Today’sCPA MAY/JUNE 2012
T E X AS S O C IET Y OF
The Key to Ethical Behavior Managing Risk in the Competition for Clients The Ever-Changing Lease Exposure Draft
C E RT I F I E D P U BL IC AC C OU N TANT S
YEAR IN REVIEW
Also: An Update on Today’s CPA
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CHAIRMAN Donna Holliday Wesling, CPA
EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE
VOLUME 39, NUMBER 6
EDITORIAL BOARD CHAIRMAN Arthur Agulnek, CPA
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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.
Wayne Hardin email@example.com
24 The 2011-2012 Year in Review
5 Chairman’s Message
At the end of the fiscal year, TSCPA takes a look back at the highlights of 2011-2012.
Ali Allie, Marcia Attmore, AICPA; Melinda Bentley; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Heather O’Connor, AICPA; Catherine Raffetto; Dianne Rollin; Katey Selph; Rori Shaw; Patty Wyatt
DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton
Design/Production/Advertising The Warren Group thewarrengroup.com firstname.lastname@example.org
CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 email@example.com
Editorial Board Arthur Agulnek, CPA-Dallas; Lisa Bauman, CPA-Dallas; James Danford, CPA-Fort Worth; Greta Hicks, CPA-Houston; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPAHouston; Ty Moore, CPA-Houston; Jan Taylor Morris, CPA-Houston; Windford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Brinn Serbanic, CPA-East Texas; Paul Willey, CPA-Dallas.
14 Spotlight on CPAs 20 Capitol Interest
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Primaries and Prospects
29 An Update on Today’s CPA
A brief report on Editorial Board’s activities.
technical articles 30 Courage: The Key to Ethical Behavior
Self-interest alone does not produce unethical code violations. Courage plays an important role.
34 Managing Risk in the Competition for Clients
Year End 2011-2012 – A Time for Reflection
6 Tax Topics
IRS Announces a Third Offshore Voluntary Disclosure Initiative
8 Business Perspectives
A Bane or Boon?
9 Accounting and Auditing
Required Audit Firm Rotation
10 Emerging Issues The Broken Federal Budget Process
Chapter “Aces” Summer Competition
departments 16 Take Note 44 Classifieds 46 CPE Calendar
Economic pressures may bring sound risk management and practice management into alignment.
© 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.
Tonight on 60 Minutes
38 CPE: The Ever Changing Lease Exposure Draft, Part II – Lessor Accounting
An in-depth exploration of the new lessor accounting model proposed by the Boards.
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If you did not get a W-2, see instructions.
12 13 14
Other gains or (losses). Attach Form 4797 .
IRA distributions . 15a b Taxable amount . . . b Taxable amount . . . Pensions and annuities 16a Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . .
Unemployment compensation . Social security benefits 20a
Enclose, but do not attach, any payment. Also, please use Form 1040-V.
Adjusted Gross Income
16a 17 18 19 20a 21 22 23 32 24 33 34 25 35 26 36 27 37 28 29 30 31a 32 33 34 35 36 37
. . . . . . b Taxable amount
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Cat. No. 11320B
Chairman’s Message By Donna Holliday Wesling, CPA | TSCPA Chairman
Year End 2011-2012 – A Time for Reflection Editor’s Note: TSCPA’s 2011-2012 Chairman Donna Holliday Wesling, CPA-Austin, provides a review of the year that is coming to a close.
This is the final message of my term as your 2011-2012 chairman, so I’d like to cover a few items of interest from the year. You can read a more indepth overview in the “Year in Review” article in this Today’s CPA issue. When beginning my tenure as your chairman, I selected the theme: Strong, Diverse, United. It was based on my belief that TSCPA supports and serves a diverse and strong community of accounting professionals. As individuals, we are diverse, but we are united by our certificate and our identity as CPAs. My goals were to continue the effort to meet the needs of all our members. Throughout the year, I traveled extensively around the state meeting CPA and student members, attending TSCPA meetings and chapter events, providing professional issues updates, and more. I enjoyed seeing old friends and making new ones. I also especially valued the opportunities to meet the upcoming leaders in our profession and encourage them to continue on to become CPAs. A key area of emphasis was on young CPAs. We initiated an effort to obtain the names of young CPAs from the chapters and then place a young CPA on every available TSCPA committee. In addition, one of the major initiatives this year was the new Rising Stars Program. TSCPA launched the program to recognize CPA members 40 years old and younger who have demonstrated leadership skills and active involvement in TSCPA, the accounting profession and/ or their communities. There were over 60
nominations received, and a task force of TSCPA Executive Board members served as the selection committee. The selection process was difficult, but the task force narrowed it down and 12 were chosen. They were highlighted in the cover story in the March/April issue of Today’s CPA. Another area of focus was providing additional resources for the business and industry member segment. The online Business & Industry Center on the website includes links to research resources, the latest professional news, specialized CPE, connections with other members, and other links. There are specialized neighborhoods (CFOs, Healthcare, Energy, Nonprofit, Education, and Government), and TSCPA added three new neighborhoods for Manufacturing, Service Industry and Internal Auditors. TSCPA also added a new “Ask a Question” area and the Industry Issues blog to the B&I Center. The blog is written by TSCPA member Bill Schneider, CPA-Dallas, who is a member of the Society’s Business & Industry Committee. This is an interesting time in our profession as we strive to keep informed on the many issues, new rules, revisions, pronouncements, and more that might have an impact on us. Some of these on the national level this year were Private Company Reporting Standards, COSO’s Internal Control Framework, International Financial Reporting Standards (IFRS) with convergence, endorsement and condorsement, and
the myriad pronouncements issued from accounting and auditing standardssetting bodies. There were also issues at the state level, such as the franchise or margin tax, the state comptroller’s office offering new rules, and other issues. We’re fortunate to have TSCPA and the hardworking leadership and committees who diligently work on behalf of CPAs and the accounting profession. They’ve responded throughout the year, and TSCPA uses a variety of communications vehicles to keep the membership updated, including the website, online communities, blogs, e-newsletters, social media, CPE programs and this magazine. In addition, TSCPA works with AICPA on a national level. As TSCPA chairman, I participated in AICPA Council meetings. TSCPA also participated with the AICPA Horizons 2025 Project. This effort was completed in partnership with the state CPA societies. With input from thousands of CPAs from around the country, the Horizons 2025 Project looked out into the future (15 years) and provided a roadmap for the profession to help maintain and achieve success. These are just a few of the highlights for 2011-2012. Be sure to read the “Year in Review” article for more details on TSCPA’s programs and initiatives. As we finish out the year, I want to express my appreciation for the opportunity to serve as your TSCPA chairman. It can be challenging to keep up with continual change and daily demands we face, but I’ve seen first-hand that TSCPA’s membership is strong, diverse and united – and the profession has a bright future with the dedication and commitment of upcoming CPA and Society leadership. n
Donna Holliday Wesling can be contacted at firstname.lastname@example.org.
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Tax Topics By Joel N. Crouch | Guest Columnist
IRS Announces a Third Offshore Voluntary Disclosure Initiative On Jan. 9, 2012, the Internal Revenue Service (IRS) announced it was opening its Offshore Voluntary Disclosure Initiative (OVDI) for a third time, to allow taxpayers to avoid criminal penalties and reduce exposure to civil monetary penalties by disclosing their offshore bank accounts and other foreign assets to the government. The 2012 OVDI is similar to the previous OVDIs and came after the IRS commissioner had previously announced that there would be no further OVDI after the 2011 program closed. The federal tax system is a voluntary system that relies on taxpayers to completely and accurately report their income and deductions, and pay their taxes. The IRS recently released a report that individuals and businesses underpay their taxes by an estimated 17 percent each year, resulting in an underpayment of almost $450 billion. Taxpayers who intentionally under report their income, over report their deductions or fail to disclose foreign activities risk significant criminal penalties. For taxpayers who have a guilty conscience or second thoughts, the Internal Revenue Manual has a voluntary disclosure practice that allows taxpayers to voluntarily come forward to reduce the chance of a criminal investigation and prosecution. Although an IRS voluntary disclosure does not automatically guarantee immunity from prosecution, historically the IRS has not pursued criminal charges against taxpayers who meet the requirements of the voluntary disclosure practice. A voluntary disclosure occurs when a taxpayer in a manner truthful, timely and complete notifies the IRS of issues on tax returns or other documents filed with the IRS. Timeliness is the most important factor for a voluntary disclosure. A disclosure
is timely if it is made before the IRS has initiated a civil examination or criminal investigation of the taxpayer, or before the IRS has notified the taxpayer that it intends to commence a civil examination or criminal investigation. A disclosure is not timely if it is made after the IRS receives information from either a third party alerting the IRS to the taxpayer’s noncompliance or after a criminal enforcement action, such as a search warrant or grand jury subpoena. A taxpayer who is concerned that a third party, such as a former spouse, disgruntled employee or former business partner, may provide information to the IRS should consider making a voluntary disclosure before the third party contacts the IRS. In these situations, establishing the day, and even the time, a disclosure was made to the IRS can be critical. The IRS has publicly announced that it does not consider a “quiet disclosure” to be a voluntary disclosure as defined by the Internal Revenue Manual. A quiet disclosure occurs when a taxpayer files amended returns and does not notify the IRS or agree to cooperate and pay any resulting tax, penalty and interest. As a result, a taxpayer making a quiet disclosure
risks exposure to a criminal investigation and possible prosecution. In 2009, the IRS introduced a special variation of its voluntary disclosure practice, the OVDI. The 2009 OVDI allowed taxpayers who had failed to disclose to the IRS offshore activities, such as offshore bank accounts and interests in foreign entities, to disclose this information to the IRS and thereby avoid potential criminal penalties and reduce potential civil penalties. Although the 2009 OVDI was available to all taxpayers, the genesis of the initiative was the agreement between the United States and Switzerland releasing 4,450 names of U.S. persons with accounts at the Swiss bank, UBS. Approximately 15,000 taxpayers, with bank accounts in more than 60 countries, came forward to participate in the 2009 OVDI, agreeing to pay additional tax for the years 2003 through 2008, a 20 percent penalty and interest on the additional tax due, and a penalty equal to 20 percent of the highest account balance during the years 2003 through 2008. The 2009 OVDI concluded on Oct. 15, 2009, with the IRS collecting billions in additional tax penalties and interest. Hoping to duplicate the success of the 2009 OVDI, in early 2011, the IRS announced the 2011 OVDI. The 2011 OVDI was similar to the 2009 OVDI, but with more restrictive terms and higher civil penalties. Participants in the 2011 OVDI paid additional taxes and interest for the years 2003-2010 plus accuracyrelated penalties, if applicable. The penalty framework also required an additional penalty of 25 percent of the highest aggregate account balance for the years 2003 to 2010. For offshore accounts with
Joel Crouch, a partner at Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. is Board Certified in Tax Law, and handles civil and criminal tax controversies. He can be reached at email@example.com.
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an aggregate balance of less than $75,000, there was a reduced penalty of 12.5 percent. Under limited circumstances, the penalty could be reduced to 5 percent. The deadline for participating in the 2011 OVDI and submitting all necessary information, including all amended tax returns, was Aug. 31, 2011. Although the IRS commissioner had previously announced there would be no further OVDI after the 2011 program closed, on Jan. 9, 2012, the IRS announced it was opening the OVDI door for a third time. As of this writing, the terms of the 2012 OVDI are similar to the 2011 OVDI with a few small, but important changes. Under the 2012 OVDI, the highest penalty is 27.5 percent instead of 25 percent, with the 12.5 percent penalty and the 5 percent penalty
still available for taxpayers who meet certain criteria. In addition, the 2012 OVDI is open ended, likely in recognition of the numerous taxpayers who made post-2011 OVDI disclosures and those who would like to do so with some assurance regarding their exposure. In announcing the 2012 OVDI, the IRS cautioned that the terms of the program could be changed at any time, including increasing the penalties for some or all taxpayers, redefining the terms of the reduced penalties or redefining the class of taxpayers who are eligible for reduced penalties. The IRS also warned that the program could be terminated at any point. Any voluntary disclosure to the government must be handled carefully, but especially a voluntary disclosure under the OVDI. In the wake of the focus on
foreign activity, the IRS has investigated and indicted numerous individual taxpayers and professional advisors. In addition, it has negotiated non-prosecution agreements with many foreign banks that include payment of large penalties and agreements for turning over the identity of U.S taxpayers with accounts. The IRS and the Department of Justice are continuing their efforts to obtain information from foreign banks, including banks in India, Hong Kong, Israel and other jurisdictions beyond Switzerland. The IRS is reviewing the information it has obtained from recent enforcement efforts and is looking for U.S. taxpayers to investigate and prosecute. It is critical to analyze all the risks before deciding to participate in the 2012 OVDI. n
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Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor
A Bane or Boon? “Tax dodgers … corporate raiders … asset strippers … job killers.” These are some of the words used to describe private equity investing, which has been thrust into the political spotlight as Mitt Romney vies to be the Republican presidential nominee in the upcoming election. While Romney touts his economic credentials, his opponents have charged him with destroying jobs while enriching him, and critics of private equity have questioned overall fairness. A pillar of alternative investments, private equity is an ownership in a private company or raising equity capital through a private placement. Investors take a position through a pooled investment vehicle, which is used to buy large or middle-market companies, or to be used as venture capital to finance new or growing companies. Acquired companies are transformed with new management and restructured operations, or bought at a substantial discount to capitalize on gains. Financing of new or growing companies is used primarily for early, late and pre-IPO phases with a recapture of funds when the merger with another company, acquisition by another company, or an IPO, takes place. The intermediary is the limited partnership (LP) or limited liability company (LLC). The investors are the limited partners who have limited liability. They have no control over the partnership and contribute the bulk of the funds, committing to a specific “lock up” period of these funds, from seven to 10 years. The professional managers are the general partners who organize the fund, raise capital, select, structure and manage investments and plan the exit. The general partner has unlimited liability and assumes an active role in the partnership. The general partner receives a management fee of approximately 1.5 percent to 2.5 percent of committed funds and an incentive fee, around 20 percent of profits subject to a hurdle rate.
The concept of private equity does play an important role in investing. Private equity can transform markets by providing a good model of capitalism – by providing efficiency in operations, a laser focus on cash flow, a better use of debt, aligned incentives for managers and investors, and a sound model of governance, which ultimately helps companies to maximize returns and long-term value. From a prudent investor perspective, investors should consider this asset class within an entire portfolio, as it offers a longterm return enhancement capability with moderate risk diversity. However, private equity is also facing strong headwinds for the following reasons: • the business is near mundane; • it appears less lucrative; • the number of global buyouts is lower; • the pace of IPOs has slowed; and • it has been difficult to raise debt, as banks are not lending as much as they did before. As a result, more equity is raised from the investors, resulting in less leverage and, in turn, less return and less compensation to the manager. “Carried interest,” incentive fees and high executive compensation are hot topics, with investors requesting fairness. Politicians are launching attacks on private equity tax breaks, raising the prospect that capital gains be treated as ordinary income. The amount of job loss
has been called into question as creative destruction and re-invention of portfolio companies occur. Investors have had to deal with the lack of transparency on deal making, which makes it difficult to assess performance. The old way of using debt to buy companies and take them private with the expectation of resell, otherwise known as financial engineering, is out of fashion. Making operational improvements such as process improvement, restructuring and outsourcing, or reducing cost, seem to be commoditized across the industry. However, pension plans, endowments and insurers continue to show faith as they invest with private equity firms. Private equity firms seem to be reciprocating the faith as they re-invent themselves. Case in point – to deal with national issues of debt and control, buyout shops in China, India and Indonesia have modified their traditional investment approach by taking minority ownership in growth companies. Private equity firms have shown that they can create and sustain value over time. They have accomplished this objective by being agile and efficient, with a laser focus on the mission by having the right members of management, systematically increasing top-line organic growth, reducing cost, using a sector-specific focus, selecting appropriate targets and managing deal size. Private equity does play an important role in markets. It should not simply be an “asset class” and it should not have a primary mission of creating jobs. Private equity is about providing a solution to companies that will help them gain a competitive advantage. With tax codes and incentive pay under attack, private equity must provide sustainable value to the next “buyer” to create value for investors. This will be an important development for the broader market. 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 firstname.lastname@example.org.
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Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor
Required Audit Firm Rotation
For years, mandatory audit firm rotation has been proposed by numerous reformers as an idea for enhancing auditor independence. At its inception in 2002, the Public Company Accounting Oversight Board (PCAOB) proposed mandatory audit firm rotation for audits of public companies every 10 years. The idea was eventually scrapped in favor of mandatory audit partner rotation. Subsequent audit practice reforms, including the limitation of non-audit services, improved the perception of auditor independence and the reliability of financial statements. However, results of recent PCAOB investigations have caused the idea of firm rotation to re-surface. In August 2011, they issued a concept release (CR) statement that emphasizes the importance of auditor independence, as well as the mutual agreement among constituent groups for reliable financial statement audits. According to the CR, PCAOB continues to find “failures” in audits of some of the largest companies. While the term “failure” does not involve failure to detect financial statement misstatements, there are indications that in some cases, auditors have pushed the limits of the underlying auditorclient relationship, presenting themselves as a member of the client’s team, or a partner “supporting and helping [the issuer] achieve its goals.” Auditors appeared to be walking a fine line between their dual roles of independent examiner and business advisor. In PCAOB’s words: [The audit firm] rotation requirement would aim directly at the basic conflict that, while inherent in the Securities Act of 1933, too often proves difficult for auditors to overcome. By ending a firm’s ability to turn each new engagement into a long-term income stream, mandatory firm rotation could fundamentally change the firm’s relationship with its audit client and might,
as a result, significantly enhance the auditor’s ability to serve as an independent gatekeeper. The CR describes PCAOB’s view in detail and seeks the opinions of accounting and auditing professionals, primarily concerning the advantages and disadvantages of mandatory audit firm rotation. As of January 2012, more than 600 comment letters have been issued, almost unanimously in opposition to mandatory firm rotation, for three primary reasons: (1) increased cost for clients; (2) lack of client familiarity; and (3) decreased audit quality. Companies and auditors agree that first-year audit engagements are typically the most costly and inefficient, requiring more test work. On initial audits, auditors are unfamiliar with client day-to-day operations, and may not have a full understanding of the client’s business model and long-term goals, making it difficult to identify possible areas of weakness and misstatement. Additionally, on initial audit engagements, employees of the client often spend less time working and more time helping auditors get the information they need. Furthermore, because audit firms have begun to specialize in certain industries, large multinational companies find it difficult to find multiple auditors qualified to audit their operations and specific financial statement issues. As auditors continue to work with clients, they obtain a better understanding of the business, and auditors can better protect the investor by scrutinizing likely areas of misstatement. Additionally, the client’s
ability to provide the auditor with accurate reports and documentation increases over the client and auditor relationship. Comment letters to the CR have suggested numerous substitute measures for increasing auditor independence without going to the more extreme measure of mandatory firm rotation. These methods include: • increased disclosure to shareholders regarding independent accountants; • additional reporting for firms auditing over 100 public companies; • lead engagement partner and upper management evaluation and increased rotation; • standardized communication between the audit committee and independent auditors, reporting on methods used to promote professional skepticism and objectivity; and • mandatory audit rotation where auditor independence is proven to be jeopardized. The European Commission recently proposed a similar initiative. It includes mandatory audit firm rotation, the use of joint audit arrangements in certain circumstances, a complete ban on nonaudit services performed by the auditor, the appointment of public auditors, and restructuring of audit firm ownership to allow more entrants in the market. If approved, accounting firms would be required to rotate European audit clients every six years. This would create challenges for audits of multinational firms using one auditor across all locations. For an update and opinion on the issue of auditor rotation from TSCPA Executive Director/CEO John Sharbaugh, CAE, please see his blog post from April 02, 2012, at www.thesharblog.com. n Sources: PCAOB Concept Release-Docket 037; EU proposal; comment letters from PwC, KPMG, EY, and Deloitte; PCAOB Public meeting announcement; Wall Street Journal article, “One Cure for Accounting Shenanigans.”
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
The Broken Federal Budget Process There is no doubt that for the next six months, we are going to be inundated with proposals and platforms from various politicians and political parties about how best for the federal government to raise and spend what is now about $3.8 trillion a year. And while a legal framework is in place for determining how the funds should be raised and allocated, the process is outdated, ineffective and sometimes ignored altogether, contributing in no small part to the fiscal situation our nation finds itself in today. Yet it’s doubtful that reform of the federal budgeting process will enter the national conversation between now and November. Why is understanding the federal budget process important? In general, we are all stakeholders. As taxpayers, we fund the federal government through the taxes we pay, but few individuals understand how their money is spent, what governance mechanisms are in place, and what level of accountability ensures that the system is working the way it’s supposed to work. As experts in accounting and budgeting, not to mention key players in the revenue side of the equation, CPAs can be part of the conversation, lending our skills and expertise to help identify a better path forward. There is clearly a problem and we have an opportunity to contribute to the solution.
THE FEDERAL BUDGET PROCESS As with any enterprise, the federal government’s budgeting cycle is an annual process. While the Constitution assigns the power of the purse to Congress, the president actually makes the first move when he submits his budget request to Congress each year in early February for the fiscal year beginning Oct. 1. The president’s budget represents his vision for the country and reflects input from all federal agencies on federal programs. It serves as an important benchmark against which Congressional legislation will be
measured, and is supposed to quantify discretionary spending measures, tax revenues, resulting deficits and relative priorities. The president’s budget may also include proposed changes to the tax code, as well as entitlement programs. Once the president submits his budget request, both the House and Senate budget committees review the request, hold hearings and eventually draft their own budget resolutions, representing their own blueprints that then go to the floor of each chamber and ultimately to a conference committee to resolve any differences. The conference committee’s joint resolution would theoretically be passed by both houses, but does not go to the president at this point for his signature or veto. The joint budget resolution represents a high-level framework for subsequent decisions on spending and taxes. It contains revenue totals and total recommended changes, but does not provide details of specific proposals. Various appropriations subcommittees in each chamber then set the actual level of spending authority for all discretionary programs, abiding by the spending limits set in the budget resolution. The appropriations bills eventually work their way back up to the full appropriation committees, the full House and Senate, and ultimately to the president
who must sign each appropriations bill for it to become law. A veto would force Congress to overturn the veto with a 2/3 majority in each house or pass another bill to avoid a shutdown of the government.
IN REALITY… This budgetary process was developed and became law in 1974, designed to force all competing plans to be publicly disclosed and consistently evaluated. The budget is calculated on the cash basis of accounting, and the budget law calls for Congress to pass the joint resolution by April 15 of each year and the appropriations bills to be signed by the president before the beginning of the fiscal year, Oct. 1. In reality, however, Congress often ignores these deadlines, forcing the enactment of continuing resolutions to provide temporary funding of government operations. These continuing resolutions are often negotiated at the 11th hour behind closed doors, no doubt influenced by lobbyists and special interest groups. The last time the budget process followed the script for all spending bills was 1994. In the past seven years, only four budget resolutions were approved by conference committees. The Senate has not passed a budget resolution since 2009, although it voted down the president’s proposed budget 97-0 in 2011 without offering an alternative. Further, only discretionary expenditures (about 1/3 of the budget) are subject to the legislative process; mandatory (entitlement) spending does not require an annual appropriation. And, Congress can also pass supplemental or emergency appropriations bills to deal with additional spending needs it identifies. Special appropriations paid for the wars in Iraq and Afghanistan and for dealing with natural disasters such as Hurricane Katrina. Such spending is exempt from the budgetary enforcement rules. So basically what we have is a budgetary
James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at email@example.com, or visit his blog at http://jamesfreeves.blogspot.com.
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process that is not transparent, is routinely out of compliance, covers only one-third of expenditures, and is subject to outside influences. Would anyone manage a business like this?
POTENTIAL SOLUTIONS One obvious place to begin in reforming the budget process is to include all revenue and spending in the annual budgeting process. While I am not suggesting here that entitlements be changed, they should be part of the process, transparent, and periodically reviewed. Another key principle would be to take a longer-term view, with a long-term budget and periodic reviews of how actual revenues and expenditures are tracking to the long-term plan, with material variances publicly reported. One benefit of
this approach would be the elimination of gimmicks that enable lawmakers to hide the true cost of new spending initiatives in the out years. Another recommendation is to revise the process to bring the president into the process earlier, perhaps by making the annual resolutions binding acts the president would sign into law, causing the negotiating to begin much earlier in the process with fewer 11th hour back room deals. Finally, several current accounting practices should be replaced with methods that more accurately reflect the real-world consequences of proposed legislation and policies. This would begin with a requirement that budgets reflect the expected cost of future liabilities; it would eliminate so-called baseline budgeting that
allows a reduced increase to be characterized as a cut; and it would replace static scoring of proposed tax legislation with more reality-based scoring that incorporates the true economic effect of tax law changes into the revenue estimates.
A NATIONAL DISCUSSION While it’s no secret that budget deficits are a looming problem, it’s less clear to most people that the budgeting process is a big part of the problem. While originally designed to ensure transparency and accountability, it is no longer effective. There needs to be a national discussion on budgetary process reform, and CPAs, as stakeholders and experts in accounting, budgeting and the tax law, should take a lead role in the conversation. n
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Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative
Chapter “Aces” Summer Competition
Volleyball team members from the El Paso Electric Company team. Top row: Fernie Hernandez, Jamal Thomas, Larry Hancock, and Daniel Hernandez. Kneeling: Jennifer Borden, CPA-El Paso, and Kirsten Hancock.
All work and no play makes Jane a dull CPA. To help its members achieve the work/life balance that keeps them at peak performance, the El Paso Chapter holds a summer picnic featuring a volleyball tournament. The event, first held in 2006 and now an annual activity, is a project of the chapter’s Young CPA group. Average attendance each year is approximately 100-150. Most are CPAs from public practice firms or large employers in the El Paso area, with their families, friends and colleagues. Comparing that number as a ratio of the chapter’s total membership, which is around 470, it’s easy to see that this activity is a winner. Daniel Gomez, current Young CPA Committee chairman says, “We like to host this event to help promote the profession and for the accounting community to get to know each other outside the workplace.” He smiles and adds, “It provides a little fun and friendly competition, as well as an alternative to our regular monthly chapter meeting since it’s in the summer.” A big tradition is the traveling trophy, which is engraved with the names of winning teams. The victors take great pride in holding the trophy for a year. Teams take the competition seriously enough to practice for the tournament! But it’s all in good fun and also offers camaraderie between
employers, as well as great team-building opportunities. The YCPA Committee members plan and organize, starting in April. Decisions are usually made as a group, after discussion at the monthly YCPA meetings. The first two considerations are date and location. Although there are many parks and outdoor facilities in the El Paso area, the ability to make a reservation for a group of this size is a must. That narrows the field considerably. Then, the usage fee is a factor in the selection. Explains 2011 event coordinator Eunice Diaz, “This year, we discovered that Fort Bliss has a park with volleyball courts – and the price is very reasonable.” She went on to say, “The park includes tables, chairs and shade, which drastically reduced some of the prior years’ facility expenses.” The next task is to develop information for postcard invitations, which the chapter mails to all members well in advance so that companies can decide if they want to participate and organize their teams
for the volleyball tournament. Members of the YCPA Committee make follow-up contact. In addition, an invitation asking for sponsorship is e-mailed to firm partners or company CFOs. Food and drinks for the event are catered, which requires volunteers from the YCPA Committee to scout a reliable provider that can serve a crowd. Meals range from burgers and hotdogs to tacos and other Mexican food. Each year, the planning committee decides on a theme and the volunteers arrange for a menu that’s fun, flavorful … and affordable. Another aspect of the preparations involves planning something special for the kids. In addition to a kids’ park, it’s a special treat to find a facility that has a swimming pool nearby. Young (and future) CPAs join together to make the event happen by each taking on specific tasks. For instance, a few might make the kids’ goodie bags. Two might get together to buy the soft drinks the night before. Someone else will work on invitations, someone will find caterers, etc. On-site, the event chair coordinates volunteers throughout the day and the YCPA members help out during the day’s activities, setting up and cleaning up before and after. After the event, all winners, volunteers and sponsors are named in the chapter newsletter. The event is funded by the chapter and is usually a break-even activity; however, this past year, sponsorships were received from a couple of firms to help offset anticipated expenses. After careful planning, any money left over from sponsorships is used for other YCPA projects. With the right mix of dedicated volunteers, employer support and fun participants, any chapter can hold a successful event like this! El Paso Chapter Executive Director Beverly Longoria contributed significantly to this article, as did Daniel Gomez, Eunice Diaz and Thania Gonzalez, CPA. n
Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at firstname.lastname@example.org.
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What CaN You ExpECt
FRoM TSCPA BESIDES
Newest Member Benefit Discount Sports Tickets for TSCPA Members Currently, TSCPA has arranged deals with the San Antonio Spurs, Houston Rockets and Dallas Mavericks. To check out the discounts, please visit the Member Benefits Marketplace at tscpa.org. Stay tuned for more ticket packages on the way.
Becker CPA Review Direct Bill Program Save $600 per staff member off the cost of the full four-part CPA review course www.beckercpa.com/tscpa
Texans Credit Union Full service financial institution 800-843-5295, www.texanscu.org
CPA Exam Review Discounts For a complete list of exam review discounts available, visit the Member Benefits Marketplace at tscpa.org.
FedEx Shipping Discounts on select FedEx shipping services Passcode: 4R9TJP. 1-800-MEMBERS
Personal and Career Development
Paychex Partner Program Payroll processing. 877-264-2615
Exclusive rates on audio and web conferencing services.1-800-636-2377
Cutting-Edge Professional Information and CPE
Discounts on credit card processing 888-227-9856
Discounts on magazine subscriptions 800-603-5602
Enhancing the Image of the CPA Profession
Recruiting New Members to the Profession Protecting the CPA Certificate You can expect special deals and discounts
Discounts on computer and technical products 888-289-6424
Online career center for accounting and finance professionals. tscpa.careerbank.com
Discounts on office supplies. 201-253-5215
FedEx Office Discounted pricing on most services 646-302-9242
Infinet, Inc. AntiSpam/AntiVirus Protection 214-446-0089
Accurate Forms & Supplies Discounts on computer supplies and tax forms 800-777-0072
Nova Information Systems Discounts on payment processing services 800-546-1831
Monroe Systems for Business Discounts on calculators and other supplies www.monroe-systems.com
Bank of America TSCPA credit card programs – Platinum MasterCard, CPA logo and other benefits. 800-932-2775
Discounts on professional framing of all certificates. 800-677-3726
Marsh Affinity Group Services TSCPA Insurance Trust offering a variety of insurance plans, including TSCPA-sponsored professional liability insurance. 800-262-7689
Liberty Mutual Homeowners and auto insurance. ID number: 7026. 800-524-9400
AXA Equitable TSCPA Members’ Retirement Program – Members are waived $25 enrollment fee. 800-523-1125, www.axa-equitable.com/mrp
Hertz Discounts on car rentals - ID number: 1041643 800-654-2200, www.hertz.com
La Quinta Inns and Suites Ten percent off standard room rates. Discount code: TXSCPA. 800-531-5900, www.lq.com
Quest Membership Program Save 50 percent on your next hotel bill 800-STAY450
Please visit the Member Benefits Marketplace at tscpa.org for complete information and links to each of our Member Discount Programs.
Questions? Contact the Member Benefits Administrator at 1-800-428-0272 ext. 216 or email@example.com.
Spotlight on CPAs By Anne McDonald Davis, ABC
Tonight on 60 Minutes Dallas Chapter’s CPA of the Year Gives Interview to CBS
“If you’d looked at the financial statements of the major banks on Wall Street in the weeks leading up to the financial crisis of 2008, you wouldn’t have guessed that most of them were about to crumble and require a trillion-dollar bailout from taxpayers. It begs the question: Did the CEOs and their chief financial officers withhold critical information? … Tonight we take a look at Citigroup, beginning with a former vice president named Richard Bowen.” – CBS reporter Steve Kroft This past Christmas when the toughest issue facing many of us was how to tactfully spin the holiday family newsletter, Dick Bowen, CPADallas, was steeling himself as CBS aired the interview he had given to 60 Minutes about his experience as Citigroup’s business chief underwriter over correspondent mortgage operations. Only a few years
ago, Bowen was a highly successful career banker, proud of his track record and accomplishments; he could hardly have envisioned sitting in a network studio and saying what he felt ethically obligated to say for that Dec. 4 broadcast. He didn’t even start out to be a CPA.
ONCE UPON A TIME IN THE WEST “I was born in Fort Worth, but grew up for a time in the west Texas oil fields,” explains Bowen. “We’re long-time Texans. My great granddaddy was J.D. Cooper,
who used to own the land where the University of Texas at Arlington sits today. A Confederate prisoner of war, he actually claimed to have used his pistol once to ‘shoot Yankees,’” he mentions ruefully, adding that he still owns the infamous pistol. Family reminiscences come vividly to Bowen these days. Recently, his widowed mother moved to a senior community from the Highland Park home where he spent his teenage years attending junior high and high school. Sifting through years of memories in the house with his sister was “a great experience, healing.” “My father has been gone 12 years now … he was an engineer in the oil industry,” Bowen muses, thinking back. “But me? I was going to be a navigator for B52s.” A Texas Tech alum and self-avowed “Red Raider,” Bowen had his heart set on an Air Force career; in the Tech ROTC, he was commander of a 425-cadet wing. Then on a ski trip after Air Force summer camp his senior year, he ripped up both knees. And not long after that, his father had a stroke. “My world came crashing down,” he sighs. So Bowen dropped out and left to be with his family. While home, the first nudge toward his future career came from family friend Weldon Howell, the venerable Highland Park banker who reigned for decades as chairman and CEO of Preston State Bank, once billed as “the largest independent bank in Texas” until, after tenaciously holding out, finally selling to a holding company in the early ’80s. Amid rethinking his future, the sidetracked cadet became a proof courier for Howell; then, after Bowen returned to Tech to complete his engineering degree, Howell introduced him to the president of Lubbock National Bank who employed Bowen as a collections officer. These were likely pivotal influences for the young man as he enrolled in the
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University of Texas to earn his MBA in finance, a course of study that formally introduced him to accounting. Bowen recalls planning to continue in banking – get his “ticket punched in finance” – then move on to industry where he could utilize his engineering background. But that’s not how it worked out. Instead, Bowen became a career executive banker, first at Republic National Bank in downtown Dallas in the mid1970s and then for many years as CFO for First National Bank of Oklahoma City. Along the way, he realized that he needed to become a certified public accountant to have the credibility and credentials to serve as a knowledgeable executive in his now chosen field. Over the years, his professional life expanded into software consulting for banking, directing credit administration for BankOne Texas, and serving as the division information officer over corporate applications for The Associates in Las Colinas, relying heavily on his accounting background. But it was not as heavily as he would rely on his accounting background after Citigroup purchased his company. Bowen recalls: “My father had become critically ill and I left The Associates before the actual merger to spend time with him. Then Citigroup hired me back as a chief underwriter within the mortgage operations. The plot started thickening pretty quickly after that.” In late 2005, Citigroup consolidated their diverse mortgage operations and soon after, Bowen was given “a huge, huge promotion” – business chief underwriter over correspondent mortgage operations. Bowen explains: “It became my responsibility to see that the $90 billion a year in mortgages that Citigroup purchased met our policy requirements. The policy requirements were the same as for mortgages Citigroup originated. In
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early 2006, as I’m trying to get my arms around these new responsibilities, I made a very significant discovery. I discovered that almost 60 percent of my largest channel did not meet our credit guidelines.” At first, Bowen couldn’t believe what he had found, thought it couldn’t possibly be true. To make matters worse, Citigroup was reselling those same mortgages to Fannie Mae, Freddie Mac and others – all with guarantees that the mortgages met Citigroup policy guidelines. “But many didn’t,” asserts Bowen. So Bowen notified his immediate superiors; no action was taken as far as he could tell. He requested an investigation by internal controls; no action was taken as far as he could tell. After warning his business unit repeatedly and watching, horrified, as the percentage of defective mortgages rose steadily and precipitously, he thought it only ethical and responsible to directly alert the Citigroup board of directors. Bowen says that’s when he sent what came to be known as “the Rubin e-mail,” on Nov. 3, 2007. After detailing the crisis to Robert Rubin, chairmen of the executive committee of the board of directors, as well as Citigroup’s CFO, chief risk officer and chief auditor, Bowen requested an outside investigation. Finally, action was taken; Bowen was forthwith relieved of his responsibilities.
LIFE AFTER BANKING AND 60 MINUTES Today, Bowen is a professor at the University of Texas at Dallas and is
hoping to find the time to get more involved with TSCPA and the Dallas Chapter. He enthuses, “It’s a terrific organization … they’re building up a business and industry group here in Dallas.” Yet he expresses quiet surprise at “the incredible honor” of being named “CPA of the Year” by the Society’s Dallas Chapter, as if the courage he displayed was routine. The overriding impression one gets of Bowen is that of an unblinking professional who was trying to do his job the way his job was supposed to be done, the kind of person who couldn’t conceive of any other course of action. Speaking of his family with affection, Bowen shares that he and his wife of 39 years, Debbie, are expecting their third grandchild in June. Two of his three sons, Kevin and Daniel, also became financial professionals while his oldest, Rich, is an executive chef at UT Permian Basin. Still a Boy Scout at heart, he says that while no longer as active in the organization as in the past, he remains an enthusiastic outdoorsman, even expressing a bit of nostalgia for his days as captain of the rifle team in high school. His approach to life is at once simple and difficult. “I always told my kids, ‘Keep your faith and be true to yourself,’” he smiles. This is the Dick Bowen who sat calmly before the camera, his voice steady and clear, and began his interview with reporter Steve Kroft by stating that “there are things that obviously went on in this crisis and decisions that were made that people need to be accountable for …” n
To view Bowen’s CBS interview, go to 60 Minutes – Prosecuting Wall Street at www.cbsnews.com/video/watch/?id=7390542n. Bowen also testified before the Financial Crisis Inquiry Commission. To view his C-SPAN televised testimony, go to www.c-spanvideo.org/program/id/222129.
Take Note TSCPA Thanks 2011-2012 Campus and Faculty Reps As part of TSCPA’s outreach to accounting students, the Society utilizes volunteer campus and faculty reps to maintain a presence at Texas colleges and universities. The campus and faculty rep program serves to promote TSCPA student membership, share information and gain valuable feedback from students. A special thanks goes to those students and faculty members who represented TSCPA so well throughout the year. Faculty Reps Emily Bellamy – LeTourneau University Karen Russom – Lone Star College System Dr. Bob Thomas – Midwestern State University DeShay Voss – Odessa College Karen L. Senecal – Southwestern Adventist University Treba Marsh – Stephen F. Austin State University Rabih Zeidan – Texas A&M University, Corpus Christi Ray Pfeiffer – Texas Christian University Roselyn E. Morris – Texas State University Kim Webb – Texas Wesleyan University Rob Walsh – University of Dallas Susan Rhame – University of Dallas Mattie C. Porter – University of Houston, Clear Lake Tiffany Mitchell – University of Mary Hardin-Baylor Allison McLeod – University of North Texas Carol Collinsworth – University of Texas at Brownsville Art Agulnek – University of Texas at Dallas Barbara W. Scofield – University of Texas of the Permian Basin Rod Elrod – University of the Incarnate Word Student Reps Tiffany Lam – Houston Baptist University Rogelio Cuevas – Our Lady of the Lake University Kathleen René Garza – Schreiner University Michael Denny – Southwestern Adventist University Courtney Schuetze – St. Mary’s University Margaret Stewart – Texas A&M University Amy D. Lisenbe – Texas A&M University, Central Texas Brittney L. Honeycutt – Texas A&M University, Corpus Christi Edgar Rodriguez – Texas A&M University, Kingsville Laura Kingsley – Texas A&M University, San Antonio Duc Nguyen – Texas Christian University Rachel Kiel – Texas Lutheran University Philippe LeBlanc – Trinity University Michael Wander – University of Houston Jerre Schoffstall – University of Houston, Clear Lake Thi Tra – University of Houston, Clear Lake Joseph Alan Hester – University of Houston, Downtown Anastasia Jenkins – University of Texas at Dallas Christabel Rocabado – University of Texas at San Antonio Hector Flores, Jr. – University of the Incarnate Word
TSCPA’s Young CPAs Conference This year’s Young CPAs Conference will be held on Friday, June 8, at the Westin La Cantera in San Antonio. The daylong event is designed for young CPAs, CPA candidates and accounting students. The conference will feature sessions on: • developing your sphere of influence, • cloud computing, • data mining, • motivating yourself and your employees, • a professional issues update, and • much more. For more information and to register, please go to TSCPA’s website at tscpa.org.
Practice Management Institute is Your Succession Planning Resource Succession planning is one of the most important practice management issues. TSCPA is here to help through the Practice Management Institute. Developed in partnership with the Succession Institute, LLC, the Practice Management Institute provides TSCPA members with 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 and utilize this resource for members only, please go to the CPE section of the TSCPA website at tscpa. org, scroll down and select Practice Management Institute CE.
Accountants Confidential Assistance Network If you know a Texas CPA, CPA candidate or accounting student who is dealing with alcohol, chemical dependency and/or mental health issues, there are resources available to help. TSCPA offers a peer assistance program, the Accountants Confidential Assistance Network (ACAN). This program provides a 24-hour hotline at 1-866-766-ACAN to help people who need assistance. You can also contact Craig Nauta at firstname.lastname@example.org. More information about the program is posted on TSCPA’s website. Please visit the site at https://www.tscpa.org/eweb/ DynamicPage.aspx?Webcode=RECacan to learn more.
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Volunteerism as a Path to Leadership Development By Michael Brown | CPA-Central Texas
“Volunteering with the Texas Society of CPAs was my executive training,” explained Steve Goodman, TSCPA’s 2008-09 chairman, to a group of Baylor University accounting students and TSCPA Central Texas Chapter members. I heard Steve recount how, as an employee of a company without a formal leadership training program, he took advantage of volunteer opportunities with TSCPA to learn the leadership and executive skills he uses today to lead a financial advisory firm. The words Steve spoke resonated with me as an employee of a local CPA firm, because my firm did not have a formal leadership training program either. I had recently begun volunteering with TSCPA and my local chapter, and I realized that volunteerism was my path to leadership development. Recognizing, cultivating and being a good steward of opportunity are important in your path of volunteerism and leadership development. My path began by saying “yes” to an opportunity to join a newly formed task force for TSCPA. By being a good steward of the opportunity, I recognized additional opportunities. First, TSCPA was expanding the number of board positions, primarily in an effort to bring younger members on the board. Being well positioned for this opportunity and expressing interest in participation, I was nominated to serve on the TSCPA board. Second, I cultivated the opportunity to join a committee relevant to my practice area through networking with people involved in this area. By consistently recognizing, cultivating, and being a good steward of opportunity, I have since served as chairman of a committee, on multiple task forces and committees, and on the Board of Directors of TSCPA. This year, I will join the Executive Board and additional committees. While volunteering helps the organization and the professional community, through participation, you can learn valuable skills such as networking; organizing, motivating and leading a group of people; delegating responsibilities; running a meeting; cultivating opportunity; and public speaking. You can learn a lot about leadership by watching great leaders lead. The observant can also learn from the mistakes of leaders and hope to not repeat them. As your responsibilities grow, you will be given more opportunities to use the leadership skills you have learned along the way. Youth is often correlated with inexperience, which has a generally negative connotation. I contend that our youth can be an asset in our organizations. I have found that when a young person displays ordinary leadership skills, you can be perceived as extraordinary – because of your youth. A young person can leverage this perception to create opportunities where you can truly develop into an extraordinary leader. Our firms, companies and professional organizations are all facing a succession problem. The leadership of these entities largely consists of members of the baby boom generation. As they begin to tap their watch and figure out when they can retire, they are realizing that simply walking away will leave a vacuum of leadership in their organizations. When the magnitude of the succession problem is realized, the leaders seek out and surround themselves with those who are younger and have the skills to successfully carry forward these organizations. Developing leadership skills solely for the purpose of personal growth is not the point. You must bring it home to your workplace and apply it. Lead from where you are. Help organize your co-workers and show the leaders that you have the ability to build consensus and lead from the middle. With leadership skills gained through volunteerism, you can recognize, cultivate and be a good steward of opportunity where you work. Seek out opportunities with TSCPA, your local chapter, AICPA, and other professional and civic organizations. You will learn the leadership skills that will serve you well in your volunteer efforts and in your professional endeavors.
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Notice of 2012 TSCPA Annual Meeting of Members and Board of Directors Meeting June 29-30, 2012 The 2012 TSCPA Annual Meeting of Members and Board of Directors Meeting will be held June 29-30, 2012, in Corpus Christi at the Omni Corpus Christi Hotel Bayfront Tower. The Omni Corpus Christi Hotel Bayfront Tower is a four-diamond hotel located in the downtown Marina District. It offers newly renovated rooms with views of the Corpus Christi bay. Situated along 131 miles of Texas coast, there are numerous choices for water sports, including sailing, swimming, snorkeling, and deep-sea fishing. The hotel is located just 15 minutes from Corpus Christi International Airport. Omni Corpus Christi Hotel Bayfront Tower 900 North Shoreline Blvd. Corpus Christi, Texas 78401 Phone: 361-887-1600 Fax: 361-887-6715 1-800-THE-OMNI Website: www.omnihotels.com/ FindAHotel/CorpusChristiBayfront. aspx Name of room block: Texas Society of Certified Public Accountants Room Rates: Bayfront Single: $169 Bayfront Double: $179 Room block cutoff date: Monday, June 4, 2012. (The room block may sell out before this date. Make your reservations early!) For more information and a schedule of events, please go to tscpa.org and search on “Annual Meeting.”
Creating a New Worldwide Designation to Meet the Challenges of Global Business A Q&A with Barry C. Melancon, CPA, CGMA and Charles Tilley, FCMA, CGMA A new designation, the Chartered Global Management Accountant (CGMA), was launched around the world through a joint venture of AICPA and the Chartered Institute of Management Accountants (CIMA). The CGMA is a new global designation that recognizes CPAs working in a range of management accounting roles in businesses, industries and governments worldwide. Those with the new designation play a critical role in helping organizations of all sizes achieve sustainable business success. Management accountants, in today’s ever-more complex business environment, have greatly expanded their roles as business partners and must have the ability to synthesize and interpret a wide range of non-financial and financial information. The CGMA signals to employers that the designee has built upon core financial expertise and business acumen and is committed to continually developing his/her management accounting competencies. CGMA designation-holders have access to a new resourcerich website, www.cgma.org. This website features a global online community of peers, thought leadership papers, practical business tools, CGMA Magazine and Newsletter and other resources to help stay up-todate on important professional issues. AICPA President and CEO Barry Melancon, CPA, CGMA and CIMA chief executive Charles Tilley, FCMA, CGMA – a former London partner of KPMG and Group Finance Director of investment banks Hambros PLC and Granville Baird – discuss the new designation, its development and the role of management accountants in the following interview. Why have AICPA and CIMA created the CGMA designation? [Barry C. Melancon]: Combining AICPA’s expertise with CIMA’s more than 90 years of management accounting leadership is an effective way to create value for our members. For our 140,000plus members who work in business, industry and government, the CGMA will complement their U.S. CPA and will elevate their value to their employers. The CGMA is poised to be the global designation for management accounting, and this joint venture with CIMA further enhances the position of the U.S. CPA as a worldwide leader. [Charles Tilley]: We are here to help people and organizations be successful by creating a global standard for management accountants. At the same time, we’re bringing our resources together – our intellectual property and our people – and I’m quite convinced that one plus one will equal more than two. What we’re doing is bringing together two large communities of people, CIMA’s 183,000 members and students and AICPA’s collective 370,000 membership. Together, we are over half a million professionals focused upon driving successful organizations.
AICPA members are particularly interested in AICPA’s advocacy efforts. Can you talk about how advocacy plays into the AICPACIMA joint venture? [Melancon]: AICPA and the state CPA societies have been extraordinarily effective in influencing legislation on both the state and federal levels. We want to extend our impact even further. Increasingly, international rule-makers and regulators have an indirect impact on the U.S. The U.S. CPA will benefit by the joint venture leveraging AICPA’s and CIMA’s combined global footprint to advocate for, and on behalf of, the U.S. CPA anywhere in the world, as well as key public interest issues. By combining the world’s two leading accountancy organizations, we will have a very important voice on the global stage to proactively address the critical issues for our profession and the public. What would you say to both CIMA members and CPAs in management accounting about why they should pursue the CGMA designation? [Tilley]: When you have the CGMA designation, you are telling your employer and others that you understand the language of business from multiple perspectives and know how to connect the dots like no other financial professional. For those of us elsewhere in the accounting world, we know that as a U.S. CPA you will have committed to developing and maintaining your skills, ethical standards and integrity. The CGMA will expand these to include the additional and specialized skills and standards you need in business, industry and government and will show that you are an experienced business partner. [Melancon]: We envision the CGMA as a new type of designation that remains focused on a constantly changing world. Demographers tell us that young professionals, particularly in developed economies, will have multiple careers and different opportunities in their lives. For some, it will be physical relocation and for others changes in job classification. For our young professionals now in business, industry or government, or who start their career in public practice, this is a designation that will evolve with them throughout their professional lives, creating value for members and their employers and, ultimately, creating value for the people who use the services CGMAs provide. For CPAs in business and industry who for years have asked for additional support in underscoring their value and contribution in the business world, this designation and its associated resources is a long-sought solution. How will businesses benefit from the CGMA? [Tilley]: These days, it doesn’t matter if yours is the smallest organization in the world, you can still be selling anywhere else in the world through the Internet. As a result, global standards and principles are really important. Through the CGMA, we’re offering global recognition of a standard of management accounting, a
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standard of our members’ skills and expertise. A number of CIMA case studies make it clear that this is what employers want. For example, Shell wants a global standard so that when they move their management accountants around the world, they know those people have the same skills and standards. The CGMA proposition includes a virtual network where people can share problems and issues. The best people to answer your problems are people who have done the same thing and have managed to crack that particular problem. [Melancon]: The role of the management accountant is frequently underestimated; it is much more than a simple accounting commodity. Management accountants can be found at every level of an organization and are at the center of a forward-looking discipline combining both accounting and business expertise. The CGMA is a single designation that benefits large and small, public and private employers across the globe. Business owners and decision makers will confidently recognize the CPA-CGMA designation-holder as a professional who can be trusted to guide critical business decisions and drive strong, sustainable performance anywhere in the world. What is your vision of the future and what does success look like? [Melancon]: We say the CPA is the trusted business advisor and 50 percent of the CPA population works in business, industry and government. Some of them are in the C-suite, but even if they’re not, a very important aspect of their skill set is being at the decision-making table. We see a group of people who bring trusted information and thinking into that process. The future is you – the trusted business strategist – being recognized for your ability to critically look at opportunities, to think differently and broadly, and bringing the discipline, ethics, commitment and competencies to that decision-making table. [Tilley]: Success means widespread recognition of the value of management accounting. So many organizations have made poor decisions, mainly through a lack of information, analysis or proper thought. Management accounting ensures that external and internal data are complete and properly analyzed, ensuring that management and the boards can make decisions based upon a complete set of information. We envision more organizations, both in the private and in the public sector, recognizing the value of management accounting, what it brings to the quality of their decision-making and of their governance and oversight. As a benefit of the CGMA, the world will have better-run organizations in both the private and the public sector. The CGMA is available to qualifying AICPA members. Members of TSCPA who are also members of AICPA can save $50 off the annual CGMA registration fee. For more information, visit www.cgma.org.
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Membership Suspensions The following people have had their membership in TSCPA suspended by the Executive Board for noncompliance with TSCPA Bylaws Article III, Section (4A)(1) for non-compliance with the Texas State Board of Public Accountancy’s continuing professional education requirements. Suspended for a period of three years – • Anne B. Alexander, CPA, Dallas; • Jonathan E. Daniel, CPA, Dallas; • Gary W. King, CPA, Fort Worth; • Robert J. Rockett, CPA, Fort Worth.
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. • Wiley D. Carmichael, Houston; • Warren A. Krute, Nederland.
What’s New on the TSCPA Website – Converting to a New System TSCPA implemented Avectra’s netFORUM, a new association management system (AMS) and is converting the website to integrate with the new database. The system was implemented to give TSCPA the ability and resources to further enhance member services. Unfortunately, some of the resources offered on our previous system are not yet available on the new one. We’ll continue to keep you informed through updates in TSCPA’s weekly electronic Viewpoint newsletter. We thank you for your patience while we work to improve our services to Texas CPAs.
Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation
Primaries and Prospects The primary elections are upon us, finally! Because of the redistricting controversy, the Texas primary elections were postponed from April 3 to May 29, 2012. Much of the consternation over that postponement was about Texas’ influence on the Republican presidential primary outcome. Since the mainstream press has written that story ad nauseam, let’s now focus on the Texas scene.
The 2012 Texas elections do not include any statewide races. Being independent types, Texans decided to hold their statewide office elections in nonpresidential election years, presumably to avoid any undue foreign influence on the great state of Texas. That makes congressional and state legislative races the whole story in Texas. Yes, judges and justices are elected this year, but no one seems to take much interest in those races under any circumstance, so we won’t, either. The controversy over redistricting is the cause of the delayed elections, but just because we are voting May 29 does not mean that controversy is over. The district maps being used for the 2012 elections were determined by the San Antonio Federal District Court and they are the maps for 2012 only. The redistricting controversy continues in the Washington, DC, Federal Court, and perhaps the U.S. Supreme Court before it’s all over. The DC court could accept the San Antonio court’s maps or make new ones. I’m betting on the latter. In many districts, the election is over after the primary. To the extent possible, the legislature draws districts to protect incumbents and especially majority party incumbents. That means the party opposing an incumbent has little chance of winning in the general election. The 36 congressional district maps prescribed by the San Antonio court resulted in 24 congressional districts that include more than 55 percent Republican voters, one that has 50-55 percent Republican voters and 11 districts that have over 55 percent Democratic voters. If voters perform as in the past, the Republicans will have 25 winning candidates and the Democrats 11. Sometimes incumbency can overcome the gerrymandering, or a terrible or outstanding candidate can beat the odds, but not very often. The current congressional primary includes seven districts where only one party (six Republican and one Democrat)
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is fielding a candidate. Surprisingly, despite the overwhelming odds, all others have opposing party candidates – and some have a lot of candidates. Redistricting usually brings out a lot of new faces, especially in those districts with no incumbents. But just to prove hope springs eternal, there are five congressional districts (all without incumbents) that have more than 10 candidates on the combined primary ballots (not counting Libertarians or Green Party hopefuls): • CD 33 (Dallas and Tarrant counties) with 69 percent Democratic voters has 15 candidates (11 D vs. 4 R); • CD 14 (Brazoria, Galveston and Jefferson counties) with 57 percent Republican voters has 14 candidates (12 R vs. 2 D); • CD 34 (includes or touches 10 counties stretching from Gonzales in the north to Cameron in the south) with 59 percent Democratic voters has 13 candidates (7 D vs. 6 R); • CD 36 (includes all or parts of nine counties in far southeast Texas) with 68 percent Republican voters has 12 candidates (11 R vs. 1 D); and • CD 25 (touches 11 counties in central Texas) with 59 percent Republican voters has 11 candidates (10 R vs. 1 D). There are six districts that have only two candidates in the primary, so that still leaves 14 other districts that have multiple primary candidates. Texas has four new congressional seats as a result of the 2010 Census and the current map looks like those two seats will be split between the two parties. The dust will clear May 29. What does all this mean for the congressional candidates? Three incumbents (Flores, Neugebauer and Gene Green) and one newcomer (Castro) have no opposition – they have already won before any votes are counted. Texas Weekly says seven others are “cruising toward victory” (Gohmert, Poe, Hensarling, Al
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Green, Lee, Burgess and Sessions). While incumbents are always favored, with so many multiple candidate primaries, some could face runoff elections and some could even be defeated. The new state Senate districts are pretty much a yawner as far as change is concerned. The maps would dictate 20 Republican and 11 Democratic senators just as the old maps. The current Senate makeup of 19 Rs and 12 Ds is because Democratic Sen. Wendy Davis (Fort Worth) won election in a Republican district, and she must do so again to be re-elected. That doesn’t mean we won’t have some new senators. Four incumbents are not running and Davis will have a well-funded Republican challenger. Five incumbents have primary challengers and one, Sen. Jeff Wentworth (D-San Antonio) has both a primary and general election opponent. But any changes will be modest; nine incumbent senators have no major party opponents; congratulations to Sens. Carona, Deuell, Ellis, Fraser, Hegar, Huffman, Nelson, Rodriguez and Van de Putte. Texas Weekly picked Sens. Eltife, Gallegos, Birdwell and West as “cruising toward victory” despite having opposition. Absent upsets, there will be only four new senators and they will all be from the same party as their predecessors. It’s in the state House of Representatives that predictions are less certain. There has been major change to many House districts. Just based on the demographics, the newly elected House is projected to be between 90-96 Republicans and 54-60 Democrats (the balance now is 102-49 in favor of Republicans). According to Texas Weekly, “the court’s maps include 97 districts in which statewide Republicans, on average, beat their Democratic opponents in the 2008 and 2010 elections.” Some say the court’s maps are better for Republicans than the maps suggested by Attorney General Greg Abbott in his last submission to the court.
Everyone was surprised that the Republicans took a 101-seat majority in the last election. (They now have 102 because of a legislator party switch.) Many incumbent Democrats and a number of incumbent Republicans were defeated by newcomers. With new districts, more change is likely, but it will be a challenge for the Republicans to continue their two-thirds majority. Here’s the breakdown on the House primary election: • 28 Republicans and 25 Democrats have no major party opponents at all; • 30 incumbents are not seeking reelection; • 44 incumbents have primary election opposition; • 31 incumbents have general election opposition; • seven incumbents have both primary and general election opposition; • two Republican incumbents are paired, running against one another in the same district; • 68 Republicans have no Democratic opponent; • 36 Democrats have no Republican opponent; and • there are 47 out of 150 races contested between Democrats and Republicans. Under the new maps, there are four districts which have majority Democratic voters represented by Republicans and one district with majority Republican voters represented by a Democrat. Before 2010, there were several Democrats consistently re-elected in majority Republican districts. Now most of these anomalies are the reverse and occurred as a result of the Republican sweep in 2010. Pundits don’t think that can happen again with this being a presidential election year. If Texas Republicans are not happy with the party’s presidential nominee, the theory is that Democrats could recapture some of these seats and continued on next page
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perhaps encroach on other potentially swing districts. Some former House members must think this election will be different, because they are running again to try to regain their lost seats. There are eight swing districts, those with less than 55 percent of voters committed to one party, but only two of those districts are currently held by Republicans, so Democrats would have to do better than win in the swing districts to substantially improve their state House numbers beyond the demographic predictions. If the 2012 elections mirror the 2010 elections, the Republicans could well continue their 100-plus seat dominance over the Democrats. While few pundits predict that will happen, no pundits predicted it would happen in 2010 either. Based on polls and word of mouth, it should be another banner year for Republicans in Texas; at least the election is theirs to lose. The rush by Republican candidates, including State Comptroller Susan Combs, who is not even up for re-election this year, to endorse former presidential candidate Rick Santorum would lead one to believe that at least these candidates believe that conservative Republican voters are alive and well in Texas. Regardless of the winners or losers, the next Texas Legislature will be one of the least experienced we have seen. Between incumbents bowing out, the ones who will be defeated and the high turnover of legislators during the last election, freshmen and sophomore legislators will make up 50 percent of the House, and as many as one-third could be firsttimers. Those not returning include seven experienced committee chairs or vicechairs. Even in the Senate, four committee chairs will not return even if all incumbents win. Texas evidently doesn’t need term limits to have legislative turnover.
FRANCHISE TAX UPDATE It’s constitutional. I reported in my last article that the Texas Supreme Court upheld the constitutionality of the margin tax, ruling that it was not a tax on a partner’s share of income and did not violate the so-called Bullock Amendment
requiring a referendum before a Texas personal income tax can be enacted. There were other challenges to the tax in that case which were referred to the Travis County District Court, but the Bullock Amendment challenge was settled. A second case was pending before the Supreme Court at the time, alleging some additional constitutional violations, and that suit has been dismissed by the court on the grounds that the taxpayers did not meet the legal requirements to file the lawsuit in the first place because “petitioners did not pay their taxes under protest or requested a refund from the comptroller, statutory prerequisites to taxpayer suits… .” When the court ruled that an income tax on partnerships and other business entities did not violate the Bullock Amendment, the way was opened for a true Texas business income tax, giving the Legislature another revenue raising tool. Before the Supreme Court ruling, there was lots of talk about revising the franchise tax to eliminate the tax on margin and establish an income tax. Despite the ruling that seemed to pave the way, as the economy improves and state revenues increase, there seems to be a growing reluctance to attempt a full-blown franchise tax revision. Speaker Joe Straus (R-San Antonio) included an interim committee charge to the House Ways and Means committee to “evaluate the franchise [margins] tax and determine whether 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.” Straus also let it be known that he had a personal interest in that evaluation. House Ways and Means Chairman Harvey Hilderbran (R-Kerrville) initially indicated he might be in favor of repealing and replacing the margin tax. During the last session, vice chairman of Ways and Means Committee, CPA Rep. John Otto (R-Dayton), also voiced support for a business income tax to replace the margin tax. Recently, both Hilderbran and Otto have expressed some reluctance to attempt what would undoubtedly be a difficult and controversial task. Hilderbran, as reported by the Austin American-Statesman,
indicated he now favors “tweaking the tax to correct discrepancies between similar businesses.” In that same article, the paper reported, “Otto said he still hasn’t seen a good model of how the tax should be changed, and he questioned whether Gov. Rick Perry, who backed the creation of the margins tax in 2006, would consider approving a complete overhaul.” So far, the Ways and Means Committee has held no hearings on the franchise tax, but at a public hearing of the House Business and Commerce committee, testimony was taken supporting replacing the margin tax with a tax on business income. One small business owner testified that we need a tax “so owners don’t owe taxes unless they make a profit.” A representative of the National Federation of Independent Business testified that a survey of their membership showed that 82 percent favor a tax on profits rather than proceeds. So is it too early to start speculating on what might replace the margin tax? Perhaps, but here are some prospects, old ideas warmed over, thanks to the Texas Taxpayers and Research Association: • 4.5 percent (or higher) tax on net income; a higher rate may be necessary to meet state revenue targets; • 0.23 to 0.35 percent tax on gross revenue; the lower rate would be revenue neutral and the higher rate would meet original revenue targets; • 1.95 percent tax on net income plus compensation in excess of $30,000 per employee; • 1.25 percent tax on first $40,000 of wages or 1.15 percent on the first $90,000 of wages; and • increased sales tax of 1.25 percent. If you have any better ideas, be sure and let us hear from you. We will see that legislators get the suggestions, with or without attribution.
THE 2013 LEGISLATIVE SESSION It’s still months away, but pundits are already speculating on the major issues facing the 83rd Texas Legislature, which will convene next January. Six months ago, everyone was certain the budget issues
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of 2011 would repeat themselves in 2013, but the faster than expected economic recovery in Texas with better than expected state revenues is making legislators more optimistic about the state’s financial picture. Maybe it’s just wishful thinking, but legislators don’t like to make hard decisions as long as there are other options. Speaking before a group of Texas manufacturers, Straus indicated he hoped the expanding economy would eliminate the need for any new taxes in Texas. “I’d prefer to grow the economy rather than grow government,” Straus said. He suggested the next legislative session will continue to focus on growing the economy along with addressing improving public and higher education, financing water and transportation projects. Sounds like a change in focus from his “you can’t cut your way to growth” comment of a few months ago. Even if the economy improves, the Legislature could be facing significant budget issues, according to some observers, with some even projecting another $15 billion budget cut for the next biennium. Those who believe in fiscal restraint are already talking about not invading the socalled Rainy Day fund, which could total over $5 billion. Maybe we can just replay the 2011 tapes and all stay home. School funding lawsuits once again abound in Texas, which could be a significant factor either affecting the next regular legislative session or perhaps dictate a special session. There have already been pleas for the governor to call a special session on school funding even this year, but historically, the Legislature never seriously addresses the issue until the Supreme Court tells them to do so. Some of those involved in the suits suggest it may take until 2014 or 2015 before all the trials wind their way to a final Supreme Court judgment. There are two new wrinkles in the current spate of suits. One group of plaintiffs has asked for judicial supervision of any solution approved by the court. That means they want a court to monitor any legislative solutions to be sure they are
effective. Judicial review of a legislative body would be about as controversial as it gets. Is that even legal? I can picture another constitutional challenge. Another plaintiff has asked the court to rule not only on fairness and equity, but also on efficiency. Is the school finance system not only fair and equitable, but is it efficient? Evidently, the Constitution says it must be. Now that’s a hoot! We should really be careful what we put in our Constitution. Watch the governor’s budget instructions to state agencies this summer for a clue on the next session’s impending gloom or glee. You can expect the electricity generation shortage in Texas to be a hot topic in the 2013 session. With more rolling blackouts expected this summer, constituents will likely insist that legislators do something about it. And let’s not forget the federal health care law that must be dealt with before 2014. We will probably know by the November general election whether there may be any reprieve on that front. I mention all these impending subjects not to give you a headache, but just as a reminder of what these candidates you are about to vote for have to face. Too bad the winners were already determined when the district lines were drawn. There’s no accountability anymore; maybe they should just put CPAs in charge of everything. Speaking of CPAs, at this time there is only one known CPA issue on the legislative agenda (not counting tax issues). The law making the Texas State Board of Public Accountancy (TSBPA) a self-directed, semi-independent (SDSI) agency is being reviewed by the Sunset Commission. This law removes the board from the appropriations process and allows it to function with funding from license and examination fees as long as it pays $700,000 into the state’s general fund each year. The law must be renewed during the 2013 session to keep the status quo. Since the TSBPA legislation was passed, a number of other state agencies have joined the SDSI party, but the legislation for most of those agencies is not yet subject to sunset review. n
Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at email@example.com.
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THE 2011-2012 YEAR IN REVIEW BY DELYNN DEAKINS | TODAY’S CPA MANAGING EDITOR • Professional Competency – provide members with access to trusted resources and continuing professional education to maintain their professional competency; support members in the delivery of quality services to their employers or clients; • Advocacy – serve the professional interests of TSCPA members by being the advocate for Texas CPAs to public policy makers, regulators, and standards-setters; promote the profession to the public at large; • Operational Excellence – operate TSCPA in an effective and efficient manner by assuring that the appropriate level of resources, technology, and volunteer leadership is available to deliver excellent member service; • Recruitment and Retention – attract and retain competent individuals to become CPAs by promoting the career opportunities that the CPA profession provides; retain existing members and recruit all eligible candidates to TSCPA by promoting the benefits of membership. In the pages ahead, we’ll cover the activities, programs and initiatives that TSCPA leadership, members and staff used this year to support achievement of the strategic plan objectives.
RISING STARS PROGRAM TSCPA 2011-2012 CHAIRMAN DONNA WESLING, CPA-AUSTIN.
As we approach the end of the fiscal year at TSCPA, we take a look back at the highlights of 2011-2012. The year began with a new strategic plan. TSCPA’s leadership had completed the new plan during the 2010-2011 year to cover a threeyear period. To develop the plan, input was received from TSCPA’s chapter presidents, presidents-elect and executive directors, Executive Board, Board of Directors, Strategic Planning Committee, and staff directors. A survey was used to poll a sample of members about the most significant problems they were facing in their day-to-day work environment. The feedback was incorporated into the new plan, which includes the following objectives:
Launched in the fall of 2011, TSCPA’s Rising Stars Program was designed to recognize the innovation, leadership skills, professional dedication, and community commitment of CPA members who are 40 years and younger based on their contributions to TSCPA, the accounting profession and/or their communities. Nominations were received from people around the state. A task force made up of TSCPA Executive Board members selected 12 up and comers who made up the inaugural list of rising stars. The 2012 Rising Stars are: Chip Adami, CPA-Dallas; Katy Avenson, CPA-Austin; Michael L. Brown, CPA-Central Texas; Gina G. DeHoyos, CPA-East Texas; Michelle R. Downs, CPA-Central Texas; Neely Duncan, CPA-Dallas; Sheila A. Enriquez, CPA-Houston; Charlotte M. Jungen, CPA-Southeast Texas; Christi A. Mondrik, CPA-Austin; Richard W. Orellana, CPA-Houston; Joel Perez, Jr., CPA-San Antonio; and Benjamin C. Simiskey, CPA-Houston. They were highlighted in the March/ April 2012 issue of Today’s CPA magazine.
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UPDATE ON LEGISLATIVE AND REGULATORY AREA An issue of interest to TSCPA and its members is the Texas margin tax. In August, 2011, a petition was filed by Allcat Claims Service in the Texas Supreme Court challenging the constitutionality of the margin tax. The Texas Constitution requires that any income tax imposed on natural persons, “including a person’s share of partnership and unincorporated association income,” must be approved by Texas voters. If the margin tax is an income tax, this step was not taken. On Nov. 28, 2011, the Supreme Court ruled that the margin tax is a constitutional tax, indicating that a tax on business partnerships and associations was not a tax on the personal income of the partners and, therefore, did not require approval by voters. The ruling not only eliminated the constitutional uncertainty over the margin tax, but also opened the door to legislators to levy a true business income tax. Another constitutional challenge to the margin tax was also filed in the Texas Supreme Court by Nestle USA, Inc., Switchplace, LLC and NSBMA LP (Nestle). They claimed that the margin tax violates the Equal and Uniform Clause of the Texas Constitution, as well as the Equal Protection Clause, the Due Process Clause and the Commerce Clause of the United States Constitution. On Feb. 10, 2012, the Supreme Court dismissed the challenge for lack of jurisdiction. Unlike the Allcat challenge, the court did not refer the issue to a district court, but instead ruled that the petitioners did not have the right to sue for franchise tax refunds because “petitioners did not pay their taxes under protest or request a refund from the Comptroller, statutory prerequisites to taxpayer suits…” Allcat had evidently filed under protest, which allowed that case to be referred to a district court. The court explained that suits for tax refunds are only allowed under specific statutes; the petitioners did not meet the requirements of those statutes. This appears to end Nestle’s constitutional challenge to the tax. You can read the nine-page opinion on the Texas Supreme Court website. While the Supreme Court action makes it clear that a true business income tax, including taxing incomes of partnerships, is constitutional, it is not clear that current legislators are interested in the painful process of a complete franchise tax overhaul. Initially, some legislators were advocating the overhaul, but as Texas tax revenues have continued to grow faster than expectations, the outcry for major change has abated. The House Ways and Means committee, which has a charge to investigate the tax before the 2013 session, has yet to hold a hearing on the issue. TSCPA will continue to monitor developments that relate to the tax and provide appropriate input on behalf of members. The delayed primary elections caused by the redistricting controversy meant delayed action on behalf of TSCPA’s Political Action Committee. What is normally done in January had to be done in late March this year. The PAC’s Steering Committee actions were further complicated by redistricting itself. With redrawn districts, there are more new candidates than normal with some primary elections drawing as many as 15 candidates for a single district. Despite all the changes and the likely arrival of many new legislators, based on the demographics of the new districts, the Republicans will still likely control the Texas legislature by a substantial margin.
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The state comptroller’s office continues to offer new rules, and the State Taxation Committee reviews and makes comments on those rules where appropriate. The comptroller’s office has also asked TSCPA for input on franchise tax e-filing procedures. TSCPA members continue to serve on the Texas State Board of Public Accountancy. During this year, Governor Perry appointed TSCPA member Carlos Barrera, CPA-Rio Grande Valley, as the board’s presiding officer, and appointed TSCPA members J. Coalter Baker, CPA-Austin, John Broaddus, CPA-El Paso, and Rocky Duckworth, CPA-Houston, to the board for six-year terms. Twentyfive other TSCPA members serve as volunteers on various board committees.
FEDERAL TAX POLICY COMMITTEE ACTIVITIES TSCPA’s Federal Tax Policy Committee (FTP) continued its work serving as a voice to represent Texas CPAs to the U.S. Congress, Department of the Treasury and the IRS on U.S. tax matters. The committee responds to actual and proposed federal tax legislation, regulations and administrative pronouncements. In March, the committee prepared an update to its analysis of the effects that proposed oil and gas legislation, if passed, would have on the industry and the Texas economy. The analysis was provided to key Congressmen and focused on: deductions for intangible drilling costs; deductions for percentage depletion; the manufacturing deduction; deduction for tertiary injectants; amortization of geological and geophysical expenditures; and use of the LIFO inventory method for oil and gas. The committee also sent letters in response to: • the Senate and House on appropriations for FY13 IRS budget concerns; • members of the Senate and House supporting the state and local sales tax deduction; and • the IRS on continuing education provider standards, proposed regulations on new EITC due diligence requirements, and proposed revenue procedures that would update rules on permissible communications between the Office of Appeals and other parts of the agency. To read the committee’s oil and gas industry analysis and the response letters sent to Congress and the IRS, please go to the Federal Tax Policy Committee’s community on TSCPA’s website.
WORK OF THE PROFESSIONAL STANDARDS COMMITTEE The Professional Standards Committee (PSC) was busy again this year responding to accounting and auditing standard-setting bodies that have an impact on the practice of accountancy in Texas. The committee sent letters in response to a number of exposure drafts issued on proposed standards, rules and regulations. The exposure drafts and letters of comment are posted on TSCPA’s website. To read them, go to the website at tscpa.org. continued on next page
YEAR IN REVIEW continued from previous page
DIANE DECOU, CPA-CORPUS CHRISTI, AND LEROY BOLT, CPA-ABILENE.
FOR THE MEMBERSHIP In the membership area, TSCPA’s efforts focused on a yearlong campaign for both recruitment and retention. As of April, 2012, the Society gained 963 new CPA, candidate and student members as a result of the campaign. This year’s theme was “TSCPA: It’s a Wonderful Life.” Implementation was done in three phases, with each highlighting a keyword from TSCPA’s tagline of Connecting. Protecting. Advancing. The chapters participated in Society efforts by implementing recruitment and retention programs locally in their areas. TSCPA continued offering free membership to newly certified CPAs. The program offers up to 12 months of free membership.
CPA-Political Action Committee Are you familiar with TSCPA’s CPA-Political Action Committee? The CPA-PAC is the membermanaged, member-driven and member-focused political action committee for TSCPA. Through the CPA-PAC, you can participate in the political process and help ensure the accounting profession has a voice in legislative and regulatory affairs in Texas. For every dollar you give to the PAC, 75 cents comes right back to your chapter for use in local legislative races. With a contribution of $100 or more, you’ll also receive special legislative updates through the weekly e-newsletter Last Week in the Legislature, written by Bob Owen, CPA-Dallas and TSCPA’s regulatory and legislative managing director. To learn more about the CPA-PAC and make a donation, please visit TSCPA’s website at www.txcpapac.org.
Approximately 70 percent of the newly licensed CPAs take advantage of this offer. Recruitment mailings were again sent to never-been-amember CPAs licensed in the last three years, and TSCPA continued participation in the swearing-in ceremonies, held in June and December 2011. Efforts focused on members in business and industry continued with the addition of new neighborhoods in the online Business & Industry Center, as well as a member-authored blog on industry issues, which is available at industry-issues.com. Also for the business and industry member segment, the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) launched the new Chartered Global Management Accountant (CGMA) designation. The CGMA designation gives members research, career tools and access to a global community of management accountants. It is available to qualifying AICPA regular voting members to use free until July 31, 2012. After that, there is a designation fee of $150 ($100 for CGMAs who are members of both AICPA and TSCPA). To learn more, go to the CGMA website at www.cgma.org. TSCPA surveyed members to assess their needs and satisfaction with services the Society delivers to them. A significant majority expressed their satisfaction that TSCPA provides programs and services that build member value and loyalty. The members identified the top five issues they face. In order of priority, the issues were: • staying up-to-date on changes in regulations; • work/life balance; • keeping up with technology; • finding and retaining qualified employees; and • time management. With student membership, TSCPA now has 2,135 student/ candidate members as of Feb. 29, 2012. The Society continued the Campus and Faculty Rep Programs, where TSCPA works with Texas students and educators to promote membership, share resources and engage the next generation of CPAs. College students and faculty representatives assist in recruiting new student members by serving as a connection to each campus. More information on the Campus and Faculty Rep Program is available on TSCPA’s website at tscpa.org. Through the Accounting Career Education (ACE) program, members are encouraged to share their knowledge about accounting careers with students. The ACE program uses CPA career guides, videos and lesson plans for educators. As of March 2012, the Society has received 110 requests for speakers and/or materials from members and educators. This is 50 percent more than what was received by the same time last year. The Society’s staff presented a session at the Texas Career Education Conference in Dallas. More than 150 high school educators attended and received information on the ACE program and resources. TSCPA worked with a third-party vendor to deploy an e-mail campaign to solicit school visits. This proved to be a fruitful effort,
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with an increase in visit requests and a list of interested teachers that was also shared with local chapters for their use. Money Management 101, a financial literacy and career awareness piece created for college freshmen, was shared with educator members and chapters. Requests for copies and printing rights came in from 13 schools across the state. This booklet is available for download on www.ValueYourMoney.org. A student blog, written by four graduate students from the University of Texas at Dallas, launched in August. The blog gives student perspectives on courses, study habits, interviewing, and other adventures while in pursuit of the CPA credential. The blog can be found at www.TXCPA2B.com.
USING SOCIAL MEDIA TOOLS TSCPA is actively using various social media outlets. The Society’s Twitter page is reviewed daily for followers to receive updates on the latest industry news, stats, helpful tips and professional briefs. Using Twitter enables TSCPA to provide current information regarding the profession, finance news, tax issues, CPE, and more. The Twitter handles are: • @TXCPAs – General news about all things TSCPA and accounting related; and • @TXCPA2B – TSCPA student info, exam information, and accounting news and updates. TSCPA is also on Facebook, allowing members to “like” the Society and its numerous activities and offerings. This information is updated several times a week with helpful and informative notes to keep members aware of various professional topics, news of the day and general tidbits “friends” may find interesting. TSCPA’s community page can be found on the Society’s group page or by doing a search for Texas Society of CPAs at the top of your Facebook home page. Visitors may also “like” specific TSCPA conferences and seminars that are built into the main TSCPA “wall” page. Several TSCPA chapters have their own Facebook pages. To reach CPAs in a more corporate/business setting, TSCPA has created numerous LinkedIn groups and subgroups for members to join. As the world’s largest professional network online, LinkedIn is a way for professionals to stay in contact with colleagues. As is the case with Twitter and Facebook, LinkedIn is reviewed and updated regularly to keep members informed of the latest news and upcoming activities. In addition, members can stay current on Society and accounting profession news through TSCPA’s blogs. The following blogs are available on the website: • Chairman Donna Wesling at tscpachairman.typepad.com/blog; • Executive Director/CEO John Sharbaugh at www.thesharblog. com; • Governmental Affairs at tscpa.typepad.com/my_weblog; • Federal Tax Policy Committee at tscpafederal.typepad.com/blog; • Students at txcpa2b.com; and • Business and Industry at industryissues.wordpress.com.
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TSCPA on Twitter, Facebook and LinkedIn A SUMMARY FOR THE YEAR TWITTER TSCPA has more than 330 followers (up from 150 in 2011) and is following 102 (up from 28 in 2011) media outlets, accounting and personal finance industry news sources, and organizations, CPAs and other business professionals. FACEBOOK TSCPA “Likes” – 1,022 people like, or are fans of, this page (up from 670 “likes” in 2011). LINKEDIN
TSCPA Main Group Page – This page has more than 2,700 members (up from 1,500 members in 2011). TSCPA Business & Industry Center – Has 34 current members (up from 197 members in 2011). TSCPA BV/FLS – Has 39 current members (up from 25 members from 2011). TSCPA has added two additional group pages: CPA-PAC and TSCPA Diversity and Inclusiveness Community
TSCPA CONTINUES 360 DEGREES OF FINANCIAL LITERACY AND VALUEYOURMONEY.ORG The 360 Degrees of Financial Literacy program continued again this year. The purpose of this program is to educate consumers on personal finance issues. TSCPA’s consumer website, ValueYourMoney.org, provides free personal finance resources. The following activities supported the program: • updated and posted new content for all life stages on ValueYourMoney.org; • worked with TSCPA members on various local and statewide financial literacy events, presentations and speaking engagements; • updated TSCPA’s Facebook page, as well as Twitter page updates for students @TXCPA2B and @TXCPAs; • created new workplace financial education initiative for 2012 to inform Texas employees (specifically, HR and communications professionals) about the program and other workplace financial literacy resources; continued on next page
YEAR IN REVIEW continued from previous page
During the year, TSCPA continued to provide free professional issues webcasts for members. The professional issues webcasts offered these outstanding speakers: • TSCPA Chairman Donna Wesling, CPA-Austin, • William D. Schneider, Sr., CPA-Dallas, • Kathryn Kapka, CPA-East Texas, and • TSCPA Executive Director/CEO John Sharbaugh, CAE.
TSCPA EXECUTIVE DIRECTOR/CEO JOHN SHARBAUGH, CAE.
• updated ValueYourMoney.org with updated workplace financial education materials; • created Tax Season 2011 section on the site, with resources and tools to assist taxpayers with the latest information to make tax season easier and more efficient; • posted TSCPA Tax Talk on the site, providing taxpayers with a dozen tax tips and helpful hints to navigate through tax season; • developed materials and promoted 2011 Financial Literacy Month (April) and Social Media Outreach Day; • continued “12 Days of Christmas” financial tips and distributing the TakeOff! monthly e-newsletter for consumers, which now has more than 1,500 subscribers; and • exploring the possibility of establishing a Financial Literacy Day at children’s museums (will include fun, hands-on lessons/ activities for kids to learn about smart spending and saving, as well as a resource table for parents). To learn more about the financial literacy program and the resources that are available, visit ValueYourMoney.org.
NEW IN CONTINUING PROFESSIONAL EDUCATION Members can count on TSCPA’s CPE Foundation, Inc. as the source for high-quality continuing professional education. There are more than 500 live CPE programs that cover a wide range of topics via seminars or conferences. The CPE Foundation works with numerous national developers to bring virtual training to our members, which includes a multitude of programs available in various formats, such as webcasts, webinars, self-study, and onsite training. TSCPA’s onsite training program brings professional development providers and instructors directly to CPAs’ offices. Our onsite training salesperson, Annie Daub, visits companies and firms across Texas, and she is available at TSCPA conferences to discuss the program and/or answer any questions.
The third free webcast is scheduled for May 31, 2012 and will feature the latest accounting news with the same type of highcaliber and exemplary speakers. TSCPA worked with speakers Mike Seay, CPA-Austin and attorney, and Lacy Leonard, attorney from Austin, to provide a webcast covering the new Franchise Tax Litigation Update: Allcat Claims Service, L.P. and Other Court Challenges to the Texas Margin Tax. We also continue to partner with ACPEN to provide hundreds of webcasts covering numerous topics from all over the U.S. In addition, this year TSCPA partnered with ACPEN to deliver the Industry Institute, a special series of live webcasts directed to members in business and industry. In the tax area, hundreds of webinars were available to TSCPA members through our relationship with a national tax provider. Members can also access Federal Tax Update podcasts (non-CPE credit), which cover news on federal tax legislation, court cases and other developments. We know you have many options when you’re looking to fulfill your CPE requirements. TSCPA strives to offer the best, most current and timely CPE opportunities from leading educators, so you can trust TSCPA to be your premiere and unsurpassed CPE provider of choice. For more information and to register, visit the Society’s website at tscpa.org or contact the CPE department at 800-428-0272 or 972-687-8500 in Dallas.
NEW ASSOCIATION MANAGEMENT SYSTEM TSCPA acquired and implemented a new association management software system, Avectra’s netFORUM. The new system integrates and delivers the Society’s member information in one centralized database. netFORUM is a powerful tool designed to give TSCPA the capabilities, capacity and resources to further enhance our services. It was implemented this year to support the strategic plan objective to operate TSCPA in an effective and efficient manner by assuring that the appropriate level of resources and technology are available to deliver excellent member service.
JUST AROUND THE CORNER TSCPA’s 2011-2012 Annual Meeting of Members is just around the corner. It will be held June 29-30 at the Omni Bayfront Hotel in Corpus Christi, and any TSCPA member may attend. For more information, see page 17. Don’t miss the July/August issue of Today’s CPA magazine. Incoming TSCPA Chairman Fred J. Timmons, CPA-San Antonio, will discuss his plans and goals for the upcoming 2012-2013 year. n
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Society Feature By C. William (Bill) Thomas, Today’s CPA Technical Editor, and DeLynn Deakins, Today’s CPA Managing Editor
An Update on Today’s CPA In the May/June issue of Today’s CPA magazine, it has become a tradition to provide a brief report on the activities of the TSCPA Editorial Board and the ways we’re working to make the magazine content timely and relevant to members. FIGURE 1. SUMMARY OF 2011, 2010, 2009 ACTIVITY. ARTICLES
INVITED SHORT ARTICLES
In 2011, the economy continued on a slow path toward economic recovery. The Republican Party launched primary presidential campaigns, hoping to bring forth a slate of candidates that can challenge incumbent President Barack Obama for the White House in 2012. Federal budget deficits continued to soar amidst talk by legislators of tax reform and debate on how the federal deficit could be balanced with a mixture of spending cuts and tax increases. The role of government in the economy has continued to be a source of both hope and concern for business people in general, and CPAs in particular. Unprecedented government fiscal stimulus, deficit spending and increased regulation have been the order of the day in Washington, D.C. The Dodd-Frank Wall Street Reform and Consumer Protection Act has gone into effect, impacting banking practices and increasing paperwork for financial institutions of all sizes. Record state budget deficits now rule the day across America, Texas being no exception, but much better off than some others. Health care reform passed by the Obama administration has begun to take effect, impacting the lives of many Americans. The impending retirement of the baby
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boomer generation amid shrinking resources poses substantial challenges for regulators, as well as taxpayers and the CPAs who advise them. The SEC, which stalled a decision during the past recession about transition to International Financial Reporting Standards (IFRS), has promised a new timetable, probably two years later than previously expected. All of these events have helped shape the content of articles in Today’s CPA.
Today’s CPA is a bi-monthly, peerreviewed magazine. Editorial Board members, who represent a cross-section of the overall membership of TSCPA, review the articles that are submitted for consideration in Today’s CPA. The Editorial Board members’ names are listed in the magazine’s masthead. Articles may include a technical analysis and/or informed commentary on a topic. In Today’s CPA, we attempt to balance the content to cover the various areas of member interest and accounting practice. An article providing continuing professional education (CPE) credit is provided in each issue, which is peer reviewed; the quiz is pre-tested by reviewers prior to publication. Recurring
columns and Society features in the magazine include: Chairman’s & Executive Director’s Message, Business Perspectives, Tax Topics, Accounting & Auditing, Emerging Issues, Chapters, Capitol Interest, and Spotlight on CPAs. In Figure 1, you’ll find a comparative summary of our activities for the past three calendar years. The statistics show that the number of submissions declined in 2011 to 2009 levels, thus causing our acceptance rate to increase from 2010 to 2011. Nevertheless, we feel that the journal still enjoys the reputation of being a well respected practitioner publication. In 2010, we were named a Commended Journal by Cabell’s Directories of Publishing Opportunities, which is considered the “gold standard” for academics seeking to have their works published.
ACKNOWLEDGEMENTS We would like to extend thanks to the members of the Editorial Board for volunteering their time and efforts to review articles for publication, pretest CPE quizzes, and participate in meetings and on conference calls. We also recognize and thank our copy editor and contributing writer, Anne Davis, and the column editors and contributors: TSCPA Chairman Donna Wesling, CPA-Austin; Greta Hicks, CPA-Houston; Mano Mahadeva, CPA-Dallas; Bob Owen, CPADallas; James Reeves, CPA-Fort Worth; John Sharbaugh, TSCPA Executive Director/CEO, and Rhonda Ledbetter, TSCPA Chapter Relations Representative. We thank the accounting and financial academics and professionals who author articles for Today’s CPA. Authors from public practice, industry, government, and education are invited to submit articles for consideration in Today’s CPA. By receiving a large number of relevant submissions, we can continue to deliver a high-quality, relevant magazine for TSCPA members. n
BY DONALD L. ARIAIL, PH.D., CPA, CFF, CVA; JERRY B. HAYS, CPA, CIA; AND SANDRA VASA-SIDERIS, PH.D.
Courage: The Key to Ethical Behavior Despite the specific requirements for ethical behavior contained in the Principles of Professional Conduct (Code) of the American Institute of CPAs (AICPA),1 accounting frauds have found CPAs guilty of acting in their personal instead of the public’s best interest. If it is assumed that CPAs are generally knowledgeable regarding the ethical prescriptions of the Code – that is, they know the difference between right and wrong professional conduct – was acting out of self interest the only character trait involved in their unethical conduct? The authors suggest that the virtue of courage is also an essential ingredient of ethical behavior in that it provides the philosophical and psychological backbone that is essential for ethical action. Winston Churchill stated that “without courage all virtues lose their meaning.”2 Similarly, ethical guidance, like that contained in the Code, becomes effective only to the extent that CPAs have the courage to implement it.
must choose moral values over personal values such as greed (moral motivation); and they must have the courage to take the ethical action (moral character).13 While all four components of Rest’s Model may be important determinants of the ethical behavior of CPAs, this article focuses on the last listed component – moral character as categorized by courage.
The Preamble to the Code requires AICPA members to exhibit both “… self-discipline above and beyond the requirements of laws and regulations”14 “and … an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.”15 The Code’s additional ethical requirements include the exercise of moral judgment,16 acting with integrity,17 and exhibiting character traits such as being “… honest and candid … [and] observe[ing] both the form and the spirit of technical and ethical standards.”18 Moreover, members should “… avoid any subordination of their judgment.”19 A key driver of these normative ethical prescriptions is concern for the professions’ “public interest responsibility … defined as the collective well-being of the community of people and institutions the profession serves.”20 “All who accept membership in the American Institute of Certified Public Accountants commit themselves to honor the public trust.”21 Thus, a key role of the Code is to maintain the public’s trust by providing guidance for concrete moral actions that often require personal courage – that is, not only knowing the ethical course of action through an understanding of the Code, but also having the courage to take the ethical action. Courage is defined in the Random House Dictionary of the English Language as “the quality of mind or spirit that enables one to face difficulty, danger, pain, etc., with firmness and without fear; to act in accordance with one’s beliefs, [especially] in spite of criticism.”22 Accounting scandals in the late 1990s and the early 2000s revealed unethical actions on the part of CPAs that illustrate a lack of personal courage. Nevertheless, there were also instances of CPAs exhibiting exemplary ethical behavior that required a high level of personal courage.
Throughout history, courage has been viewed as a virtue. While early philosophers discussed courage mostly in terms of bravery in battle,3 their writings form the foundation of our understanding of the term. According to the ancient Greeks, courage was one of the virtues.4 Socrates viewed courage as “acting to further an ethical ideal.”5 For Aristotle, “what differentiates courage from rashness … is the use of reason combined with a noble goal … and training in the virtues was considered essential to their development.”6 For Confucius, wisdom, benevolence and courage composed “the three cardinal virtues.”7 In The Analects, he stated that “faced with what is right, to leave it undone shows a lack of courage.”8 Building on the foundation of courage as a virtue, psychologists propose that it is one of the key components of ethical decision making.
Much significant research in psychology has focused on the cognitive means by which individuals make moral judgments (e.g., Piaget9 and Kohlberg10). Rest, Narvaez, Bebeau and Thoma define moral judgment as “judging which actions would be most justifiable in a moral sense.”11 Finding that moral judgment theory did not adequately explain all of the psychological determinants of ethical behavior, James Rest developed his Four-Component Model, which included moral sensitivity, moral judgment, moral motivation and moral character.12 According to Rest’s Model, four things need to happen in order for people to act ethically: they must recognize that an ethical situation exists (moral sensitivity); they must make a judgment about what is right or wrong (moral judgment); they
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Aaron Beam, CPA and cofounder (along with CEO Richard Scrushy) of HealthSouth, started down the slippery slope of unethical behavior when he agreed to falsify financial reports for what was supposed to be a “one-time fix.” From the initial public offering (IPO) in 1986 to the second quarter of 1996, HealthSouth underwent steady and substantial growth; however, in that quarter, for the first time, earnings were not going to meet expectations. With pressure from Scrushy, Beam agreed to alter the accounting records to make up for a $50 million shortfall. Then 10 years later, business reporter Seth Fox said that Beam: … thought the company would only fix the books for that quarter. That, along with his fear that reporting the shortage would cripple the company he viewed as his own, robbed him of any courage or moral strength to oppose the move. Beam also later commented about it. “I knew if we did report bad earnings, it would be disastrous,” said Beam. “I let myself slip into agreeing to commit fraud.”23 Faced with perpetuating the fraud, Beam retired and distanced himself from the company. However, the fraud continued, and in 2003 the CFO at that time, Weston Smith, faced with the significantly heavier penalties brought about by the enactment of the Sarbanes-Oxley Act, reported the fraud. As the case was being investigated, Beam finally stepped forward, pled guilty, and testified against Richard Scrushy. Beam was sentenced to three months in federal prison and incurred over $500,000 in penalties and attorneys fees.24 If Beam would have just said “no” to Scrushy, the fraud would have been stopped at its inception, and his professional life and that of several subsequent CFOs would have been saved. More importantly, a lack of courage at this critical point resulted in a fraud that harmed not only the public, but also the reputation of the accounting profession. Once one starts down the slippery slope of unethical behavior, it is very hard to put on the brakes. Another example involved David Friehling, CPA, who for 17 years attested to the fairness of the financial statements of the largest Ponzi scheme in history, that of Bernie Madoff. After Madoff turned himself in, David Friehling was the next one arrested. Friehling subsequently pled guilty to nine criminal counts related to the fraud and admitted that he had never performed an independent audit of Madoff ’s financial statements, but simply “trusted” Madoff and accepted the financial information provided and certified the statements.25 While Friehling continued to deny that he knew about Madoff ’s Ponzi scheme, U.S. prosecutor Preet Bharara stated that, “David Friehling was one of the key enablers of Bernard Madoff ’s historic fraud.”26 Freihling lacked the ability to stand up to the pressure exerted by this lucrative source of income. He subordinated his professional judgment to gain a personal advantage and lacked the ethical character traits of a CPA. Freihling chose the unethical path, which requires courage in the sense of a gambler accepting the risk of being caught, but not courage in the sense of a professional with “… an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.”27
An example of professional courage in the face of a massive fraud perpetrated by boy-band impresario Lou Pearlman was chronicled in Hit Charade.28 Over two decades, Pearlman built a complex conglomerate of seemingly highly successful businesses: charter
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air service, real estate, food, CD manufacturing and a myriad of others, topped off by his wizardry with the Backstreet Boys and NSYNC. Pearlman seemed to have a golden touch that brought in bankers and investors who lined up to get in on his run of success. However by early 2006, with Justice Department and Internal Revenue Service (IRS) investigations in progress, Pearlman brought in CPA Paul Glover as a consultant to help save his “sinking ship.” Glover, described by Gray as “a straight shooting Eliot Ness of the accounting world” quickly found indications of what was, at the time, the largest Ponzi scheme in U.S. history, approaching half a billion dollars. Glover focused on Pearlman’s in-house retirement plan, which had also been opened for public investment. While the retirement plan had been advertised as being backed by the Federal Deposit Insurance Corporation (FDIC) and insured by both American International Group (AIG) and Lloyd’s of London, Glover found no such backing because, ironically, there were no accounts. Instead, the documentation showed that all of the retirement plan money had been converted by Pearlman. After noting that almost all of the statements were shown as audited by the firm of Cohen and Siegel, Glover remarked, “I’ve seen poor accounting work before, but I thought, ‘Wow, this is a shoddy firm.’”29 With that thought in mind, Glover dialed the number of Cohen and Siegel and noticed that the phone on Pearlman’s desk rang. Glover dialed the number again, and again the phone on Pearlman’s desk rang – the first indication that there was, in fact, no CPA firm by the name of Cohen and Siegel. The independent audits, and even the audit firm itself, were fabrications, as was much of Pearlman’s success. Using his knowledge of accounting (in 1976, Pearlman earned a degree in accounting from Queens College), Pearlman had for years falsified financial statements and tax returns. Armed with enough evidence to put a stop to this massive fraud and implicate most of those involved, Paul Glover turned the documentation over to authorities.30 Despite having a lucrative engagement and association with a famous client, Glover did not subordinate his professional judgment, but maintained his commitment to ethical behavior. He had the courage in the face of temptation to do the ethical act – he didn’t just fire his unethical client, he turned him in to the authorities. Cynthia Cooper, former vice president of internal auditing at WorldCom, demonstrated moral courage in exposing significant continued on next page
Courage: The Key to Ethical Behavior continued from previous page
accounting irregularities in the company that, in the end, resulted in federal investigations, criminal and civil suits, the imprisonment of corporate executives, fines against corporate directors, corporate bankruptcy and the eventual acquisition of the company by Verizon. Extraordinary Circumstances: The Journal of a Corporate Whistleblower31 recounts Cooper’s efforts, supported by her trusted staff, to pursue what would turn out to be the largest case of fraud at the time. Cooper was persistent in overcoming significant hurdles in pursuit of the truth: the chief financial officer’s (CFO’s) attempts to delay her work, deliberate efforts by the CPA controller to block access to accounting data, as well as to divert her attention from the problem areas to other auditing projects, and efforts to obscure improper accounting entries in a complex maze of unsupported accounting transactions. Even the chair of the audit committee encouraged her to wait for direction from the CFO. In spite of these challenges and personal fear about the ramifications of her findings, Cooper demonstrated moral courage in doing what she knew was right. Her book would be more aptly titled Extraordinary Courage.
DAILY PRACTICE EXAMPLES
In the previous examples, ethical courage was exemplified by the actions of CPAs Cooper and Glover, while a lack of ethical courage was exhibited by CPAs for Madoff and HealthSouth. These wellpublicized examples of ethical and unethical actions are familiar to most practitioners. Nevertheless, the authors contend that the activation of the courage component of ethical behavior is also required in the daily practice of CPAs. For example, in tax practice it is not unusual for clients to provide CPAs with tax deductions that appear unreasonable. If the CPA questions a deduction and the client provides an adequate explanation or documentation to support the amount claimed, an ethical problem does not arise. However, an ethical problem may arise when a client refuses to adequately explain a problematic deduction, especially one that could result in the IRS penalizing the client and perhaps the CPA for substantially understating the taxpayer’s liability32 and tells the CPA to “just go ahead and put the deduction on my return.” Let’s assume that this individual has been a good client for many years, that the annual fees paid for tax
return preparation and other accounting services are material to the firm, and that this client is an influential business person in the community – especially influential with other firm clients. What should the CPA do? The CPA must have the courage to stand up to the client and refuse to be connected with the return. It is much better to lose a client who wants to “push the envelope” with his/ her tax deductions than to risk potential professional sanctions, including the loss of the CPA’s license to practice, the loss of the ability to practice before the IRS, and/or the loss of a CPA’s most valuable asset – his/her professional pride and reputation. By acquiescing to the client’s demands, the CPA violates the Code by subordinating his/her professional judgment to that of the client.33 Another example is where a staff accountant working on an over-budget audit engagement is instructed by a supervising senior to skip a required procedure while indicating on the working paper that the procedure was completed. This accountant could take the easy but unethical route of being a “good soldier” (which is never an adequate justification for following the unethical instructions of superiors) and succumb to the senior’s demands. It is much harder to be courageous by taking the ethical stance that requires not only refusing the request to be dishonest,34 but also by going up the chain of command (as required in the Institute of Management Accountants’ ((IMA)) Statement of Ethical Professional Practice35) to report the unethical demand of the senior. In the opinion of the authors, merely refusing to take the unethical act is not enough. Acting in the profession’s and public’s best interest demands that CPAs also follow the precepts of the Honor Code of the U.S. Military Academy by not tolerating the unethical behavior of others.36 Rejecting new clients may also require the exercise of courage. It takes courage to refuse a potentially lucrative engagement when an investigation of the prospective client, as required by the AICPA Quality Control Standards,37 reveals prior illegal, unethical or questionable acts or transactions. Especially for a small CPA firm, it may be very difficult to turn away a client who could bring in a substantial amount of revenue. Disengaging from a current client who has proven to be unethical can be even more difficult. A CPA who has worked with a client for
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a number of years has probably developed a personal relationship with that client and may rationalize that an unethical act committed or requested by the client was an isolated incident or at least one that could be managed in the future. Nevertheless, CPAs must sacrifice potential personal and firm advantage38 in order to minimize their “… association with a client whose management lacks integrity … .”39
ETHICS IN MATTERS LARGE OR SMALL
Courage was seen by ancient philosophers as one of the cardinal virtues. More recently, psychologists have identified this virtue as one of the key drivers of ethical behavior. Personal and professional courage is required by CPAs in following the rules and spirit of the Code. Recent accounting scandals give us examples, on the one hand, of CPAs who acted out of self interest and lacked ethical courage and, on the other hand, of CPAs who behaved ethically and exhibited great personal and professional courage. CPAs in daily practice are often challenged to act ethically. To avoid becoming the CPA involved in a “big scandal” or being one who loses his/her license to practice, it is important that ethics be practiced in the small matters encountered in daily practice. Ethical behavior cannot be turned on and off at will. By having the courage to always behave ethically, CPAs will avoid starting down the slippery slope of unethical behavior where what at first appears to be a small or one-time concession (as happened at WorldCom and HealthSouth) mushrooms into a major violation of the public’s trust. As stated by C. S. Lewis, “courage is not simply one of the virtues, but the form of every virtue at the testing point.”40 n Donald L. Ariail, Ph.D., CPA, CFF, CVA, is an associate professor and accounting program coordinator in the Department of Business Administration at Southern Polytechnic State University in Marietta, Ga. He may be contacted at firstname.lastname@example.org. Jerry B. Hays, CPA, CIA, is an adjunct professor at Austin Community College and a doctoral candidate at Nova Southeastern University in Austin, Texas. He may be contacted at email@example.com. Sandra VasaSideris, Ph.D., is a professor and graduate program coordinator in the Department of Business Administration at Southern Polytechnic State University in Marietta, Ga. She may be contacted at svasasid@ spsu.edu.
FOOTNOTES 1. 2. 3. 4. 5. 6.
American Institute of Certified Public Accountants (AICPA), Professional Conduct Standards, vol. 2 (New York: AICPA, 2002). “Winston Churchill.” Great-Quotes.com. Gledhill Enterprises, 2011. 20 Apr. 2011. http://www.great-quotes.com/quote/381903 Dan Putnam, “Psychological Courage,” Philosophy, Psychiatry, & Psychology 4.1 (1997): 1-11. Christopher Rowe, “Ethics in Ancient Greece,” A Companion to Ethics. Peter Singer (ed.) (Oxford, England: Basil Blackwell, 1993):12. Robert E. Goodin, “Utility and the Good.” A Companion to Ethics. Ed. Peter Singer. (Oxford, England: Basil Blackwell, 1993): 253. Dan Putnam, “Psychological Courage,” Philosophy, Psychiatry, & Psychology 4.1 (1997): 1-11.
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8. 9. 10. 11.
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.
27. 28. 29. 30. 31. 32. 33. 34. 35.
37. 38. 39. 40.
Lisheng Chen, “Courage in the Analects: A Genealogical Survey of the Confucian Virtue of Courage.” Frontiers of Philosophy in China 5.1 (2010): 2 21 Feb. 2011. http://scienceofvirtues.org/blogs/publications/archive/2010/04/19/courage-in-theanalects-a-genealogical-survey-of-the-confucian-virtue-of-courage.aspx Confucius. The Analects, trans. D. C. Lau (London: Penguin Books, 1979): 66, II:24. Jean Piaget, The Moral Judgment of the Child, trans. M. Gabin, (1932; New York: Simon & Schuster, 1987). Lawrence Kohlberg, “The Development of Modes of Moral Thinking and Choice in the Years 10 to 16,” diss., U. of Chicago, 1958. James Rest, Darcia Narvaez, Muriel J. Bebeau, and Stephan J. Thoma, Postconventional Moral Thinking: A Neo-Kohlbergian Approach (Mahwah, NJ: Lawrence Erlbaum, 1999). James Rest, J. (1983). “Morality” in J. Flavel, E. Markman, and P.H. Mussen (eds.), Handbook of Child Psychology: Vol. 3, Cognitive Development (4th ed., (New York: Wiley, 1983): 856-929. Rest, Narvaez, Bebeau, & Thoma. American Institute of Certified Public Accountants (AICPA), Professional Conduct Standards, Volume 2. (New York: AICPA. 2002): ET § 51.01 AICPA, ET § 51.02. AICPA, ET § 52. AICPA ET § 53.02. AICPA ET § 54.02 & ET § 54.03. AICPA ET § 55.02. AICPA ET § 53.01. AICPA ET § 53.04. “Courage,” Random House Dictionary of the English Language, 2001 ed. Seth Fox, “A World Unraveled.” Baton Rouge Business Report. (1 Aug. 2006): n.pag. 10 Mar. 2011. http://www.bus.lsu.edu/accounting/faculty/lcrumbley/ unraveled.htm Fox. Diana B. Henriques, “Madoff’s Accountant Pleads Guilty in Scheme,” The New York Times. (3 Nov. 2009). 8 Mar. 2011. http://www.nytimes.com/2009/11/04/ business/04madoff.html?ref=davidgfriehling Andrew Clark, “Madoff Auditor Pleads Guilty to Fraud,” Guardian.co.uk (3 Nov. 2009). 10 Mar. 2011. http://www.guardian.co.uk/business/2009/nov/03/madoffauditor-pleads-guilty-to-fraud AICPA ET § 51.02. Tyler Gray, The Hit Charade (New York: HarperCollins, 2008). Gray 11. Gray. Cynthia Cooper, Extraordinary Circumstances: The Journey of a Corporate Whistleblower (Hoboken, NJ: John Wiley & Sons, 2008). IRC § 6701. AICPA ET § 55.02. AICPA ET § 54.02 & ET § 54.03. “IMA Statement of Ethical Professional Practice,” IMA: The Association for Accountants and Financial Professionals in Business, n.d. 21 Feb. 2011. http:// www.imanet.org/PDFs/Public/CMA/Statement%20of%20Ethics_web.pdf “Information paper on ‘honor” – A bedrock of military leadership.” MACC-S-HON. Cadet Honor Committee Home Page, United States Military Academy at West Point, 8 May 1998. 21 Feb. 2011. www.usma.edu/committees/honor/info/main. htm AICPA QC § S20.14. AICPA ET § 51.02. AICPA QC § 20.14. “C.S. Lewis.” Great-Quotes.com. Gledhill Enterprises, 2011. 20 Apr. 2011. http:// www.great-quotes.com/quote/32654
BY RONALD C. PARISI, CPA, JD
MANAGING RISK in the Competition for Clients The recent changes in the CPA profession have been as pronounced and unprecedented as the “great recession” that triggered many of those changes. For firms that are diligent in the ways they respond to the challenges presented by the recession, economic pressures may ultimately align sound risk management with successful practice management.
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From 1997 to 2007, most CPA firms’ top priority was finding and retaining qualified staff, according to the PCPS CPA Firm Top Issues Survey for those years. The economic boom of the late 1990s, and the SarbanesOxley era that followed it, created a demand for CPA services, and for many firms it was a struggle just to keep up with that demand. Then along came the economic downturn, causing many CPA firms’ clients to close their doors, or to reevaluate and reduce expenses. The resulting loss of clients and business for CPA firms had the effect of rearranging priorities for most of those firms. High on the list of priorities in the 2009 PCPS survey were client retention, marketing and practice growth. Two years later, the top priority for most firms shifted from client retention to bringing in new clients, according to the 2011 PCPS survey. The resulting competition for fewer and leaner clients has pressured firms to lower fees, as clients and prospective clients compare the pricing quoted by two or more firms. In this environment, it is important for firms to avoid risky practices, such as shortcuts, that would lower fees, but expose the firm to professional liability disputes. Now is the time to remain disciplined, diligent and ethical in one’s practice management. The upside is that good practice management often converges with good risk management. The client acceptance and continuance process is a prime example of this convergence. Not only is it the first step in effective risk management and loss prevention, but client screening can be used to identify less-than-desirable clients who may be keeping your firm from developing more desirable clients. The client acceptance and continuance process can also reduce the risk of accepting engagements that are not a good fit for the firm’s expertise or continuing engagements that are no longer a good fit, due to changes in the client’s business or changes within your firm. (See the following section on Terminating the Relationship.
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In this environment, it is important for firms to avoid risky practices, such as shortcuts, that would lower fees, but expose the firm to professional liability disputes. Now is the time to remain disciplined, diligent and ethical in one’s practice management. CHANGES CALL FOR RE-EVALUATING
Changes in a client’s business may lead the client in a direction that causes you to re-evaluate the relationship. A client may, for example, buy a business that requires work you are not qualified to perform. Or a start-up client may grow and decide to go public, and you might not be qualified to perform the public work. When there are changes within your firm, you may also need to re-evaluate your client base. The loss of a partner with an area of expertise that the other partners don’t possess will require a decision by the firm regarding continued service to the former partner’s clients. The risk exposures from accepting or continuing engagements for which the firm is not qualified are significant. Substantial losses in revenue and billable time, as well as damage to reputations, can come from disappointing clients with substandard work and becoming embroiled in disputes. Further, violations of professional and ethical standards as a result of substandard work might put a firm’s licenses in jeopardy. Claims experience shows that CPAs are most at risk when providing services without adequate practice and proficiency. Services that represent 65 percent or more of a firm’s service concentration produce loss ratios of about 25 percent; i.e., 25 cents of every premium dollar is a loss. (See Figure 1, Risk is High for Beginners and Dabblers, on next page.) Services that represent 15 to 65 percent of a firm’s service concentration produce loss ratios of about 70 percent. However, the kicker is in services representing less than 15 percent of a firm’s service concentration: loss ratios of
about 225 percent are produced. Clearly, dabbling in an area or an industry where the firm is not practicing the services often enough is a highly risky activity.
REFER OR CONSULT
The issue of competence is addressed in the American Institute of CPAs (AICPA) Code of Conduct under ET Section 56, Article V: Due Care, as well as in several state codes of conduct. Article V, Section .03 of the AICPA code states that competence “establishes the limitations of a member’s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member’s firm.” Accordingly, the basic options to dabbling are to: • refer clients to other practitioners who have the requisite expertise in a specific area; and/or • consult with other practitioners to acquire the expertise needed in a specific area. Referring clients to other practitioners instead of attempting to perform a service for which you are unqualified is not only the prudent course of action, but it will generate goodwill and respect from clients who will appreciate the referrals. Clients are already accustomed to accepting referrals from their doctors and other professionals, and CPAs will enhance their own reputations by emulating such practices. It’s a good idea to develop a small referral and consulting network among a group of experienced professionals you trust. continued on next page
Managing Risk in the Competition for Clients continued from previous page
DEFINE THE ENGAGEMENT IN WRITING
Risk is High for Beginners and Dabblers Losses by Service Concentration
Losses as a % of Premium
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All engagements deserve an engagement letter that defines the purpose of the engagement and specifically states what the CPA will and will not do. The letter also spells out client instructions and responsibilities, terms for fee collection, stop-work clauses, mediation/arbitration language, and other clauses required by the specific engagement. By setting forth clear terms for the engagement, you can close the expectation gap between what you think the engagement entails and what the client thinks. The client whose expectations haven’t been met is often the client who wants the CPA to pay for losses. The engagement letter is not the place for marketing information or any other allencompassing language that expands your risk exposure. Always have the client sign the letter.
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Down the road, your client may seek additional services that are outside the engagement letter parameters. Upon mutual agreement to the additional services, amend the original engagement letter to include additional services and additional fees. With pressure coming from clients scrutinizing fees, remember to adequately price each engagement and each additional service to avoid the temptation to take short-cuts. Document the engagement as it evolves and changes, recording the advice given and decisions made. In certain engagements, such as estate tax planning or business entity selections, detail all planning advice in “informed consent” letters, outlining the pros, cons and options in terms the client will understand, and obtain client consent. Effective informed consent letters clarify that the CPA advises and informs, and the client decides. With this letter, it is difficult for claimants to make it appear the CPA made the decisions.
TERMINATING THE RELATIONSHIP
When you decide to disengage, seek to terminate the relationship professionally and formally, in writing. Your disengagement letter should always contain clear statements, a description of your work, and a list of any due dates or filings. Try to provide ample lead time before a client’s deadlines to better protect yourself. Your client need not feel antagonized in any way. Done effectively, a disengagement can leave your client feeling that you have considered their business needs and acted in their best interests – a good sign you are practicing in an ethical manner. In the end, knowing how to disengage professionally and ethically will help you grow your practice and avoid liability. Despite the changes that continue to take place in the economy and the profession, the fundamentals of risk management for CPAs have remained
constant over the years. This is mainly due to the high expectations the public has for CPAs, which are often expressed in the form of jury verdicts, sometimes referred to as jury, public or claims standards. Such standards are generally higher than the standards the profession has established for itself, so it’s important to remember that there is a higher bar by which CPAs are judged. The public will remind CPAs of that fact from time to time when there are disputes about what constitutes professional and ethical practices. n Ron Parisi, CPA (inactive), JD, is executive vice president of risk management for CAMICO (www.camico.com), a provider of professional and employment practices liability insurance for the CPA profession. Parisi is responsible for executive oversight of the company’s underwriting and claims functions.
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4/4/12 11:34 AM
CPE Article BY JOSEF RASHTY, MS, CPA, AND JOHN O’SHAUGHNESSY, PH.D., CPA (INACTIVE)
THE EVER CHANGING LEASE EXPOSURE DRAFT, PART II – LESSOR ACCOUNTING
CPE Self Study Curriculum: Accounting and Auditing Level: Intermediate Designed For: CPAs in private and public corporations or engaged in public practice Objectives: To explain the new lease exposure draft on leases with emphasis on lessor accounting Key Topics: Lease exposure draft and lessor accounting Prerequisites: None Advanced Preparation: None 38
ON AUG. 17, 2010, THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) AND THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) (COLLECTIVELY, THE BOARDS) JOINTLY RELEASED AN EXPOSURE DRAFT (ED), LEASES, AND PROPOSED AN ACCOUNTING MODEL THAT WOULD SIGNIFICANTLY CHANGE LEASE ACCOUNTING. THE OBJECTIVES OF THIS ED WERE TO CONVERGE INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) WITH THE U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) AND DEVELOP AN IMPROVED STANDARD ON LEASE ACCOUNTING. Today’sCPA
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The proposed model has significant business implications, including impacts on contract negotiations, financial ratios, business systems and processes. The ED addresses both lessee and lessor accounting methods. Today’s CPA, in its November/ December issue, published an article titled, “The Ever Changing Lease Exposure Draft” (Rashty & O’Shaughnessy), which focused mostly on lessee accounting. This article, on the other hand, discusses the lessor accounting model that the Boards have proposed. The ED initially proposed a hybrid or dual accounting model for lessors. The choice of the model depended on whether the lessor retained exposure to significant risks or benefits associated with the underlying asset. After further re-deliberations, the Boards decided on a single lessor accounting model – the receivable and residual method (R&R), which the authors will discuss in this article. The Boards received over 770 comment letters in response to their Aug. 17, 2010 ED. The comment period ended on Dec. 15, 2010. The Boards also outreached to users and preparers in different countries and held several roundtable discussions. Many respondents to the ED stated that the lessor accounting proposals need significant further development and refinement, and that lessors would need additional guidance to determine which approach to apply. In addition, many respondents believed that the current lessor accounting model is “not broken” and questioned whether the costs of implementing the new model were accompanied by an improvement in financial reporting. The Boards announced on July 21, 2011, that they plan to re-expose the ED to provide another opportunity for comments on revisions the Boards had undertaken since the publication of the ED on leasing in August 2010. A revised ED is expected to be issued in the third quarter of 2012, and the final standard is expected to be issued sometime in 2013.
THE EXPOSURE DRAFT
The ED initially proposed a hybrid or dual accounting model for lessors – performance obligation and derecognition approaches: • Performance obligation approach – The lessor would recognize and initially measure (i) lease assets as a receivable for the expected rental payments and (ii) a corresponding liability as of the date of commencement of the lease. The lessor would recognize income as the performance obligation is reduced over the lease term in addition to recognizing interest income on the receivable. • Derecognition approach – The lessor would recognize an asset for the right to receive rental payments, remove a portion of the carrying amount of the underlying asset from its statement of financial position, and reclassify it as a residual asset that represents the lessor’s rights in the underlying asset that it did not transfer. In addition, the lessor may recognize up-front income and expense in profit or loss. The choice of model depended on whether the lessor retained exposure to significant risks or benefits associated with the
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underlying asset. A lessor that retained exposure to significant risks or benefits associated with the underlying asset would have kept the underlying asset on its balance sheet, and recognized a receivable and a performance obligation. If the lessor did not retain exposure to significant risks or benefits, the underlying asset would have been derecognized and replaced with a receivable and a residual asset and profit might be recognized at lease commencement.
The Boards tentatively decided in July 2011 that a single lessor accounting model, the R&R method, should apply to all leases. The only exceptions would be short-term leases and leases of investment property measured at fair value. The proposed model allowed for profit recognition at lease commencement depending on whether the profit was reasonably assured. The staff indicated that it would have further discussions with the Boards regarding the need for additional clarification of the term “reasonably assured.” Many Board members indicated that they would prefer this application guidance to be consistent with the definition of “reasonably assured” in the revenue recognition project, but asked the staff to add criteria that would be more appropriate to a leasing environment.
THE LATEST DEVELOPMENT
The Boards’ staff met in October 2011 and reversed their earlier decision and tentatively decided to remove the requirement that a day-one profit should be recognized in the income statement only if it passes a “reasonably assured” test. They agreed that the profit related to the lease receivable would be recognized in income at the commencement of the lease. The deferred profit (i.e., the portion of the total profit not recognized) would reduce the gross residual. That is, the recognized residual asset at the end of the lease agreement would be equivalent to the gross residual less the deferred profit. Additionally, the staff has proposed three different approaches to the accounting for the residual asset based on the feedback that the Boards had received in their outreach activities. All three approaches would have a different way to calculate the residual asset, and therefore would result in a different measurement of any profit at lease commencement. In all three approaches, however, the lessor would measure profit at lease commencement if the carrying amount of the underlying asset is less than the sum of (i) the initial measurement of the lease receivable and (ii) the initial measurement of the residual asset. A detailed analysis and discussion of these three approaches is beyond the scope of this article, but they may impact the final proposed approach to the R&R model. Furthermore, the Boards tentatively decided that lessors would not apply this new approach to leases of investment property. The Boards still have some work to do in defining exactly what the term “investment property” would include for purposes of this exclusion. continued on next page
Lessor Accounting continued from previous page
THE PROPOSED REVISED R&R MODEL
In the proposed revised R&R model, the profit and residual asset will be measured as follows at lease commencement: • Profit = (lease receivable + residual asset) – carrying amount of underlying asset.
• Residual asset = carrying amount of the underlying asset – [(present value of lease receivable ÷ fair value of the underlying asset) × carrying amount of the underlying asset]. The residual asset is subsequently accreted, using the interest rate that lessor charges the lessee and is reflected as interest income. The lease receivable would be initially measured at the present value over the lease term discounted using the rate the lessor charges the lessee. Lessors would determine the lease term and lease payments using the same principles applied by lessees. The amounts to be received under residual value guarantees would not be recognized until the end of the lease. (The illustration of this article has not depicted this provision of the ED.)
Short-term leases are leases that have a maximum possible lease term, including options to renew or extend, of 12 months or less. Short-term leases can use a simplified form of accounting and lessors are permitted to elect, on an individual lease basis, to not recognize assets or liabilities arising from short-term leases nor derecognize any portion of the underlying property. In other words, lessors can elect to treat short-term leases as operating leases.
The following illustration reflects the two different lessor accounting scenarios that the ED has proposed: • Fair value of the underlying asset is equal to the carrying value.
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Moreover, the Boards also tentatively decided that both lessees and lessors could follow either a full retrospective approach or a modified retrospective approach in transition. The modified retrospective approach would provide specific relief from some of the more difficult aspects of the full retrospective transition approach and is designed to reduce transition costs. Either of the transition approaches agreed to by the Boards would avoid the recognition of a disproportionate amount of lease expense in the periods immediately following transition that would have been recognized under the Boards’ original proposal.
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• Fair value of the underlying asset is greater than the carrying value. The assumptions used in this illustration are as follows: • Entity R (the lessor) enters into a three-year lease agreement for equipment with Entity E (the lessee). • The carrying value (CV) of the equipment is $37,000 at the commencement of the lease and has a residual value of $5,000 at the end of three years. • For the scenario whereby the fair value (FV) equals the carrying value (CV), the lessor will charge the lessee a monthly lease payment of $1,000 in arrears, which is equal to a 6.08 percent return, the implicit rate in the lease agreement. The lease receivable, $32,832, is equal to the present value of the lease payments discounted at 6.08 percent. • For the scenarios whereby the fair value (FV) is greater than the carrying value (CV), the fair value is $40,000 and the lessor will charge the lessee a monthly lease payment of $1,091 in arrears, which is equal to a 6.08 percent return, the rate implicit in the lease agreement. The $35,820 lease receivable is equal to the present value of the lease payments discounted at 6.08 percent.
EXHIBIT 1: RECEIVABLE AND RESIDUAL APPROACH – JOURNAL ENTRIES FAIR VALUE EQUALS CARRYING VALUE Year
(A) Annual lease payments of $1,000 per month. (B) Lease receivable is equal to the present value of an ordinary annuity of $1,000 discounted at 6.08% over 36 months. (C) Residual asset represents the rights to the underlying asset retained by the lessor and is equal to CV – (CV X (LR/ FV)) or $37,000 – ($37,000 X ($32,832/$37,000)) = $4,168. (D) Represents the lease revenue on the lease receivable, which is amortized using the effective method at 6.08%. (E) The residual asset is accreted using 6.08% interest rate to arrive at $5,000 residual value at the end of the lease.
EXHIBIT 1A: RECEIVABLE AND RESIDUAL APPROACH – SELECTED ACCOUNT BALANCES FAIR VALUE EQUALS CARRYING VALUE R&R MODEL
OPERATING LEASE MODEL
$ - (C)
(A) Lease receivable is equal to the present value of $1,000 discounted at 6.08% over 36 months. (B) Residual asset represents the rights to the underlying asset retained by the lessor CV – (CV X (LR/FV)) or $37,000 – ($37,000 X ($32,832/$37,000)) = $4,168. (C) The lease receivable is amortized using the effective interest method at 6.08%. (D) The residual asset is accreted using 6.08% interest rate and accreted using a constant rate to arrive at the residual value at the end of the lease. (E) Represents the book value of the equipment, cost less depreciation of $10,667 (($37,000 less $5,000) / 3) per year. (F) Annual lease payments of $12,000 less depreciation of $10,667.
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continued on next page
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Lessor Accounting continued from previous page
Not surprisingly, Exhibits 1 and 1a reveal the same total profits under both the R&R model when fair value equals the carrying value and the operating lease model, but the R&R model profit is front loaded. At the beginning of the lease, the R&R model begins with assets equal to $37,000, the lease receivable of $32,832 and residual asset of $4,168, and end with assets equal to $5,000, the lease receivable of $0 and a residual asset of $5,000. With the R&R model, income is based on the interest earned at 6.08 percent on the lease receivable and amortized to zero by the end of the lease and the amount of residual asset is accreted to its residual value of $5,000 using 6.08 percent. The operating lease model derives the lease payment of $1,000 based upon the 6.08 percent interest rate (the rate the lessor charges the lessee). This rate is applied to a beginning balance of $37,000 to arrive at the residual value of $5,000.
EXHIBIT 2: RECEIVABLE AND RESIDUAL APPROACH – JOURNAL ENTRIES FAIR VALUE GREATER THAN CARRYING VALUE Year
(A) Annual lease payments of $1,091 per month. (B) Lease receivable is equal to the present value of an ordinary annuity of $1,091 discounted at 6.08% over 36 months. (C) Residual asset represents the rights to the underlying asset retained by the lessor and is equal to CV – (CV X (LR/ FV)) or $37,000 – ($37,000 X ($35,820/$40,000)) = $3,866. (D) Represents the lease revenue on the lease receivable, which is amortized using the effective method at 6.08%. (E) Represents profit at the inception of the lease (LR – (CV – RA)) = ($35,820 – ($37,000 - $3,866) = $2,686. (F) The residual asset is accreted using 6.08% interest rate to arrive at $4,639 residual value at the end of the lease. The accretion is considered interest income.
EXHIBIT 2A: RECEIVABLE AND RESIDUAL APPROACH – SELECTED ACCOUNT BALANCES FAIR VALUE GREATER THAN CARRYING VALUE R&R MODEL
OPERATING LEASE MODEL
$ - (C)
(A) Lease receivable is equal to the present value of $1,091 discounted at 6.08% over 36 months. (B) Residual asset represents the rights to the underlying asset retained by the lessor CV – (CV X (LR/FV)) or $37,000 – ($37,000 X ($35,820/$40,000)) = $3,866. (C) The lease receivable is amortized using the effective interest method at 6.08%. (D) Represents the residual asset plus accretion. (E) Equals lease revenue plus any accretion (interest income). (F) Represents the book value of the equipment, cost less depreciation of $10,667 (($37,000 less $5,000) / 3) per year. (G) Annual lease payments of $13,092 less depreciation of $10,667. (H) Represents profit at the inception (LR – (CV – RA)) = ($35,820 – ($37,000 - $3,866) = $2,686.
Exhibits 2 and 2a indicate that, although the R&R model when fair value is greater than carrying value produces a profit of $2,686 at the inception of the lease, the residual asset initially valued is less than that of the R&R model applied when fair value is equal to carrying value (only $3,866 vs. $4,168). The residual asset is based on a $37,000 cost rather than a $40,000 fair value [CV – (CV X (LR/FV))]. This produces a lower residual value of the underlying asset at the end of the lease by $361 ($5,000 residual value less $4,639). The overall profit is also lower by an equivalent amount ($361). On the other hand, the operating lease model earns profit based on the fair value. The operating lease model derives the lease payment of $1,091 based on the rate charged by the lessor to the lessee (in this case, the implicit rate of the lease, 6.08 percent) applied to a beginning balance of $40,000 (fair value) to arrive at the residual value of $5,000.
The Boards have made it clear that they do not have complete and final thoughts on lessee or lessor accounting at this time. Some questions remain to be resolved and are subject to further deliberations. The Boards plan to re-expose the proposed guidance and continue with deliberations. This outreach indicates that the Boards intend to issue a quality standard and are cognizant of the views of their constituents. A complete summary of the Boards’ deliberations on the leases project is available on FASB’s website at www.fasb.org or IASB’s website at www.ifrs.org. n Josef Rashty, CPA, has held managerial positions with several publicly held technology companies in the Silicon Valley region of California. He is a member of the Texas Society of CPAs and can be reached at email@example.com. John O’Shaughnessy, Ph.D., CPA (inactive), is an accounting professor at San Francisco State University. He can be reached at firstname.lastname@example.org.
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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 June 30, 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. c 2. b 3. c 4. d 5. b 6. a 7. c 8. d 9. a 10. a 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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The Ever Changing Lease Exposure Draft, Part II – Lessor Accounting BY JOSEF RASHTY, MS, CPA, AND JOHN O’SHAUGHNESSY, PH.D., CPA (INACTIVE) 1 The initial Exposure Draft issued in 6 The calculation of profit using the R&R August 2010 proposed a dual accounting model is: model for lessors based on who bears A. (lease receivable + residual asset) – carrying amount the significant risks or benefits of the of underlying asset underlying asset. The two approaches were B. (present value of lease receivable ÷ fair value of titled: the underlying asset) X carrying amount of the A. Sales-type and Operating approaches underlying asset B. Direct Financing and Performance Obligation C. (lease receivable ÷ fair value) X carrying amount of approaches underlying asset C. Residual and Direct Financing approaches D. (lease receivable ÷ fair value) X residual asset D. Performance Obligation and Derecognition approaches The assumptions used in the questions below are as follows: 2 The Boards tentatively decided in July 2011 that a single lessor accounting model, the R&R method, should apply to all leases. The only exceptions to the R&R method would be short-term leases and: A. B. C. D.
PERIOD PRESENT VALUE OF $1 DISCOUNTED AT 7.50% 1 0.9302 2 0.8653 3 0.8050 TOTAL 2.6005
operating leases leases of inventory leases of investment property measured at fair value leases of real property
The lessor entered into a three-year lease agreement for equipment with the lessee. The carrying value (CV) of the equipment is $28,420 at the commencement of the lease and has a residual value of $3,000 at the end of three years. The fair value (FV) equals the carrying value (CV). The lessor will charge 3 Short-term leases are leases that have a the lessee an annual lease payment of $10,000 in arrears, which is equal to a 7.5 percent return, the implicit rate in the lease maximum possible lease term: agreement.
A. of 12 months or less, including bargain purchase options B. of 12 months or less C. of 12 months or less, including options to renew or extend D. of 12 months or less, including options to renew or extend up to a maximum of 24 months
7 Given the above assumptions, how much is the amount of the lease receivable at the inception of the lease? A. $25,024 C. $27,004 B. $28,420 D. $26,005
approach, the residual asset recognized on the lessor’s balance sheet represents:
A. $2,415 B. $1,563
A. B. C. D.
9 How much is the interest income resulting from accretion for the first year of the lease? A. $211 C. $891 B. $1,950 D. $181
8 How much is the amount of the residual 4 When using the Receivable and Residual asset at the inception of the lease?
rights to the underlying asset retained by the lessee rights to the underlying asset retained by the lessor rights to the lease receivable present value of the lease payments
C. $1,113 D. $2,670
5 When using the Receivable and Residual approach and when fair value equals Additional assumptions – assume the fair value (FV) is greater than the carrying value (CV). The fair value is $35,000, the carrying value, the residual asset value at carrying value (CV) of the equipment is still $28,420 and the end of the lease term is equal to: the lessor will charge the lessee an annual lease payment of
$12,530 in arrears, which is equal to a 7.5 percent return, the A. the residual value of the underlying asset rate implicit in the lease agreement. B. zero C. the initial value of the residual asset at the inception 10 How much is the profit at the inception of the lease of the lease? D. not enough information to determine answer A. $1,962 C. $6,126 B. $5,583 D. $3,530
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$143,153 gross. Southeast Houston. 50% tax and 50% accounting. Good location with loyal clientele. TXS1108
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$63,000 gross. Brownsville. High concentration of tax work with 7 bookkeeping clients. Bilingual staff in place. TXS1100 $400,000 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 $303,000 gross. Conroe. Year round revenues include 50% tax, 25% bookkeeping, 5% reviews, & 20% other. TXS1106 $178,230 gross. Clear Lake Area. CPA firm with 53% tax, 27% acctng, 14% state returns and 6% other. Cash flow to owner 70%. TXS1114 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: NORTH DALLAS CPA $200,000; CORSICANA area CPA firm grossing $450,000+. TYLER area CPA grossing $175,000+. 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 firstname.lastname@example.org
Practices Sought 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 email@example.com. 210-366-9430.
| MAY/JUNE 2012
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.
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
ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales
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!”
Engineering-based Cost Segregation Bring significant tax deductions to your clients through IRS approved engineeredbased cost segregation studies. CSSI is the premier company providing engineeringbased cost segregation studies for U.S. property owners and can provide you an additional tax savings tool you can offer to your clients at no cost to your firm. Partner with a company you can trust to be solely dedicated to this process and who values the relationship you have with your clients. Please contact Bob Farr, CPA.
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!
firstname.lastname@example.org 512-750-9088 www.rfarrcpa.costsegserve.com CSSI is not a CPA firm
Call now for your Free Report! 800-419-1223 X101 or send a quick e-mail to email@example.com
Software For Sale
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.
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: firstname.lastname@example.org. For more information and to request a classified ad, contact Donna Fritz at email@example.com or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601.
TSCPA Continuing Professional Education Programs JUNE MONDAY
Annual Yellow Book Update and Review: A Realistic Approach Fort Worth CPE Credits: 8
11 Texas School District Accounting & Auditing Conference San Antonio CPE Credits: 16
18 How to Conduct a Review Under the AICPA Practice-Monitoring Programs Dallas CPE Credits: 16
22 Real World Fraud: War Stories From The Front Lines Houston CPE Credits: 8
27 Satellite Broadcast: CPA’s Guide to Tax Planning for Debt Cancellation and Restructuring Various CPE Credits: 8
28 Advanced Course: Overview of the AICPA Peer Review Program Standards Houston CPE Credits: 8
Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Dallas CPE Credits: 4
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Fort Worth CPE Credits: 8 CPE By The Sea Conference Galveston CPE Credits: 24
Personal and Professional Ethics for Texas CPAs El Paso CPE Credits: 4 Audit Workshop: Best Practices in Planning & Designing a High Quality Audit Houston CPE Credits: 8
CPE Cluster South Padre Island CPE Credits: Up to 24 25 Advanced Workshop: Practical Guidance for Peer Review Dallas CPE Credits: 8
Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4
Advanced Excel Houston CPE Credits: 8
Advanced Excel Midland CPE Credits: 8
Audit Workshop: Best Practices in Planning & Designing a High Quality Audit Austin CPE Credits: 8
Real World Fraud: War Stories From The Front Lines Austin CPE Credits: 8
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Midland CPE Credits: 8
CPE Personal Assistant Be sure to use your CPE Personal Assistant on the TSCPA website. It’s an online tool TSCPA members can use to track, maintain and update their CPE records. You can access this tool by going to the CPE area of the TSCPA website (tscpa.org) and clicking on the CPE Personal Assistant box.
| MAY/JUNE 2012
9 10 Estate and Life Planning Issues for The Complete Trust Workshop the Middle Income Client Houston Houston CPE Credits: 8 CPE Credits: 8
11 Estate and Life Planning Issues for the Middle Income Client Dallas CPE Credits: 8
12 Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4
13 Accounting and Reporting for Notfor-Profits: Issues and Answers Dallas CPE Credits: 8
Accounting and Reporting for Notfor-Profits: Issues and Answers Austin CPE Credits: 8 The Complete Trust Workshop Dallas CPE Credits: 8 Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Houston CPE Credits: 8
IFRS For Smaller Entities vs. U.S. GAAP Houston CPE Credits: 8
18 Audit Workpapers: Documenting and Reviewing Field Work Austin CPE Credits: 8 Advanced Excel Dallas CPE Credits: 8
IFRS For Smaller Entities vs. U.S. GAAP Dallas CPE Credits: 8
Accounting for Income Taxes: Applying Temporary and Uncertain Tax Positions Houston CPE Credits: 8
Accounting for Income Taxes: Applying Temporary and Uncertain Tax Positions Dallas CPE Credits: 8
Advanced Excel Austin CPE Credits: 8 Advanced Health Care Conference San Antonio CPE Credits: 20
CPE Cluster San Antonio CPE Credits: Up to 24 23 Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4
24 Annual Yellow Book Update and Review: A Realistic Approach Austin CPE Credits: 8
Annual Yellow Book Update and Review: A Realistic Approach San Antonio CPE Credits: 8
Hot IRS Tax Examination Issues for Individuals and Businesses Dallas CPE Credits: 8
Annual Update for Accountants and Auditors Fort Worth CPE Credits: 8
Audits of 401(k) Plans Dallas CPE Credits: 8 Technology for CPAs: Don’t Get Left Behind Fort Worth CPE Credits: 8
Audits of 401(k) Plans Houston CPE Credits: 8
Technology for CPAs: Don’t Get Left Behind Dallas CPE Credits: 8
Hot IRS Tax Examination Issues for Individuals and Businesses Houston CPE Credits: 8 Annual Update for Accountants and Auditors Dallas CPE Credits: 4
International Versus U.S. Accounting: What in the World is the Difference Houston CPE Credits: 8 Texas Franchise (Margin) Tax Fort Worth CPE Credits: 8
Annual Update for Accountants and Auditors Houston CPE Credits: 8
International Versus U.S. Accounting: What in the World is the Difference Dallas CPE Credits: 8 Texas Franchise (Margin) Tax Dallas CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Lubbock CPE Credits: 4
| MAY/JUNE 2012
with TSCPA-Sponsored Insurance Plans TSCPA-Sponsored Insurance Plans include:
Quality Coverage Negotiated Exclusively For TSCPA Members
Whether you need term life coverage to help protect your growing family … a solid disability program to help protect your income … or long-term care coverage to help protect your quality of life, TSCPA-sponsored Insurance Plans are a smart financial safety net—that are NOT tied to any practice or employee benefit program.
• Professional Liability Insurance
Plus, TSCPA-sponsored Insurance Plans give you the added advantages of economical group rates and reliable coverage from some of the nation’s leading insurance companies. Best of all, you can help set up a strong safety net through TSCPA-sponsored Insurance Plans and then practically forget about it—no matter what turns your career takes.
• Group Term Life Insurance Plan*
Insurance Protection You Can Trust— Call toll-free 1-800-262-7689 or visit www.tscpainsure.com for your free,
no-obligation information packet including costs, eligibility, renewability, exclusions, limitations and terms of coverage. No insurance agent will call.
• Group Long-Term Disability Income Plan* • Group Voluntary Dental Insurance Plan** • Long-Term Care Insurance Plan • Group Hospital Indemnity Plan* • Group AD&D Insurance*
AR Ins. Lic. #245544, CA Ins. Lic. #0633005 d/b/a in CA Seabury & Smith Insurance Program Management
Plans may vary and may not be available in all states. *Underwritten by New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010 (Policy Form GMR). **Underwritten by The United States Life Insurance Company in the City of New York. 55317 ©Seabury & Smith, Inc. 2012
• Group 10-Year Term Life Insurance*
• Veterinary Pet Insurance • Health Savings Account (HSA) Qualified Group High Deductible Health Plan*