slightly less per vote than Leppert’s losing cause. Ted Cruz, who also made the runoff, spent over $4 million.

THE SENATE One of the most intriguing races had to be the rough and tumble race for state Senate District 25 between incumbent Sen. Jeff Wentworth and two challengers, former Railroad Commissioner and state legislator Elizabeth Ames Jones and a relatively unknown physician, Dr. Donna Campbell. Jones was backed by the powerful Texans for Lawsuit reform PAC and she spent more than anyone else in the race (over $1.8 million) for an average of $76.03 per vote. But when the dust settled, it was Campbell who was in the runoff with Wentworth. Campbell refused to accept PAC funds and spent very little on her campaign. The only other reasonably exciting state Senate race was in SD 9 (Tarrant County) between two sitting House members, Todd Smith and Kelly Hancock. While this was supposed to be a close race where there was no Senate incumbent, Hancock won handily with 65 percent of the vote. There are two Senate races that might prove interesting in November. One is another Tarrant race, SD 10, where Democratic incumbent Wendy Davis is being challenged by Republican Rep. Mark Shelton. The district has more Republican

voters than Democrats, but Davis won her initial election in such a district. It is expected to be a close contest. SD 20, which spreads from the Corpus Christi Chapter area into the Rio Grande Valley Chapter area, is a race between Democratic incumbent Juan “Chuy” Hinojosa and State Rep. Raul Torres, who is also a CPA. Fifty-four percent of the district voters have historically voted Democratic, so the odds favor Hinojosa. But keep in mind that Torres beat the odds when he won his seat in the House in a Democratic district. You also have the geographic rivalry in play, with Torres from Corpus Christi and Hinojosa from the Valley.

THE HOUSE The primary elections resulted in 16 new House members (12 Republicans and four Democrats) because these primary winners have no major party general election opponents. Likewise, 76 incumbents (47 Republicans and 29 Democrats) have no major party opposition in the general election. That means 59 Republicans and 32 Democrats have already been elected to the House. There are five primary runoffs that will determine the House member, because there is no general election opponent. By my estimate, there are only about nine House races that will be decided in the general election. It looks like the Republicans will have at least 92 members, the Democrats at least 49, with the remaining nine seats decided in the continued on next page

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Capitol Interest continued from previous page

general election. Those nine will likely split five to four between the parties, but it’s too close to call which party will get the five. Whatever the final numbers, the Republicans will continue to have a substantial majority in the House.

lower turnout is expected for the runoff. That means the second place candidate has a better chance than one would think. It’s whose voters are the most committed that counts.

THE U.S. SENATE

Speaking of vote totals, about two million people voted in the primaries; about eight million will likely vote in the general elections. It’s a shame that there are only about nine or 10 legislative races that will be decided in the general election. Redistricting is to blame. Most districts are drawn to protect an incumbent or at least a party, effectively removing choice from the general election voters. In the 2010 general elections, the Republicans – especially very conservative Republicans – swept the House. When it was all over, including some party switching, the House now stands with 103 Republicans and 47 Democrats. Did the Republican primary elections indicate another conservative sweep? The answer depends on who you ask. The very conservative folks, those who don’t like Speaker Joe Straus, say the defeat of three committee chairs shows the moderate Republicans are out and further point to the defeat of moderate Todd Smith by conservative Kelly Hancock in SD 9 as proof of their point. And it is fair to say that a number of new winners are of the conservative ilk.

Of course, the big news is the runoff between Lt. Gov. David Dewhurst and former Solicitor General Ted Cruz. It’s covered more than adequately by the press, so we won’t reiterate what you’ve already read. The most interested persons in this Senate runoff election are the four or five state senators who would like to replace Dewhurst as the lieutenant governor until the 2014 elections. The state senators get to choose one of their own for that spot; the public doesn’t get to vote for lieutenant governor until 2014. There is even a runoff to see who will undoubtedly be the loser in the general election Senate race. The Democrats have their own primary runoff for the U.S. Senate between former Rep. Paul Sadler and retired educator Grady Yarbrough (referred to by the Houston Chronicle as “the mystery man who made the Democratic Senate runoff ”). One might think it would be logical that a candidate with a double digit lead in the primary could expect to win in the runoff; but runoffs are very different from primaries. While over two million people voted in the primaries, a much

THE GENERAL ELECTION

On the other hand, Harvey Kronberg writing in his “Quorum Report” (quorumreport.com) says, “It was just a typical post re-districting election.” While admitting that there were “pockets of Tea Party activism” that were successful, there were many other factors at play. The change in districts where incumbents found themselves with new voters to convince, substantial and targeted contributions by well funded PACs that were not part of the conservative movement to defeat a few specific candidates were both significant factors in incumbent defeats according to Kronberg. We will just have to wait and see if the Republicans sweep in the November elections. In 2010, the substantial move to the right by the electorate was totally unpredicted. There was nothing in the 2010 primaries to indicate what happened in the general election. With that said, the results of the primaries will dictate a more conservative legislature, barring major upsets in November.

THE 2012 SESSION As mentioned above, there will be substantial turnover in the legislature. Four Senate committee chairs are not returning and another is in a runoff. Eleven House committee chairs are not returning and two more are in runoffs. The experience shortage is most acute in the education area. Neither the Senate nor House Education committee chairs will be back. To make the education brain drain worse, Rep. Scott Hochberg, House Education committee vice-chair (he chaired the committee when the Democrats were in charge), the acknowledged House expert on education, did not run for re-election. Neither did Sen. Steve Ogden, former Senate Finance Committee chair, who was another of the legislative experts on school finance. On the administration side, Education Commissioner Robert Scott is

Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at bowen@tscpa.net.

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leaving the Texas Education Agency after 18 years of service. When the Supreme Court rules the public school finance system to be unconstitutional (as many people expect), again, it’s not clear which legislators are prepared to take the lead to solve the problem. Will all this be Speaker Joe Straus’ problem? Straus’ leadership of the House is already being challenged by Rep. Bryan Hughes (R-Mineola). Straus was challenged at the beginning of the last session, but easily won the post. In an unusually defiant mood, several of the Republican House members refused to support Straus even when it became obvious he would win – bad form from a House manners standpoint. A quick look at the candidates after the primaries shows about 16 or so Republicans who may not support Straus for speaker. It will take a lot more than 16 to topple the Speaker, but to complicate the issue Democratic Caucus Chair Rep. Trey Martinez Fischer recently sent a letter to Democratic representatives suggesting they should not commit to Straus at this early date. It’s probably a little early to be predicting the next session’s legislative agenda, but in

addition to education issues, we know they will have to do a state budget. That one item took almost all the legislators’ time in the last session. Since state revenues are exceeding expectations, there’s hope that the next session will not be entirely consumed by the budget discussions, but they will still be important. Evidently, the increased state revenues have not been enough to encourage consideration of budget increases. In the first budget instructions to state departments, they were told to submit a budget request that does not exceed the current budget and to identify 10 percent of their budget that could be cut. That doesn’t sound as optimistic as the political sound bites in the press. Will they replace or revise the franchise (margin) tax? At a recent House Ways and Means Committee hearing, the focus was on revision, not replacement, despite several witnesses who suggested just that. Chairman Harvey Hildebran (R-Kerrville) said the committee was interested in making the margin tax “fairer and simpler.” Witnesses complained about the fact that similar businesses may be taxed differently,

We Go To Work For You.

how retailers are defined, cost of goods sold (both who gets to deduct it and how the deduction is calculated) and lack of consistency on pass-through revenues. All of these issues have been complained about before and they are all expensive to fix. Hildebran admitted that despite good intentions, the impact on revenues would have to be considered before implementing changes. Most of the complaints at the hearing came from small businesses. There was some support for an income based tax by small business representatives, even if the rate has to be as high as 6.5 percent. Big business representatives remained supportive of the margin tax and expressed no interest in substituting a business income tax. Don’t forget to vote in the July 31, 2012, primary runoff. It may be more important than voting in the November general election. Absent some catastrophe or miracle, depending on your point of view, the Republican runoff is where the next U.S. Senator from Texas will be decided. If you have a legislative runoff in your district, it’s likely the primary runoff will decide that election too.  ■

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Cover Article

A TEXAS CPA

MEET FRED TIMMONS, TSCPA’S INCOMING CHAIRMAN BY ANNE MCDONALD DAVIS


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ncoming 2012-13 TSCPA Chairman Fred Timmons, CPASan Antonio, is proud of his Texas heritage. Born in Waco, but having spent most of his life in the shadow of the Alamo, Timmons says he bought his “Native Texan” license plates because part of the proceeds go to support the site of Bowie’s and Crockett’s last stand. Historic photos of the Alamo from the 1920s forward decorate the walls of his office at Tsakopulos, Brown, Schott & Anchors alongside a map of Texas during the mid-1800s when it was a republic. “I had the good fortune to have an affiliation with the Alamo for a number of years. Over the years, I found that sales from the gift shop generated the funds needed to operate the Alamo. And the one item that was a major seller was, of course, the coonskin cap. Timmons admits that, yes, he “loves Texas, loves bluebonnets – we had a fantastic crop this year, didn’t we?” A CPA devoted to his diverse base of San Antonio business clients – some large or mid-sized, but very many small and closely held, he wouldn’t live anywhere else. He says he would recommend his job to an aspiring CPA. Q: What led you to pursue a career in accounting? A: Growing up, I was always the clerk in the candy shack … grocery store cashier. When I was getting ready for college at Southwest Texas, my dad said that he really felt like I should pursue something in business. And I loved math. So the first year, I took a lot of math and took “Principles of Accounting,” which I also liked. Then I went to the placement office to look at which careers were available to a math major and which careers were available to an accounting major. Math? I basically had the choice of teaching or engineering with some kind of minor in science. That didn’t interest me. But there were probably five pages of jobs referencing the accounting profession. Clearly, there were more opportunities. So accounting is what I chose, and enjoyed most of my studies, with the exception of governmental accounting (laughs). Later, auditing governmental entities became an expertise of mine for quite a while in my career. Q: What part of your career has been the most rewarding? A: Mostly, I just really enjoy my clients, especially my tax clients, working with them to find the best deductions. I enjoy auditing, but I am inclined to want to “help” my clients and the auditor must be independent, detached, somewhat impersonal. I just never enjoyed that as much. I’d rather straighten out the books, establish a rapport with the bookkeeper and the owners, get the taxes right. Small closely held clients are a favorite of mine. Just this afternoon, I have a meeting with a contractor who has probably 15 people in his company. I particularly like being a CPA in San Antonio, a large city with a small-town attitude. After all these years, I consider many of my clients to be personal friends. People who know me know that I love jokes and all of my close clients send me jokes for my collection. I attend social functions for my clients and get them involved in the golf tournament for our chapter to benefit accounting scholarships and the Academic Matching Gifts Fund for area universities.

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Q: What do you consider to be the top issues facing TSCPA and the accounting profession in the next several years? A: For one thing, some of the Baby Boomers will be retiring, and that brings up the issue of TSCPA continuing to have a breakeven budget in the coming years. It’s liable to be a battle for both the state office and the chapters. While some Boomers like myself plan to work forever, others won’t. Keeping that bottom line out of the red is why we just went with a modest dues increase after nine years of not having one, but it’s something we’re probably going to have to consider more frequently. As for the profession, one big issue continues to be just keeping up with the tremendous amount of requirements and standards, so many geared to companies like IBM and AT&T. Many of our smaller local clients have to conform to those same standards; it costs extra money, extra work, extra time, expanded financial statements. It can be standards overload for smaller compilations, reviews, audits, or special consulting work. AICPA convened a Blue-Ribbon Panel to present findings to the Financial Accounting Foundation (FAF) to try and reach a differentiation of standards. In May, the FAF Board of Trustees established the new Private Company Council (PCC) to help improve the process of setting accounting standards for private companies. The PCC will determine whether exceptions or modifications to existing nongovernmental U.S. Generally Accepted Accounting Principles (GAAP) are necessary to address the needs of private company financial statement users. The PCC will also serve as the primary advisory body to FASB on the appropriate treatment for private companies for items under active consideration on FASB’s technical agenda. Another issue is keeping up with tax changes. All kinds of people talk about simplifying the Code (Internal Revenue Code) … but I have doubts that will ever happen. It seems like every proposal to simplify the Code actually makes it more complicated. My idea of simplification, as a CPA, and some others’ ideas of simplification are a long way apart. I don’t think there will ever be a flat tax – who is going to be willing to pay a flat tax on gross revenue? Everyone is going to want to deduct their expenses first. Then IFRS (International Financial Reporting Standards) conversion is looming out there in the near future. It will be a totally new ball game if the United States moves to that; a lot of European countries already have. The national CPA firms may not be using those standards in the States, but if they have international clients, they are. So there’s a lot of discussion about it again. Consider the small closely held companies with no business outside the country. Are we going to impose IFRS on them? It’s been pushed back to 2015, but if it does come in … big changes. And from what I’ve seen, it will be quite different from the type of financial statements that we prepare now. There will be quite a learning curve for many current CPAs, although accounting students and the national CPA firms’ staffs are already learning about it. continued on next page

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Cover Article COVER STORY A TEXAS CPA continued from previous page

Q. What advice would you give students interested in becoming a CPA? A: Oh, I would say go for it! It’s the finest profession. One piece of advice: start studying for the CPA exam at the earliest opportunity in your college career and pass the exam as soon as possible after you graduate. It took me too long to get serious about taking the exam back when I graduated, and the longer you’re away from college, the harder it is to study and find the time. Plus, with all the changes taking place, you’ll end up being tested over material you didn’t cover in college. So I would highly recommend jumping right on it – graduate, take the exam, pass it. There are so many opportunities out there. I’m about to go out to talk to students at Lamar University, and I’ll tell them: alongside medicine, accounting is the most respected profession. All major companies want and need a CPA, whether it’s finance director or controller or CFO … there are so many different avenues that they can pursue with the CPA certification. They can go with a big accounting firm, stay there, or maybe move into industry when a client makes an offer they can’t refuse. They can be self employed; it’s amazing to me how many young people go out on their own right out of college. To me, that would be scary, but a lot of them aspire to do that. Of course, that’s a big benefit of being a TSCPA member – they meet seasoned professionals who they can call and ask, “Hey, what do I do in this situation?” We are out there to help one another. Good salaries too. The sky’s the limit. Even if someone decides at some point that accounting is not exactly where they want to be, they will find that they can use their accounting education and experience in any job they will ever have. That will come back to be a benefit to them and help them in whatever they pursue. It’s just something you use for the rest of your life. Q. You have been involved with TSCPA and the San Antonio Chapter for more than 20 years. Why did you become a volunteer? A: One reason many of us stay so involved in the chapter is, again, that small-town feel of San Antonio. Most past chapter presidents from the city are still involved, and that’s good for the chapter and good for the community. We had an awards luncheon just last week and there were about a dozen past chapter presidents and both past TSCPA chairmen from San Antonio – Ed Polansky and Bob McAdams. I first got involved because I had two partners who felt very strongly that one should give back to the profession. They saw that I was very interested in being a volunteer. Locally, I started on the CPE committee, worked with other CPAs to come up with seminars and speakers. I can remember doing a breakfast seminar back in the beginning of peer review and explained how we had volunteered for the program and what would be required to conform. Then at the state level, TSCPA decided to form the CPE Board of Governors (now the CPE Advisory Board) to work with the

Fred Timmons at the Alamo. CPE Foundation, and the chapter picked me to serve. It was a fantastic seven years, because I met CPAs from all over Texas who are still good friends today. That was probably one of the reasons I became interested in becoming chairman; I had met so many other professionals across the state and realized how much I enjoyed contributing. So I followed up by serving on the Membership Committee and as TSCPA treasurer. I really enjoyed working with the staff. Q: How has your TSCPA service impacted your career? A: It’s made me be more outgoing (laughs) … if that’s possible. It’s enabled me to work with a variety of CPAs, which has been very valuable. For example, I’ve been in a discussion with my partners about a certain area of practice. I’ve been able to say, “Well, I know so-and-so in this city that I can call – I know that they’re involved

Anne McDonald Davis, ABC, is a freelance reporter, writer and editor in Dallas, Texas.

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in this and we can find out what they’re doing.” The networking has been tremendous. Our firm is considering joining a practice management group and it was CPA friends of mine from this group who considered us for membership. I also think TSCPA helped me expand my horizons. TSCPA involvement gave me the desire to be a leader. It has been a great influence in my career and in my life all these years. Q. Tell us about “Fred’s Funnies” that can be found in the San Antonio Chapter’s newsletter. A: I’ve always loved jokes; I love to hear jokes and I love to tell jokes. When I was president of our chapter about seven years ago, I thought that it would be fun to have a joke each month in the newsletter. I had a huge joke file in my former workplace … until our IT person noted that it was so large, it was making my computer run slower! So off it went from the network and onto my personal hard drive. That evolved into the column “Fred’s Funnies,” and the next year the incoming president asked me to continue. Amanda, the editor of the newsletter, doesn’t even ask the incoming president anymore – it’s just required (laughs). What I’ve wound up doing is, whenever I get a ‘clean’ joke, I send it to her so that she has a bank of seasonal jokes to draw from. In fact, wherever I go to speak, I let them know that we’re in the market if they want to send us their jokes. We do our newsletter electronically now and the first time, “Fred’s Funnies” got left out. The editor said she got at least 20 phone calls right away, “Where is it?” Hopefully, they read the rest of the newsletter … Q: Tell us about your personal life; what activities and interests fill your days when you’re not working? Rotary Club has been a big part of your life, yes? A: It was more so before I became so active with TSCPA but, yes, I have served in every officer position there is for Rotary and have also been active at the regional level – chair of the Foundation, regional treasurer. That can be very consuming, and being active in TSCPA is also. Because it’s my livelihood, at some point CPA volunteering overtook Rotary volunteering. But I still try to attend as much as possible. One of the largest groups in the world is here in San Antonio. It is a great international organization that does tremendous things. One of their historic pledges was to wipe out polio throughout the world, and everything we did in Rotary for a time was to push to raise money and awareness so that they could. Today, there are only a few countries left who have documented instances of polio. Rotary once inoculated nine million children in one day. Personal life … my wife, Sharon, and I enjoy traveling. We’ve been married 36 years. We’re close with our family and look forward to getting together for the holidays. We love going to South Padre and Sante Fe, New Mexico. We’ve been going to Santa Fe for 30 years; we both enjoy the food, the atmosphere, the climate. We’re fans of a phenomenal pianist there named Doug Montgomery. I like to golf in the area. It’s the second oldest city in the United States and very laid

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Fred Timmons and his wife, Sharon. back, romantic. Plus, I like green chiles on everything! We’ve gone out there with our CPA friends and have spent New Year’s out there the past several years. I have a long-time client, friend and entertainer in South Padre who did a CD for us on our 25th wedding anniversary. Sharon and I actually originally went to South Padre for our honeymoon. Otherwise, we spend a lot of time by the pool at home, entertaining ... and we eat out, too much (chuckles). Timmons ends the conversation with another bit of Alamo trivia. “Did you know the John Wayne movie The Alamo wasn’t filmed here actually – it was made in a town called Brackettville (Texas). It is one of my favorite movies, some of my favorite movie music,” he muses. When interrupted to be asked who John Wayne portrayed in the movie, Timmons seems incredulous. “Davy Crockett!” he exclaims. ■

Photographs: ©Ross Benton, Studio Benton, StudioBenton.com

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Feature

By Linda M. Leinicke, Ph.D., CPA; Joyce A. Ostrosky, Ph.D., CPA, CMA; and W. Max Rexroad, Ph.D., CPA

SOX Quarterly Certifications: What’s Your Comfort Level? The Sarbanes-Oxley Act (SOX) became law in 2002. For the past 10 years, SECregistrant companies have been living with this law. One of the landmark provisions of SOX is the Section 302 certifications that require the chief executive officer (CEO) and the chief financial officer (CFO) of a company to certify that the financial statements are fairly presented in all material respects. How does a company keep its Section 302 certification process robust? Since a decade has passed, it may be time for companies to review and freshen their approaches to Section 302 certifications. This article will present a proactive, structured approach designed to ensure that the financial statements are presented fairly in all material respects. This approach has been developed and successfully used by a large Fortune 100 company, hereafter referred to as Company X. Company X’s approach to Section 302 certifications can be modified to fit smaller organizations. CPAs who are CFOs or controllers, CPAs who audit SEC registrants, and CPAs who consult with SEC registrants will benefit from this article. The information will also benefit large, growing private companies that seek to implement best practices. Readers can benchmark their Section 302 procedures against those used by Company X as they reassess the adequacy of their 302 processes.

SECTION 302 REQUIREMENTS The passage of SOX was an attempt to improve corporate financial reporting. Section 302 of SOX, Corporate Responsibility for Financial Reports, requires the principal executive officer(s) (the CEOs) and principal financial officer(s) (the CFOs) to certify, for each annual or quarterly report, six things. The CEO and CFO must certify that:

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(1) they have reviewed the periodic report for the applicable year or quarter; (2) the report “… does not contain any untrue statement of a material fact or omit to state a material fact … necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;” (3) based on their knowledge, the financial statements and other financial information included in the report “… fairly present in all material respects the financial condition and results of operations …” for the reporting period; (4) a. they “… are responsible for establishing and maintaining internal controls;” b. they have designed the company’s internal controls such that any material information relating to the financial reports is made known to them; c. they have evaluated the effectiveness of the company’s internal controls over financial reporting as of a date within 90 days prior to the report; and d. they have presented in the report their conclusions about

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the effectiveness of the company’s internal controls over financial reporting; (5) they have disclosed to the company’s external auditor and audit committee of the board of directors, a. all significant deficiencies and material weaknesses in internal controls over financial reporting; and b. “any fraud, whether or not material,” that involves anyone who has a significant role in the company’s internal controls over financial reporting. (6) they have reported any significant changes in internal controls over financial reporting subsequent to the date of the controls’ last evaluation.

SOX INTENT The intent of SOX’s Section 302 certifications was to make corporate executives responsible for the financial reports of their organization. Section 302 particularly points out that management is responsible for the internal controls over financial reporting (ICFR). When things go wrong with financial reporting, the “unaware CEO defense” will no longer work. Section 302 certifications clearly put the responsibility for ICFR in the lap of management. SOX’s Section 906 requires the CEO and CFO to certify that the periodic reports filed with the SEC present fairly, in all material respects, the results of operations and the financial condition of the organization. The Section 302 certification processes described in this article will also support Section 906 certifications.

CHALLENGES FOR COMPANIES Companies face many challenges as they carry out their quarterly certification processes. Some difficult questions that companies may face include the following. How can a company improve the structure of its certification process and any associated sub-certification processes? How can companies keep the 302 certification process from becoming a perfunctory task as opposed to a meaningful assessment of ICFR? How do companies keep the certification process proactive rather than reactive? How can companies continue to be sure that all frauds, whether or not material, involving anyone with a significant role in ICFR have been reported? On an ongoing basis, how can companies get everyone involved in the 302 sub-certifications to be candid and forthright in their reporting? How do companies get consistent reporting across business segments? How is materiality defined for the 302 subcertification process? To answer these questions, we approached one of the more complex Fortune 100 organizations for a discussion of its internal processes supporting the 302 certifications. We interviewed the director of accounting controls in the corporate comptroller’s office. This person’s responsibilities include the coordination of the 302 and 404 certification processes. This company has more than 50,000 employees, billions of dollars of assets, operations worldwide, and many product and service lines.

COMPANY X’S QUARTERLY SUB-CERTIFICATION PROCESS The size and scope of Company X’s operations create numerous challenges in implementing an effective 302 sub-certification process. Company X decided to design a sub-certification process that tracks its financial consolidation process. With numerous

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international and domestic operating units, Company X has a consolidation process that relies on the financial reports of subconsolidation units. To facilitate the gathering of 302 quarterly certification information from these units, Company X requires that the CEO, CFO and controller of each sub-consolidation unit make a series of certification statements. The objective of each certification statement is clearly defined and explained in the sub-certification document. To aid each business unit in making its certifications, specific guidelines for each certification are also provided. This leads to consistency in the certifications across sub-consolidation units. If there are any exceptions to the sub-consolidation certification statements, the sub-certifying unit must describe the details of the exception in a sub-certification exception report. Importantly, this process affixes responsibility for 302 sub-certifications at the sub-consolidation unit level. Additionally, Company X’s subcertification document states that the certifying officers of each sub-certification unit recognize that their sub-certifications will be relied on by Company X’s CEO and CFO when making their respective certifications. A brief description of each of Company X’s sub-certification statements follows. Certification statement #1 acknowledges that the subconsolidation unit’s certifying officers have reviewed the unit’s financial results for completeness and accuracy, and have validated that any post-closing journal entries are accurate. In addition, a copy of the quarterly financial report for the unit is attached to the sub-certification to confirm that the submitted results accurately reflect what was consolidated. Certification statement #2 (deals with materiality issues). The unit’s certifying officers must certify that the unit’s financial statements do not contain any untrue statement of a material fact or omit to state a material fact. The Company X certification guidelines define materiality, per the Financial Accounting Standards Board’s (FASB’s) Statement of Financial Accounting Concepts No. 2, for the certifying officers. The guidelines also indicate that materiality should be determined at the sub-consolidation unit level and not in relation to Company X as a whole. Additionally, the business unit officers must certify that they have reviewed any journal entries that correct errors in prior periods. Certification statement #3 indicates that the sub-consolidation unit’s financial results present fairly the unit’s financial condition and results of operations. To ensure that proper due diligence has been done to support this, Company X provides numerous detailed guidelines. For example, each business unit must acknowledge that an appropriate person or persons has/have read, in their entirety, all applicable Company X accounting policies. The guidelines: • state that the business unit must follow Company X accounting policies and U.S. Generally Accepted Accounting Principles (GAAP); • require that reconciliations be prepared for all of the unit’s balance sheet accounts; • specifically emphasize that all revenues earned and all expenses incurred be reported in the appropriate period; and • require a statement that all significant, non-standard transactions in the period have been submitted to Company X’s Office of Accounting Policy for review and approval. continued on next page

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The SOX Quarterly Certifications: What’s Your Comfort Level? continued from previous page

Certification units also receive detailed guidance regarding how to account for: • impairment of fixed assets, loans receivable, goodwill and other intangible assets; • capital expenditures; • income taxes; • derivative instruments; • special purpose entities and other special-treatment legal entities; • hybrid financial instruments; • pensions; and • other applicable items. Certification statement #4 asks the individuals providing the sub-certification for each unit to certify that they are responsible for establishing/maintaining disclosure controls and procedures and ICFR. So that there are no misunderstandings, the certification guidelines define the terms “disclosure controls and procedures” and “ICFR.” Business units must make a number of separate sub-certifications related to certification statement #4. These sub-certifications are briefly summarized as follows: (1) disclosure controls and procedures have been designed to ensure all material financial information has been reported to the unit’s management; (2) ICFR have been designed to provide reasonable assurance regarding the reliability of the unit’s financial reporting; (3) disclosure controls and procedures have been evaluated for their effectiveness and any significant deficiencies or material weaknesses in them have been reported; (4) ICFR have been evaluated for their effectiveness and any significant deficiencies or material weaknesses in them have been reported; and (5) any material changes in ICFR during the reporting period have been reported in the sub-certification. Certification statement #5 requires the unit to report all significant deficiencies and material weaknesses in ICFR and any fraud, whether or not material, that involves management or other employees who have a significant role in the unit’s ICFR. The guidelines for certification statement #5 contain a formal definition of “fraud” to aid management in its determinations. Any fraud must be reported to Company X’s internal auditors, Company X’s SOX Section 404 unit, and the external auditors. In addition, each sub-certification unit must include a schedule detailing all incidents of fraud occurring during the quarter. Certification statement #6 requires each sub-consolidation unit to report any facts or circumstances of which persons providing sub-certifications are aware that could cause any of its certification statements to be untrue without regard to whether (1) the CEO or CFO became aware of these facts and circumstances subsequent to the date of its financial report and/or (2) those facts or circumstances relate to business areas for which the unit is responsible.

Certification statement #7 indicates that the individuals certifying for each sub-consolidation unit must review Company X’s Complex Structured Financial Transaction (CSFT) Policy and Procedures. The guidelines for certification statement #7 require sub-consolidation units to have policies and procedures to identify transactions that may be CSFTs. These policies and procedures convey to all unit employees that it is their responsibility to properly identify any possible CSFTs and refer them to Company X’s CSFT committee for approval. Failure to follow these CSFT policies and procedures is grounds for discipline, including dismissal. The guidelines also indicate that sub-certification units may not engage in any transactions, including CSFTs, where the persons providing the subcertification know, or have reason to believe, that the objective of the sub-certification unit or the counterparty is to achieve a misleading accounting or financial result.

REVIEW AND VALIDATION OF THE SUB-CERTIFYING UNITS’ RESPONSES Once all of the sub-consolidation unit certifications have been submitted, they are reviewed for accuracy and completeness. Unit certifications are then used to prepare the financial information of the business segments of Company X that are presented in its quarterly and annual reports. At this point, the director of accounting controls meets with the CFO of each reporting segment to review the subcertifications. Company X’s internal auditors, SOX coordinators, operational risk management representatives, corporate comptroller’s representatives, and the external auditors also attend these reporting segment-level meetings. The participants collectively evaluate the significance of any exceptions noted in the sub-certifications. They also assess the integrity of the sub-certifications and the risk that the business units did not consider all significant matters when providing their sub-certifications.

Linda M. Leinicke, Ph.D., CPA, is a professor of Accounting at Illinois State University. Contact Leinicke at lmleini@ilstu.edu. Joyce A. Ostrosky, Ph.D., CPA, CMA, is a professor of Accounting at Illinois State University. Contact Ostrosky at jaostro@ilstu.edu. W. Max Rexroad,

Ph.D., CPA, is an emeritus professor of Accounting at Illinois State University. Contact Rexroad at wmrexro@ilstu.edu.

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Various “validators” are used to determine if any relevant information has not been provided in the sub-certifications. These validators include the status of reconciliations, recent internal audit findings, and the results of internal SOX testing, among others. Additionally, this group evaluates whether or not materiality exceptions noted at the sub-certification level could aggregate to a significant amount when evaluated at the reporting segment level. These meetings provide the segment-level CFOs with the subcertifications from all sub-certifying units within the reporting segment and a basis for aggregating similar issues and risks across the segments. In addition to the sub-consolidation unit quarterly certifications described above, Company X also relies on certifications by individuals who hold senior roles in certain company-wide functions (e.g., investment accounting).

Monitor CPE Compliance the Easy Way!

KEEPING THE INTEGRITY Because the 302 certification is a routine quarterly event, there is always a danger that diligence efforts in support of the certifications can weaken over time. One way to guard against this is to adopt a subcertification process similar to the one used by Company X. Company X’s process conveys the message that this process is to be taken very seriously. Two elements are essential to maintaining the robustness of the process. The first is a strong culture of accountability that causes each provider of a sub-certification to take responsibility and demand accountability throughout his/her unit. The second element is a review process that tests, and where appropriate, challenges the accuracy and completeness of the certifications on a regular basis. The culmination of the 302 certification process includes a final summary memo to Company X’s CEO and CFO by the accounting controls unit addressing the various issues that arose during the process, and a final summary provides a further level of assurance to the CEO and CFO of the integrity of the sub-certification process. Once this 302 certification process is complete, it also provides the CEO and CFO the comfort level they need to sign the Section 906 certification.

SIGNALS FROM TOP MANAGEMENT Company X has invested significant resources to create its accounting controls unit. Involving very senior people in the 302 certification segment-level meetings sends a strong message to the business units about the importance of the certification process. This message that the certification process is very important is further strengthened by the requirement that sub-certifying unit executives must sign their names to their sub-certifications and that multiplepage, detailed guidance is given for each certification. When one considers Company X’s 302 certification process in its totality, it makes for a very robust process. This is not just a compliance exercise. It is a reflection of the fact that Company X embraces the principles contained in the SOX certification process and has embedded these principles into its culture and practices. Company X has created a structured, systematic 302 certification process that it has embedded into its culture. The importance of this certification process is continually emphasized and reinforced by strong signals from top management. The integrity and accuracy of the process are validated quarterly through a rigorous and comprehensive review process. As a result, top executives can have a higher level of comfort when making their 302 certifications. ■

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Feature By Adam Neary

Time to Take Advantage of Cloud Technologies Within the accounting world, last year seemed to be a time for talking about cloud technologies. Dashboards and customization and implementation and, oh, the wondrous data and insights that will blossom! Yet that conversation and excitement tended to stay just that: conversation and excitement. Not action. And while the adoption of any new technology or process takes some time and patience, this year should be the time when the accounting profession not only sees the value in cloud technologies, but also begins taking the plunge and implementing. So let’s start at the top by reviewing the basics. What is the cloud? This may seem somewhat remedial, and we’re not here to minimize anyone’s knowledge level, but oftentimes the chatter that follows mention of the word “cloud” results in unnecessarily complicated jargon and glazed eyes. Essentially, when we talk cloud, we’re talking about applications delivered over the web. And over the last few years, as inoffice technology has caught up and cloud app development has flourished, the depth of opportunity for better business for the accounting profession is immense. Well built, intuitive and fully customizable accountingfocused cloud applications bring what used to be massive, high-end (read: expensive) tech to a segment of the profession that’s hungry for innovative ideas and solutions. Before we provide some tips on how to get comfortable taking the plunge into the cloud, let’s crystallize the actual ways in which these technologies help improve the way CPAs and financial professionals do business and, ultimately, develop stronger client relationships and/or add value for their firms, companies and organizations. Anywhere Access – Not being tied to one location or computer means that you and your co-workers can work as long as you’ve

got Internet access. This can save travel time and costs, and gives you a jump on working with data from others since you don’t have to wait for them to “send it over.” Subscription-Based – The fact that cloud accounting tends to be subscriptionbased means that it can scale with your firm, company or organization. A small organization, for example, with few transactions may even find a free package; then as the organization grows, upgrading requires usually just a few clicks. Further, you don’t have to worry about the time or upfront cost of installing hardware and software. On-the-Go Upgrades – One of the really annoying things about desktop accounting software is the constant updates and getting out of sync with earlier versions. Keeping everything up-to-date and coordinated is now a given with cloud accounting software. Constant upgrades mean that new features will be available on a regular basis and you, the customer, have the ability to help shape the software’s development – at no additional cost! While these are just a few of the key benefits of cloud-based accounting apps, they’re the most apparent and the most convincing when it comes time to make a call on implementation. After all, CPAs need

to know the benefits not only for their own sake, but also so that they can effectively communicate those benefits to their clients or management. That, in turn, is what will yield deeper client relationships and add value to your firm, company or organization, moving toward a perception of being a trusted business advisor. With that, below are a few thoughts that can help accounting professionals enter the cloud. Before diving into a cloud software suite, start small. Test out remote PC access with tools like GoToMyPC. Not only do these tools do a good job of showing how the cloud functions, but they will also save you time and money when it comes to repeat data entry. Get backed-up on the cloud. Dropbox is a great way to store and access documents, spreadsheets and more. Think of Dropbox as a hard drive that you can access anywhere; and everything in it updates in real time when anyone with access make changes. If you’re managing expense policies for your clients or organization, look into hosted expense reporting systems like Expensify. The benefit here is that just about anyone can empathize with the pain of filing expense reports. A cloud-based solution that makes expense reports easier should have universal appeal. Identify ways to become more than just the “report generator.” Cloud apps, specifically turnkey analysis portals, are giving the accounting community the ability to dig deep into data and extract previously hidden trends, insights and analysis. This leads to better business decisions. So throughout the rest of this year, let’s start taking the initiative to turn our excitement for the cloud – and all the ways it can foster better business within the accounting profession – into action. ■

Adam Neary is the CEO of Profitably, a financial planning and analysis web app that helps businesses – and their advisors – plan, measure and execute on what matters most: their business. For more information, visit http://profitably.com or e-mail Neary at adam.neary@profitably.com.

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CPE Article BY GIA CHEVIS, PH.D.; MICHAEL A. ROBINSON, PH.D.; AND BRETT WILKINSON, PH.D.

TRANSFER PRICING CONCEPTS & PRACTICES In an increasingly globalized world, an understanding of transfer pricing is essential for corporate managers and their advisers at all levels. In fact, it is likely that the vast majority of mid-sized and large business entities will confront at least some transfer pricing issues in the course of doing business; even small, domestic businesses may encounter transfer pricing if they have operations in more than one state.

CPE Self Study Curriculum: Management, tax Level: Intermediate Designed For: Tax practitioners, business and industry Objectives: Understand the uses of transfer pricing for subsidiary performance evaluation and the potential conflicts with transfer pricing for tax purposes Key Topics: Performance evaluation, transfer pricing Prerequisites: None Advanced Preparation: Read “Understanding the Complex World of Transfer Pricing” by Gia Chevis, Ph.D., and Brett Wilkinson, Ph.D., in the September/October 2011 issue of Today’s CPA magazine

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Figure 1. MakeDiv Sells To, and UseDiv Purchases From, the External Market

(COGS = $160)

(COGS = $100 + $240)

(Distribution = $10)

(Purchasing = $6)

Su ba ss em bl y

$2 40

Subassembly Market

This article is the second in a series dedicated to discussing transfer pricing and its implications for companies. In our first article, we reviewed the basics of transfer pricing and identified major issues confronting practitioners. This article provides a more detailed and technical review of applied transfer pricing practices. In particular, it focuses on the effects of performance evaluation, the technical requirements of the tax law and the link between these two dimensions. It also addresses the Advance Pricing Agreement (APA) process and the potential it offers for avoiding costly transfer pricing disputes. Our third article in this series will examine contemporary developments with a particular emphasis on intangibles.

PERFORMANCE EVALUATION AND THE ZERO-SUM GAME

Transfer pricing arises when two divisions of a consolidated company, a seller (maker, provider) and a buyer (consumer, user), interact. A division or subunit might entail anything from a subsidiary that is an incorporated entity on its own through to a single department within a larger company; the key factor is that there is a product or service that one profit center may “sell” to another.1 For example, one division of a company may make an intermediate product that another division uses as a component in its final product. The first division incurs costs to make the intermediate product and the second division incurs additional costs to convert the intermediate product into the final product. If the second division buys the intermediate product from the first division, the total profit to the company is the revenue from the sale of the final product less the costs incurred by both divisions. This total is allocated between the two divisions according to the transfer price of the intermediate product. Such a transfer is not restricted to physical goods. Services often are transferred between divisions, including between the corporate office and the various divisions (e.g., human resource personnel, IT specialists, and the payroll and accounting department). In a decentralized organization, sourcing and sales decisions rest with the division heads; consequently, these managers typically are evaluated based on the profitability of their divisions. The head of the division selling the intermediate good (or service) may have the freedom to choose whether to sell to the buying division or to any external customers that may exist. Likewise, the buying manager is often free to buy

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Product

Product Market

$400

$2 40

UseDiv

Su ba ss em bl y

MakeDiv

PROFITABILITY MAKEDIV

USEDIV

WHOLECO

REVENUE

$240

$400

$640

COGS

(160)

(340)

(500)

DISTRIBUTION

(10)

PURCHASING MARGIN

$70

(10) (6)

(6)

$54

$124

the intermediate product from either the selling division or external suppliers that are capable of delivering the quantity and quality demanded. All else equal, the seller prefers a higher sales price, whereas the buyer prefers a lower purchase price. When interacting with each other, this means the selling division prefers a higher transfer price (i.e., more of the company’s total profit) and the buying division prefers a lower transfer price (also more of the profit). Consider MakeDiv and UseDiv, two divisions of WholeCo. MakeDiv spends $160 to make a subassembly (the intermediate good above). The division can sell the subassembly to external customers for $240, incurring a variable (marginal) distribution cost of $10. UseDiv can buy the intermediate good from external suppliers for the same amount, $240, incurring a variable purchasing cost of $6 per unit. Once it obtains the subassembly, UseDiv adds another $100 of costs to create a final product, which it then sells for $400. Alternatively, MakeDiv and UseDiv could trade the subassembly between them; if they do not have to deal with the external market, they avoid all distribution and purchasing costs. Figures 1 and 2 illustrate the two possible scenarios. When each division deals with the external market for subassemblies, $240 flows in and out of the consolidated company. MakeDiv earns a margin of $70, UseDiv earns a margin of $54 and, upon consolidation, WholeCo recognizes the combined margin of $124. By contrast, when the divisions trade with each other, the transfer price between them is eliminated upon consolidation; it is not a cash flow in or out of the overall entity. A performance evaluation based on profitability leaves both division heads with no incentive to trade internally unless their division’s profits will be at least as high as if they had traded externally. continued on next page

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Transfer Pricing Concepts & Practices continued from previous page

Figure 2. MakeDiv Transfers to UseDiv

Subassembly

MakeDiv

UseDiv

(COGS = $160)

$TP

REVENUE COGS

USEDIV

WHOLECO

$TP

$400

$400

(160)

(100+TP)

(260)

$TP-160

$400($100+TP)

$140

DISTRIBUTION PURCHASING MARGIN

The lowest transfer price acceptable to the head of MakeDiv is $230. This conceptual minimum is the division’s variable cost up to the point of transfer, $160, plus the contribution to profit of $70 that MakeDiv would forego by transferring the subassembly to UseDiv instead of selling it to external customers. As long as MakeDiv receives at least $230 from UseDiv for the subassembly, the performance evaluation of the division head will not suffer ($230 - $160 = $70). The maximum price the manager of UseDiv would be willing to pay – the conceptual maximum – is $246, the external market price of $240 plus the $6 purchasing cost avoided by buying from MakeDiv2. The management of WholeCo would prefer an internal transfer, thus saving the company the $10 distribution cost of the selling division and the $6 purchasing cost of the buying division. The heads of MakeDiv and UseDiv each have an incentive to deal with the other and find a mutually-agreeable transfer price within the range of $230 – $246; the agreed price will split the $16 of “profit” between the two divisions. If the maximum had been less than the minimum, WholeCo would have been better off without a transfer, and the managers would have chosen to buy and sell in the external market. How should the transfer price be determined in this scenario? Our first article discussed market-based, cost-based and negotiation-based approaches to transfer pricing policies, each of which having advantages and disadvantages to its use. When available, market-based prices provide objective external evidence about the value of a good or service. The market values MakeDiv’s intermediate product at $240; that price could be used, or it could be reduced by the $10 distribution cost that the division would avoid by selling to UseDiv. In the latter case, the transfer price would match the conceptual minimum of $230, which is a common result of the market-based approach. When intermediate goods are unique, proprietary or thinly traded, reliable market data are often not available. The transfer

36

Product

(COGS = $100 + $TP)

PROFITABILITY MAKEDIV

Product

Market

$400

price then could be based on the selling division’s costs. Deciding which costs to include in the markup base, though, can be problematic, and the choice of a markup percentage can be quite subjective. The company may incur search costs to determine the markup rate of profit on similar items to provide reasoned judgment about what the markup should be. For example, if the selling prices of products similar to MakeDiv’s subassembly average 45 percent above their variable manufacturing costs, MakeDiv may offer the product to UseDiv for $232 ($160 × 1.45). WholeCo could decide not to set a transfer-pricing policy per se but instead choose to let the buying and selling managers negotiate a price. The resulting price would fall between the conceptual maximum and the conceptual minimum (also called the ceiling and floor prices, respectively). The result could be fairly objective based, for example, on the calculated value added by the two divisions. On the other hand, the agreed-to price could be more a function of the relative negotiating abilities of the two managers than the value added by their divisions. Of course, negotiating ability may be a trait in which the company is interested, in which case it should be rewarded by success in the transfer-pricing process. Also, negotiation treats the divisions as independent parties, not divisions of a consolidated entity, which may or may not be the objective of corporate management. Recall that this zero-sum “competition” between MakeDiv and UseDiv derives not only from the profitability incentive, but also from the decentralized nature of WholeCo’s operations. Conversely, WholeCo could decide to centralize source and sale decisions, effectively requiring MakeDiv and UseDiv to trade with each other. If the subassembly were a critical component of the final product, if control over supply and quality were sufficiently important, or if dysfunctional behavior on the part of the division heads were to prevent effective negotiations, WholeCo could decide that such decision authority is best retained at the corporate level. To the extent the division heads lose control over a significant input into the profitability formula, WholeCo should consider adjusting their performance evaluation system accordingly. Finally, the zero-sum nature of the negotiation implies a lack of excess capacity at MakeDiv; the floor price of $230 pertains to subassemblies that MakeDiv could sell to external customers if they are not transferred internally to UseDiv. Suppose MakeDiv has excess capacity relative to what the outside market can absorb. The floor price pertaining to the units for which there

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is no external demand is MakeDiv’s variable manufacturing cost of $160. (The opportunity cost of a transfer of these units to UseDiv is zero.) If WholeCo adopts a transfer-pricing policy of negotiation, the managers of the two divisions would likely settle on a price between $160 and $230.

TAX LAW REQUIREMENTS As we noted in our first article, Section 482 of the Internal Revenue Code (IRC) is the foundation on which the tax-related transfer pricing provisions are based. Section 482 provides broad authority to the Secretary of the Treasury to make appropriate reallocations of income between any two organizations, trades or businesses “in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades, or businesses.” It is not necessary that the two entities be separate, incorporated subsidiaries for Section 482 to apply, but this is the more likely scenario in which it might become applicable. Although Section 482 provides no details as to what constitutes a clear reflection of income, the Treasury Regulations go into considerable detail on the process for determining the taxable income to be reported. Treasury Regulation 1.482-1 explicitly points out that the purpose of Section 482 is to equate the tax treatment of controlled and uncontrolled taxpayers, and that this is achieved via the arm’s length standard. The regulation specifically notes that “a controlled transaction meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm’s length result).” Although the ideal standard is identical transactions, the regulation recognizes that finding identical transactions is likely to be rare, and so it permits taxpayers to draw upon “comparable transactions under comparable circumstances.” To assist taxpayers in determining the true taxable income, the regulations provide a series of methods that may be used in determining an arm’s length result. Interestingly, Treasury Regulation 1.482-1(c) specifically points out that there is no priority of methods; rather, the taxpayer is expected to use the method that “provides the most reliable measure of an arm’s length result.” The regulations note that there are two primary factors to be considered when determining the best method to be used. These are: (1) the degree of comparability between the transaction under consideration and similar transactions between uncontrolled parties and (2) the quality of the data and assumptions being used. The possible methods do vary between the types of transactions involved (for example, transfers of tangibles versus transfers of intangibles or transfers of services), but there are some common themes. For purposes of providing some insights into the technical tax provisions, we outline the general methods that apply to tangibles, intangibles and services. Comparable Uncontrolled Price (CUP) Method This method applies to tangible goods, but is similar to the comparable uncontrolled transaction (CUT) method for intangibles and the comparable uncontrolled services price (CUSP) method for services. Essentially, the method requires a

Today’sCPA

| JULY/AUGUST 2012

price to be determined by reference to a very similar transaction between independent parties. The price established in that independent transaction can then be relied upon as being objective and can be applied in the transaction between the controlled parties. The regulations note that it is particularly important that the product being exchanged by the independent parties be very similar to that being exchanged by the controlled parties in order to use this method. This includes, for example, the presence of intangibles, and thus one branded product might be very different from another unbranded but otherwise similar product. There should also be similarity in contractual terms and economic conditions; otherwise, an adjustment should be made to reflect these differences. The regulations contain examples of an internal CUP, the most reliable measure, whereby a manufacturer sells the same product to both controlled and uncontrolled parties and uses the non-controlled exchange price to set the transfer price between the controlled parties. A CUP may also be developed by reference to two different uncontrolled parties (commonly referred to as an external CUP). Resale Price Method (RPM) This method applies to tangible goods and has no parallel with regard to intangibles. There is a close services parallel: the gross services margin method. The method requires reference to the profit margin associated with the sale of a product (see Figure 3). The regulations note that this method is most relevant where the reseller of a tangible product does not make substantial changes to the product. In essence, what is being measured is the value of the seller’s activity, and thus the regulations state that similarity of function, risks borne and contractual terms are the crucial factors to consider in determining whether two transactions are comparable. Sellers performing a similar role should receive continued on next page

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37


Transfer Pricing Concepts & Practices continued from previous page

Figure 3. Comparison of Cost Plus and Resale Price Methods

MakeCo

Good DistCo

(COGS = $40)

$TP

RESALE PRICE METHOD

(ASSUMING 25% MARK UP):

(ASSUMING 20% PROFIT MARGIN):

$40 + (25% X $40) = $50 TP

$75 – (20% X $75) = $60 TP

Cost Plus Method (CP) This method has a close parallel in terms of services (cost of services plus method), but there is no similar intangibles method. The regulations state that the method is primarily used in cases of manufactured goods that are being sold to related parties. In essence, what is measured is the applicable markup on cost that is made by the manufacturer (see Figure 3). This gross profit reflects a return to the producer for performing production activities “including an operating profit for the producer’s investment of capital and assumption of risks.” Thus, the regulations suggest that the most important comparability factors are similarity of function, risks borne and contractual terms. Comparable Profits Method (CPM) The Comparable Profits Method is specifically addressed in Treasury Regulation 1.482-5 and relies on a direct comparison of profits earned. Essentially, this method requires selecting a profit level indicator (such as the ratio of operating profit to sales or gross profit to operating expenses) and then applying the ratios derived from uncontrolled parties to the controlled party situation. This then enables a determination to be made as to whether the actual operating profit observed is in

38

CUSTOMERS

$75

COST PLUS METHOD

similar profit margins, measured as the percentage of profit to sales price. The regulations note that product similarity is not as crucial in this method, but that the products should still be similar in type (for example, electronic goods).

Good

fact consistent with what would be expected in an uncontrolled situation. For example, consider a controlled party with sales of $10 million and an operating profit of $2 million. If it were established that uncontrolled parties typically earn a ratio of operating profit to sales of between 10 and 14 percent, then it is possible to apply this range to the controlled party and conclude that operating profit should fall somewhere between $1 million and $1.4 million. The fact that the controlled party earns an operating profit outside that range ($2 million) implies that an inappropriate transfer price has been used and a reallocation should be made. Profit Split Method – Comparable Profit Split This method is outlined in Treasury Regulation 1.482-6(c)(2). Under the Comparable Profit Split Method, the combined operating profit of two uncontrolled entities with similar transactions to the two controlled entities is analyzed. The ratio of total profit belonging to each party is used to establish an appropriate profit split between the two related parties. Thus, if two uncontrolled parties have profits of $80 million and $20 million each, the relative profit split between each is an 80-20 profit ratio. Accordingly, two controlled parties engaging in similar transactions should also tend to split profit in an 8020 ratio. Any significant deviation from such a ratio might imply that the transfer pricing between the controlled parties is inappropriate.

Profit Split Method – Residual Profit Split The Residual Profit Split Method is outlined in Treasury Regulation 1.4826(c)(3); it follows a two-step process to allocate the total operating income between the two controlled parties. In the first step, the income is allocated to each party using some benchmark to provide each with a market-based return for its routine contributions. After this income allocation to each party, the residual profit is assumed to be generated by non-routine contributions, which is typically consistent of intangibles. Thus, the residual profit is allocated between the controlled parties based on their relative non-routine contributions (which may be measured, for example, by the ratio of intangibles owned by each). The regulations provide a helpful example of the Residual Profit Split Method as follows. Assume that a U.S. company licenses its European subsidiary to manufacture and market its product in Europe. The European sales generate operating income of $200 million and the subsidiary has operating assets of $200 million. If we assume a return on assets of 10 percent (a return for routine contributions), there remains a residual profit of $180 million to be split between the two controlled entities. It is assumed that the residual profit derives from the valuable intangibles, and thus the residual is split between the two entities based on the relative value of the intangibles owned by each.

Today’sCPA

| JULY/AUGUST 2012


A FULL SERVICE LAW FIRM SINCE 1917

Practice Areas/ Contacts Include: • Business Entities/

Transactions

Keith E. Gamel Trenton Hood • Elder Law Cara Chase

WHEN PERFORMANCE EVALUATION AND TAX INCENTIVES CONFLICT Decentralized companies that operate multiple subsidiaries confront both performance evaluation incentives and tax incentives simultaneously3. All else being equal, the selling subsidiary wants a higher transfer price. If the selling division is in the lower-tax jurisdiction, it is also tax-advantaged for the company to use the highest transfer price possible, thus lowering its overall tax bill. However, if the selling division is in the higher-tax jurisdiction, its performance evaluation needs conflict with the company’s tax incentives. One solution is to base the selling division’s evaluation and compensation on efficiency, quality and overall company profitability rather than divisional profitability, similar to the situations discussed above in which the centralization of source and sale decisions might be the best course of action. With the performance evaluation criteria so adjusted, the transfer price is not particularly important to the seller. A similar result is obtained on the flip side of the transaction. All else being

Today’sCPA

| JULY/AUGUST 2012

equal, the buying division wants a lower transfer price. If the buying division is in the lower-tax jurisdiction, it is taxadvantaged to have the lowest transfer price possible. On the other hand, if the buying division is in the higher-tax jurisdiction, the tax and performance evaluation incentives conflict. One solution for performance evaluation is to add the selling division’s “profit” on the transaction (or some other agreed-to amount) to the artificially low profit of the buying division. It is wise for companies to consider carefully which, if any, adjustments should be made to either the transfer pricing or the performance evaluation system. One of the advantages of using arm’s-length, market-based prices is that they bring a certain discipline to divisions’ approaches to cost management and quality control. This discipline may be lost if the selling division’s inefficiencies in production can be passed on via high transfer prices or if the cost of the transferred good is set artificially low and leads to the buying division spending more on other activities or components than it should.

• Tax Planning Marcus J. Brooks Franklin L. Tuttle • Tax Controversy

& Litigation

Marcus J. Brooks • Trust, Estate, &

Probate Litigation Jeffrey A. Armstrong

• Wills, Trusts, &

Probate

Kristen Mynar Franklin L. Tuttle

Offices in Amarillo (by appointment), Austin, Fort Worth, San Antonio, Temple and Waco

(800) 765-1470 www.namanhowell.com

continued on next page

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Transfer Pricing Concepts & Practices continued from previous page

It is also possible to use two sets of transfer prices, one for taxes and one for performance evaluation. The set that most closely approximates the arm’s-length price must be used for tax purposes, but for internal purposes a company is free to do whatever it wants. Such a dual-price system is not costfree. To the extent different prices are recorded in the books of the buying and selling divisions, consolidation is that much more complicated. Two sets of prices also introduce additional IT system complexity, cognitive load on corporate executives to keep track of what information should be used for what purpose, and confusion on the part of the managers, perhaps even assertions that a particular division “would have been profitable” or performed better if an alternative transfer price had been used. Another solution that enables the company to remain decentralized is to tie division managers’ compensation to overall, consolidated profitability instead of divisional profitability. This approach encourages division managers to work together as a team instead of compete in a zero-sum game; it provides them incentives to focus on the corporate tax advantages of particular prices, rather than the impact on their own bottom lines.

THE APA PROGRAM It is evident from the above discussion that there is much uncertainty involved in arriving at a transfer price that will be deemed satisfactory by both the business and the IRS. Accordingly, firms may engage in the Advance Pricing Agreement (APA) program, which results in “a binding contract between the IRS and a

REFERENCE:

IRS. 2011. Announcement and Report Concerning Advance Pricing Agreements, 2010 APA Statutory Report, Announcement 2011-22, March.

taxpayer by which the IRS agrees not to seek a transfer pricing adjustment under IRC §482 for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method” (IRS, 2011, page 1). Note that the parties agree on a transfer pricing method, rather than a particular transfer price. These agreements enable firms to reduce their exposure to costly transfer pricing adjustments. APAs may be unilateral (involving only the IRS), bilateral (involving the IRS and one foreign tax authority) or multilateral (involving the IRS and multiple foreign authorities). According to the IRS, there were 144 APA applications filed in 2010, of which 46 were unilateral and 98 were bilateral. With regard to APAs actually executed, over the period 1991-2010 (inclusive), there were 405 unilateral APAs, 555 bilateral APAs and 13 multilateral APAs, for a total of 973. In 2010, 19 APAs were withdrawn, but none were cancelled or revoked. With regard to tangibles and intangibles, by far the most popular method employed in APAs completed in 2010 was the comparable profits method; most of these agreements used operating margin as the profit level indicator (PLI). Although the APA process affords taxpayers some certainty in an otherwise highly uncertain process, there is a considerable time cost in developing an APA. The average time to complete a new transfer pricing agreement in 2010 was 40.7 months, and the average time to complete a renewal of an APA was 33.1 months.

A CLOSE LINK Clearly, the impact of transfer pricing on companies of all sizes is not trivial. Decisions about the extent of decentralization, whether to locate divisions across political borders (including state borders within the United States), how to compensate employees, how to effectively and correctly manage

the corporate tax burden all affect, and are affected by, a company’s approach to transfer pricing. Corporate executives need to pay particularly careful attention to unintended consequences, because the tax and performance evaluation systems are so closely linked. While already challenging, transfer pricing issues can get more complicated still. Our discussion in this article focused primarily on tangible goods. In our next article, we will discuss how certain problems are exacerbated when the item of interest is intangible, an increasingly common interest in the 21st century for companies … and the IRS.  ■ FOOTNOTES 1.

2.

3.

This transfer could occur, for example, across international borders between the United States and foreign subsidiaries of a consolidated corporation, or between the production and the sales departments of an entirely domestic company that operates as a single legal entity. We use the generic term ‘division’ to represent the wide variety of organizational structures possible. The conceptual maximum is the lower of two figures. One is the margin available to cover the cost of the subassembly, which in this example is $400 – 100 = $300. The other is the cost of an external purchase, here $246. If the margin available to cover the cost of the subassembly were less than the cost of an external purchase (say, if the incremental costs to UseDiv were $200), UseDiv should cease operations until it reduces its costs to avoid producing items with a negative margin. Although transfer pricing issues can arise outside the subsidiary context, the most significant international transfer pricing issues arise when different subsidiaries and parent companies interact. The distinction between a ‘subsidiary’ and a ‘branch’ (an unincorporated division) is an important one. The benefits of placing income in a low-tax jurisdiction arise because the foreign subsidiary may avoid reporting income in the high-tax jurisdiction until dividends are repatriated. If instead the income was earned by a ‘branch,’ its income would be taxed on a consolidated entity basis in the hightax jurisdiction.

Gia Chevis, Ph.D., is Clinical Professor of Accounting, Graduate Programs Director in Accounting, and PricewaterhouseCoopers Fellow for Teaching Excellence in Accounting at Baylor University. Michael A. Robinson, Ph.D., is Professor of Accounting and Chair of the Department of Accounting and Business Law at Baylor University. Brett Wilkinson, Ph.D., is Associate Professor of Accounting and Holder of the Roderick L. Holmes Chair of Accountancy at Baylor University.

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Today’sCPA

| JULY/AUGUST 2012


CPE Quiz Today’s CPA offers the self-study exam below for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article. Mail the completed test by August 31, 2012, to TSCPA for grading. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA. Answers to last issue’s self-study exam: 1. d 2. c 3. c 4. b 5. a 6. a 7. d 8. a 9. d 10. c PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.

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Transfer Pricing Concepts & Practices BY GIA CHEVIS, PH.D.; MICHAEL A. ROBINSON, PH.D.; AND BRETT WILKINSON, PH.D.

1 Transfer pricing is restricted to situations in which a selling subunit of an organization transfers (sells) a physical good to a buying subunit of the same organization.

6 It is both tax- and performanceadvantaged to use a high transfer price when:

C. Eisner v Macomber D. Revenue Ruling 482

9 According to the IRS data referenced in the article, over the past decade, most APAs have been:

A. the selling division and the buying division are in equally high-tax jurisdictions. A. True B. the selling division is in a high-tax jurisdiction and B. False the buying division is in a low-tax jurisdiction. C. the selling division is in a low-tax jurisdiction and the 2 In an intra-company transfer, the higher buying division is in a high-tax jurisdiction. the transfer price: D. the selling division and the buying division are in equally low-tax jurisdictions. A. the higher the pre-tax profit of the selling division. B. the higher the pre-tax profit of the buying division. C. the higher the pre-tax profit of the organization as a 7 An advantage of using an arms-length market price for performance evaluation is: whole. D. Both a and c. A. that there is always an objective, relevant market price readily available. 3 Both buying and selling division B. the additional discipline it brings to cost containment managers have a financial incentive to and quality control. trade with each other whenever: C. the ability of the selling division to pass along cost A. they are given the authority to make sourcing inefficiencies to the buying division. and sales decisions (i.e., the organization is D. the increased control corporate headquarters has decentralized). over the divisions’ actions. B. the two managers are evaluated based on the 8 An Advance Pricing Agreement is … profitability of their divisions. C. the conceptual maximum price of the buyer is less A. a voluntary contract between the IRS and the than the conceptual minimum price of the seller. taxpayer regarding the appropriate method for D. the conceptual maximum price of the buyer is determining the transfer price to be used. greater than the conceptual minimum price of the B. a court ordered mandate as to the transfer pricing seller. method to be used. C. a contract between the IRS and the taxpayer that 4 From where does the notion of the establishes the actual transfer price to be used by Arm’s Length Standard arise? the taxpayer. D. an agreement between two subunits of the same A Section 482 corporate entity with regard to a transfer price. B. Treasury Regulation 1.482-1

5

Which of the following is false?

A. In deciding on the best transfer pricing method to use, the degree of comparability between controlled and uncontrolled transactions should be considered. B. The Comparable Uncontrolled Price (CUP) method is used with tangible goods. C. The Resale Price Method is best used where a reseller of tangible goods does not make substantial changes to the product. D. The Regulations provide a clear hierarchy of methods that should be followed in determining the best method.

A. Unilateral B. Bilateral

C. Trilateral D. Multilateral

10 Tying managers’ compensation to company-wide profitability encourages them to work together as a team, but requires a reduction in the level of decision decentralization. A. True B. False

41


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SATELLITE BROADCAST – Governmental Accounting and Auditing Update Various CPE Credits: 8 Common Frauds and Internal Controls for Revenue, Purchasing and Cash Dallas CPE Credits: 8

6

Closely Held Business Taxation: 49 Practical Ways to Cut Taxes Houston CPE Credits: 8

7 Closely Held Business Taxation: 49 Practical Ways to Cut Taxes Dallas CPE Credits: 8 Internal Control Essentials for Financial Managers, Accountants Dallas CPE Credits: 8

Common Frauds and Internal Controls for Revenue, Purchasing and Cash Houston CPE Credits: 8

8

13

Personal and Professional Ethics for Texas CPAs Fort Worth CPE Credits: 4 Texas Sales and Use Tax Dallas CPE Credits: 8

14 Common Frauds and Internal Controls for Revenue, Purchasing and Cash Austin CPE Credits: 8 What You Need to Do Now in Estate Planning Under the New Tax Law Dallas CPE Credits: 8

Tax Staff Training – Level I – Individual Dallas CPE Credits: 16

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2

9

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3

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FRIDAY

16 Compilation and Review Annual Update: A Seminar Designed for Smaller Firms San Antonio CPE Credits: 8

17 Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Austin CPE Credits: 8

Excel Financial Reporting and Analysis Fort Worth CPE Credits: 8

Excel Financial Reporting and Analysis Dallas CPE Credits: 8

22 Annual Yellow Book Update and Review: A Realistic Approach Houston CPE Credits: 8

23 Audit Workpapers: Documenting and Reviewing Field Work Dallas CPE Credits: 8

24 Audit Workpapers: Documenting and Reviewing Field Work Fort Worth CPE Credits: 8

International Versus U.S. Accounting: What in the World is the Difference El Paso CPE Credits: 8

Advanced Estate Planning Conference San Antonio CPE Credits: 16

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15

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Technology for CPAs: Don’t Get Left Behind Houston CPE Credits: 8

Technology for CPAs: Don’t Get Left Behind Austin CPE Credits: 8 Texas State Taxation Conference Houston CPE Credits: 16 Governmental and Nonprofit Annual Update Dallas CPE Credits: 8 Not-for-Profit Accounting and Auditing Update and Reporting Issues Fort Worth CPE Credits: 8

20

21 Financial Statement Presentation and Disclosures – A Realistic Approach Houston CPE Credits: 8 Governmental and Nonprofit Annual Update Austin CPE Credits: 8 OMB Circulars A-133, A-87 and The Compliance Supplement Fort Worth CPE Credits: 8

42

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27 Internal Controls Design, Evaluation and Communication for Smaller Firms Houston CPE Credits: 8

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28

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29 Annual Yellow Book Update and Review: A Realistic Approach Dallas CPE Credits: 8

30 Frequent Frauds Found in Governments and Not-For-Profits Houston CPE Credits: 8

31 Frequent Frauds Found in Governments and Not-For-Profits Austin CPE Credits: 8

SATELLITE BROADCAST Compilation & Review Update Various CPE Credits: 8

Financial Statement Presentation and Disclosures Dallas CPE Credits: 8

Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4

Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4

SEPTEMBER MONDAY

TUESDAY

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Cloud Computing – Issues and Solutions Dallas CPE Credits: 4

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Tech Update 2012 – Incredible New Technologies for Accountants Dallas CPE Credits: 4

10

11

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THURSDAY

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6

Tech Update 2012 – Incredible New Technologies for Accountants Houston CPE Credits: 4

12 SATELLITE BROADCAST – Accounting and Auditing Update Various CPE Credits: 8

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13

Tech Update 2012 – Incredible New Technologies for Accountants San Antonio CPE Credits: 4 17

18 Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4

Cash and Tax Basis Financial Statements – Preparation and Reporting Houston CPE Credits: 8

19

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20

7

Excel – Must-Know Features for Accountants Houston CPE Credits: 4

Managing Business Mayhem – Tools & Techniques to Save You Time Houston CPE Credits: 4

Excel – Must-Know Features for Accountants San Antonio CPE Credits: 4

14

Managing Business Mayhem – Tools & Techniques to Save You Time San Antonio CPE Credits: 4

Compilations and Reviews Austin CPE Credits: 8

21

Identifying Fraudulent Financial Transactions Houston CPE Credits: 8

Navigating LLC and Partnership Allocations and Basis Fort Worth CPE Credits: 8 Service Organization Reporting Frameworks: Life After SAS 70 Houston CPE Credits: 8

Cash and Tax Basis Financial Statements Dallas CPE Credits: 8

24

International Taxation: To and From the United States San Antonio CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4

25 Cash and Tax Basis Financial Statements – Preparation and Reporting Fort Worth CPE Credits: 8 Revenue Recognition: Getting the New Standard Right Dallas CPE Credits: 8

Financial Institutions Conference Dallas CPE Credits: 16

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26

Fiduciary Income Tax Returns – Form 1041 Workshop Dallas CPE Credits: 8 Tax Staff Training – Level 2 – Business Houston CPE Credits: 16

27

Annual Yellow Book Update Midland CPE Credits: 8

28

Personal and Professional Ethics for Texas CPAs Austin CPE Credits: 4 Revenue Recognition: Getting the New Standard Right Houston CPE Credits: 8 Social Security, Medicare and Prescription Drug Retirement Dallas CPE Credits: 8

43


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$107,500 gross. North Houston. Good client mix providing year round work flow. Part time staff in place ready to continue with buyer. TXS1119 $280,000 gross. West Houston. Primarily a tax practice but does have year round revenue stream. Excellent fee structure. TXS1118 $145,610 gross. Houston. Primarily an accounting/bookkeeping practice with good cash flow. Owner available to help with transition. TXS1115 $50,000 gross. Houston. CPA firm. Virtual office so clients can be moved to buyer’s location. Seller available for transition. TXS1116 $200,000 gross. The Woodlands. Excellent fee structure and turn-key operation with long-term & loyal staff in place. TXS1111

Today’sCPA

| JULY/AUGUST 2012


$179,000 gross. Southwest Houston. Wellestablished CPA firm with excellent cash flow. Revenue mix 57% accounting & 30% tax. TXS1112 $750,000 gross. Beaumont area. CPA firm with 53% tax & 47% accounting. Good fee structure & strong cash flow. TXS1109 $45,450 gross. Brownsville. High concentration of tax work with 7 bookkeeping clients. Bilingual staff in place. TXS1100 $459,000 gross. Houston. Services to clients include 67% acctng, 31% tax, and 2% payroll. Existing staff & strong fee structure in place. TXS1110 $739,500 gross. League City area. Accounting 63%, tax 31% and consulting svcs 6%. Nice location and excellent staff in place. TXS1113 $310,000 gross. Conroe. Year round revenues include 50% tax, 25% bookkeeping, 5% reviews, & 20% other. TXS1106 ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/ register for free at www.accountingpracticesales.com PRACTICES FOR SALE THROUGHOUT TEXAS including: DALLAS-McKinney CPA $200,000. CORSICANA area $450,000+. TYLER area $155,000+. Oklahoma City $200,000. Many others! Conventional bank financing. Contact Leon Faris, CPA, at PROFESSIONAL ACCOUNTING SALES … 800-729-9031 or visit our website: www.cpasales.com. Let our 29 years of experience work for you! North Dallas $520,000 High quality small business clients, 65% tax – 35% compilation/reviews, year round cash flow, long-term staff, owner transition, reply to dallascpa2011@gmail. com

Today’sCPA

| JULY/AUGUST 2012

Practices Sought BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www. accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales Local CPA firm is interested in paying a premium for CPA practices up to $1 million in San Antonio area. We will retain staff or partners or work with transitioning retiring partners. Please contact psmith@cpatx.com. 210-366-9430. Accounting Broker Acquisition Group “Maximize Value When You Sell Your Firm” A Local Texas Corporation You Sell Your Firm Only Once! Will You Leave Money on the Table? Free Report: “Discover the 12 Irreversible Fatal Errors You Must Avoid When You Sell Your Firm!” We sell small & large CPA firms … 100 percent of our acquisition brokers are “Ex-Big Four” CPAs! We are the only firm of our type in the nation that can make this claim! Call now for your Free Report! 800-419-1223 X101 or send a quick e-mail to maximizevalue@accountingbroker.com

Experienced CPA seeking to purchase an accounting & tax practice in Houston, TX. Looking for $175k-$225k in billings. Prefer not to work with broker, but directly with owners who want to sell. chris@ cashiolacpa.com PLANNING TO SELL SOON … CASH BUYERS WAITING! Contact USA’s No. 1 accounting brokerage network for a FREE sales package with tips on getting your practice ready to sell. We provide financing so you can cash out at closing! Let our 29 years of expert experience work for you! We only get paid for producing results! Confidential, prompt, professional. Contact Leon Faris, CPA, at PROFESSIONAL ACCOUNTING SALES … 972-292-7172 or 800-7299031 … www.cpasales.com.

Services Need assistance with a Client’s Texas Sales Tax Issue/Problem? Audits? Refunds? Not permitted? We were trained by, and worked for, the Comptroller of Public Accounts. We know Sales Tax Law and Audit procedures. Your client has options. Michael J. Robertson, CPA Web page: Texas-SalesTax.com 817-478-5788 Fax: 817-478-8779

Software For Sale PROVEN OIL and GAS ACCOUNTING SYSTEM keeps getting better. Fast, easy to use. Developed for PC/network by CPA. Over 2,000 users. G/L, A/P, depletion, payroll, joint interest billing, revenue distribution, document imaging, and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605. 325-677-1543 or 800-299-1543. E-mail: sales@wolfepak.com. For more information and to request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601.

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Today's CPA July/August 2012