On Balance November|December

November|December 2013 | Vol. 9 No. 6

MAKING

THE CASE MARY JO WERNER, J.D., CPA, CFF, PARTNER, WIPFLI LLP

PLUS:

Advising your clients on tax due diligence Getting a handle on health care reform Developing an end-of-year tax checklist

A publication of the Wisconsin Institute of CPAs | www.wicpa.org

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A publication of Wisconsin Institute of CPAs | www.wicpa.org

November/December 2013 Vol. 9 No. 6

6 Features

Columns

6 Making the case Mary Jo Werner, J.D., CPA, CFF earns recognition for providing litigation support for law firms and assists in fraud and forensic investigations.

By Cynthia M. Hodnett

28 TAX

Looking toward 2014: Last minute tax information, tips and strategies Consider several tips to take stock of your business’s tax situation before the start of the new year.

By Jamey G. Rappis, J.D. and Jason M. Feltz, CPA

10 Seizing today and tomorrow Your peers provide their insight on top CPA-related issues for 2014 and beyond.

By Daniel N. Davidson 16 State and local tax due diligence: What’s the exposure?

Be aware of these issues when advising your clients about state and local tax due diligence.

By Jon P. Skavlem, CPA and Phillip A. H. Roemaat, J.D., CPA 20 The road to health care reform: Expect bumps along the way Discover how the complexities of health care reform may change how you advise your clients.

By Donna Pinsoneault

www.wicpa.org

20

30 TECHNOLOGY

Why take risks with IT risks?

Gain awareness of the latest information technology risks and how to avoid them.

By Paul R. Rozek, MPM

34

32 HUMAN RESOURCES

Designing a winning workplace culture Accountability, support, creativity and inspiration are key in creating a successful workplace culture.

By Diane Kelly

Departments

34 FRAUD

Becoming a fraud-resistant organization Prevent revenue loss by taking charge of your company’s antifraud plan.

By Melodi Bunting, CPA, CMA, CGMA

15 In Touch | president & ceo’s message

2

Membership Matters | member benefits

3 Outlook | chair’s letter 5 Spotlight | from the editor

26 Odds & Ends | news briefs 26 Kudos | members in the news 27 Memorials | departed members

On Balance

November|December 2013

1

{ Membership Matters | more involvement }

Tomorrow’s CPAs need you today

By Barb Gamez, vice president of Membership & Marketing, WICPA

2013 Apex Award for Publication Excellence Winner

2013-2014 WICPA OFFICERS/BOARD MEMBERS Chair Robert A. Gruber, Ph.D., CPA, CGMA Chair-elect Jean M. Hansen, CPA, MBA, CGMA Past-chair Danica E. Olson, CPA, CGMA Secretary-treasurer Joy L. Hertlein, CPA, CGMA Directors Kyle J. Beld, CPA Greta C. Diercks, CPA Katherine L. Hauser, CPA, MBA, CGMA Kelly K. Miller, CPA Joan M. Phillips, CPA Matthew I. Raunio, CPA Gregory L. Ryan, CPA Carver Smith, CPA Martin D. Verhelst, CPA AICPA Council Nicholas S. Lascari, CPA, CEA, CGMA Karla E. Blair, CPA President & CEO Dennis F. Tomorsky, CPA, J.D., CGMA Vice President of Communications Amy E. Gaeth Vice President of Membership & Marketing Barb Gamez Editor Cynthia M. Hodnett Copy Editor Joan Bahr Design & Layout Angela Wade Advertising Manager Ellen Engel Printing Marek Printing Join us online!

On Balance is published six times a year by the Wisconsin Institute of Certified Public Accountants (WICPA). Change of address should be sent to: Membership, 235 N. Executive Drive, Suite 200, Brookfield WI 53005; Phone: 262-785-0445 or 800-772-6939 (WI/MN); Fax: 262-785-0838; email: jessica@wicpa.org. Statements and opinions expressed are those of the authors and not necessarily those of the WICPA. Publication of an advertisement does not constitute an endorsement of the product or service by On Balance or the WICPA. Articles may be reproduced with permission. © Copyright 2013 On Balance.

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On Balance

November|December 2013

A

s you may know, it has been widely reported that the largest population, baby boomers, are beginning to retire. Nearly every profession is experiencing the impact of that population leaving the workforce. What does that mean for the accounting profession and what can we do about it?

The AICPA’s Trends report about the supply of accounting graduates and the demand for public accounting recruits offers insight into what we can expect. The report identifies key trends in enrollment, graduation and hiring through the 2011–2012 academic year. According to the report, 100 percent of firms with 10–49 CPAs expected a higher number of new accounting graduates to be hired in 2012! Of those with 50–200 CPAs, 50 percent expected a higher number of new accounting graduates, and of those with more than 200 CPAs, 75 percent expected more new graduates to be hired. This shows that hiring is at an all-time high.

Ensuring that there are enough CPAs to meet tomorrow’s demand requires us to encourage students about the rewards of becoming a CPA. The WICPA Educational Foundation is committed to supporting 14 elementary, high school and college programs that create awareness of the profession and encourage future generations of accountants.

Awareness of the profession starts early Interest in accounting starts by planting the seed through financial literacy. Each April, the WICPA and its members promote national financial literacy month with Reading Makes Cents. Throughout the month, members volunteer at local elementary schools to read money-themed books to kids.

Hands-on experience often sparks the passion for the profession

High school is where the seed grows into a budding desire to pursue a career in accounting. In fact, 50 percent of high school students surveyed said they chose an accounting career because of their high school accounting classes.

Because high school teachers are critical to student awareness of accounting, the foundation offers accounting career awareness grants to teachers who attend the foundation-supported high school educators symposium. Twenty-six high school teachers were awarded grants totaling $37,939 for projects that promoted accounting and involved interaction with Wisconsin CPAs in 2013.

Another vital program is the Young Entrepreneurial Scholars (YES) program, which is dedicated to introducing minority high school students to the accounting profession. The foundation contributes to the YES program’s efforts to provide internships and scholarships for students to participate in a week-long, pre-college program at University of WisconsinOshkosh and UW-Milwaukee to attend various business classes.

Scholarships help ensure success One way to help college students become CPAs is by offering scholarships to directly support that goal. The foundation’s scholarship program rewards students who excel academically and demonstrate commitment to a career as a CPA. Scholarships are awarded to qualified accounting students in their fifth year of academic study and working toward the 150-hour requirement to sit for the Uniform CPA Examination.

The foundation awarded $45,000 in scholarships in 2013.

These are just a few of the ways the WICPA and the educational foundation are helping students today become CPAs tomorrow. What will you do?

Your membership to-do list this month:  Contribute to the WICPA Educational Foundation: www.wicpa.org/EF.  Nominate an outstanding colleague for the 2014 WICPA Excellence Awards: www.wicpa.org/awards. www.wicpa.org

{ Outlook | chair’s letter } “OK, perhaps ‘love’ is too strong of a word for our feelings about numbers.

However, we are certainly more comfortable with them than most people.”

Know your WICPA

A

s CPAs, we love numbers. They are symbols used to count, measure, describe and label. They can be mathematically manipulated, e.g., add, subtract, cosine, derive, etc., and order things from best to worst or highest to lowest. They can be positive or negative, and in some cases, represent absolutely nothing.

OK, perhaps “love” is too strong of a word for our feelings about numbers. However, we are certainly more comfortable with them than most people.

So, I thought it would be a good idea to share some numbers about the WICPA with you. After all, numbers speak volumes, but only when they form a basis for further discussion, analysis and action.

The following numbers are from 2012, unless noted otherwise.

Us:

• There are 7,868 members in the WICPA. This represents 53 percent of the licensed CPAs in Wisconsin.

• 63 percent of WICPA members are women; 37 percent are men.

• 38 percent of members are in public practice and 38 percent are in industry. An additional 15 percent are either retired or classified as lifetime members.

• A special membership category exists for high school and college students and educators.

• The WICPA’s primary revenue sources are:

• • • •

Membership dues: 54 percent.

CPE registration fees: 36 percent.

Peer reviews: 3 percent.

Advertising: 2 percent.

• Staff information:

• Number: 13.

• Members per staff: 605.

• Revenues per staff: $230,769.

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• The WICPA’s annual budgeted expenditures in FY 2012: $3.0 million.

• 6 percent of the WICPA membership contributed $81,000 toward the PAC fund.

• States not requiring mandatory CPE to maintain a CPA license: 1. (Wisconsin is the only state that does not require mandatory CPE to maintain a CPA license.)

www.wicpa.org

Them:

• Of the 751,307 actively licensed CPAs in the United States, about 437,947 or 58 percent are members of a state CPA society or institute.

• Wisconsin’s peer cluster (10 institutes closest to us in size) includes Washington, Minnesota, Colorado, Tennessee, Missouri, Indiana, Alabama, Oklahoma, Louisiana and Arizona.

• 70 percent of the licensed CPAs in these states are members of a state society or institute.

• 39 percent of members in these states are in public practice and about 33 percent are in industry.

• Staff information (average of all state CPA societies):

• Number: 20.

• Members per staff: 447.

• Revenues per staff: $221,597.

• There are approximately 386,000 CPAs who are members of the AICPA. About 30 percent are women. As of May 2012, there were 1,129,340 positions in these states classified as “accountants and auditors.”

In conclusion … wait a minute! Why I am saying this? Since we all love numbers, I think it’s best we all now read, analyze and interpret these numbers, and begin a dialogue amongst ourselves.

And, it’s important to remember, not everything that can be counted counts and not everything that counts can be counted.

Robert A. Gruber, Ph.D., CPA, CGMA is a professor and Master of Professional Accountancy program Balance of Wisconsin-Whitewater.

November|December 2013 coordinator at theOn University Contact him at 262-472-5463 or gruberr@uww.edu.

3

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On Balance

November|December 2013

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{ Spotlight | letter from the editor } “This year brought several significant changes to your platforms of WICPA’s communications, including On Balance and our website.”

Ending the year on a high note

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W

ow, it’s hard to believe that 2013 is almost over, and a new year is almost here. This year brought several significant changes to your platforms of WICPA’s communications, including On Balance and our website. These changes reflect our ongoing mission to serve you better.

The January/February of On Balance introduced the WICPA’s first-ever, brand-new digital installment of the magazine.

The print and digital formats provide relevant information that affects you as a CPA. Both also highlight CPA-related issues, plus public policy impacting CPAs, continuing professional education programs, conferences, special events, promotions, awards and new hires.

However, you can read your digital magazine sooner instead of waiting several weeks for the printed copy to arrive in the mail. Plus, you can conveniently read the digital version whenever you want on your mobile device or desktop.

Another big change that occurred earlier this year was enhancing the website. During this time, an advisory group of members and staff reorganized the website’s content and tested its new features. The result of their hard work is an improved website that includes how-to-videos and quick links that allow you to access content relevant to you.

Offering you a digital version of this magazine and enhancing the website are examples of how we’re adding more value to your WICPA membership. We’ve discovered that by creating these platforms for communication, we’re creating a community for you and your peers.

Through member surveys, you’ve told us that networking, receiving information about issues impacting the CPA profession and accessing professional resources were several reasons why you joined the WICPA. We listened to your feedback. Stay tuned for more new and exciting changes to

www.wicpa.org

come in 2014.

In the meantime, check out this issue of On Balance, which examines issues affecting the CPA profession, including how pending health care laws will affect CPAs and their role as advisor to clients. Also, discover what should be included on an end-ofthe-year tax checklist.

Then, learn how CPAs should advise clients about state and local tax due diligence. Plus, gain insight on top information technology issues impacting accounting businesses, tips for creating a successful workplace culture and implementing costeffective fraud prevention processes at your company.

Lastly, read about WICPA member Mary Jo Werner, J.D., CPA, CFF, partner and leader of Wipfli LLP’s tax practice in La Crosse.

Learn more about Werner’s role in providing litigation support for law firms, and assisting in fraud and forensic investigations.

Cynthia M. Hodnett is editor of On Balance magazine. Contact her Balance November|December 2013 atOn 262-785-0445 ext. 3004 or cynthia@wicpa.org.

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On Balance

November|December 2013

www.wicpa.org

MAKING

THE CASE

MARY JO WERNER, J.D., CPA, CFF EARNS RECOGNITION AS AN EXPERT WITNESS

BY CYNTHIA M. HODNETT

M

ary Jo Werner, J.D., CPA, CFF, a partner at Wipfli LLP’s La Crosse office, is in the credibility business.

Werner uses her tax and accounting experience

to help her clients reduce their income and estate tax exposure, making them more profitable. Plus, she’s expanded her role as a CPA expert witness.

Not many members of a jury understand the numbers and complex financial details that frame many cases, such as a calculation of lost wages in a personal injury case. So, attorneys hire Werner to walk the jury through the details so they understand the numbers weren’t fabricated.

www.wicpa.org

On Balance

November|December 2013

7

“I have to understand all of the facts, then point out discrepancies regarding the financial aspects of the

in tax and valuation. Werner served as a member of

lawyers in helping their clients achieve a good result.”

the National Taxpayer Advocacy Panel, which reports

LIKE MOTHER, LIKE DAUGHTER

to Congress. This panel’s mission is to improve the

numbers as a child. Her mother worked part time as an accountant and bookkeeper.

“I saw how happy her clients were with her work, and what she did must have been pretty important,” Werner said. “I knew that’s what I wanted to do.”

Werner graduated with a Bachelor of Arts/ Science in Accounting, Political Science and Business Administration from Loras College in Dubuque, Iowa, in 1981. She later earned a law degree from Creighton University School of Law in Omaha, Neb., in 1984.

During that same year, she began working at the former Touche Ross & Co. (now Deloitte) in Milwaukee.

In 1987, she earned her CPA license and returned to La Crosse to work at Halverson & Associates, a small certified public accounting firm.

By 1995, Werner was named partner at the firm.

Internal Revenue Service. On the panel, she served as past chair of a committee that created best practices to reduce identity theft, streamlined the IRS audit process, modified and clarified instructions on many IRS forms, brought issues from taxpayers to IRS agencies, and assisted in the redrafting of IRS Audit Technique Guides.

In 2012, she earned the President’s Volunteer Service Award at the gold level for her service of more than 500 hours to the advocacy panel.

She also provides litigation support for law firms and assists in fraud and forensic investigations. Her background in law makes her an asset to attorneys who need a financial expert to bolster their cases.

For example, Werner has calculated the amount that the plaintiff’s family would receive in a wrongful death lawsuit. She has also calculated alimony and child support payments in various family court cases.

During that year, the firm was acquired by Wipfli LLP.

But working as an expert witness in the 2012 murder

Joining Wipfli was a good decision for the small firm,

trial of Eric Koula has been the most challenging, she said.

as it couldn’t keep up with the constant changes that

Prosecutors argued during the trial that deep debt

occurred after several federal tax laws were passed in

and a floundering day-trading career drove Koula

the 1980s.

to kill his parents in 2010 to claim his inheritance,

“There were lots of tax changes — income tax,

On Balance

During her time at Wipfli, Werner has honed her skills

case,” she said. “It’s challenging, but I enjoy assisting

The La Crosse native developed an interest in

8

TRIED AND TRUE

according to a March 28, 2013 article in the La Crosse

partnership and S-corp rules changed — and it was

Tribune. Werner testified as an expert witness on Koula’s

hard for a small firm to be able to manage all of those

financial status, which was one of the keys to the

changes,” Werner said. “We were seeking a larger firm

prosecution establishing the defendant’s motive and

with strong technical expertise and a good reputation

led to his conviction. For her work during the Koula

with whom to affiliate. Wipfli wanted to open a La

trial, Werner earned the Public Service Award from the

Crosse location, and we were looking for a firm like

Wisconsin Association of Homicide Investigators (WAHI)

Wipfli. It was good timing.”

in 2012.

November|December 2013

www.wicpa.org

“She didn’t just answer the questions that we had, but

to law school assisted me in achieving this goal. I attended law

she came up with ideas and questions of her own that we

school right after college because my study habits were good,

hadn’t thought of,” said Tim Gruenke, La Crosse County district

and it helped me connect with other attorneys. “

attorney.

“You also need patience when working on cases because

“Investigators didn’t know about the business side of things, so she was able to really dig into areas that we didn’t know existed, such as finding bankruptcy documents, information about his day-trading,” Gruenke said. “Through that, she was able to show he wasn’t telling the truth. Without it, we wouldn’t be able to explain it to the jury so they could understand.”

Werner has a list of to-dos for CPAs who want to become CPA expert witnesses.

“I would recommend attending continuing education with a focus on the area of expert witness testimony,” she said. “Going

things take longer than you think they are going to. The (Koula) incident happened in May 2010,” she said. “I was retained a month later, and it was a two-year case.”

Also, don’t underestimate the importance of networking, she said.

“I’ve been able to contact attorneys and other experts that have helped me tremendously in preparing for a case.”

Cynthia M. Hodnett is editor of On Balance magazine.

Contact her at 262-785-0445 ext. 3004 or cynthia@wicpa.org.

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On Balance

November|December 2013

9

SEIZING AND

10

On Balance

November|December 2013

www.wicpa.org

TODAY TOMORROW

Your peers provide their insight on top CPA-related issues for 2014 and beyond

By Daniel N. Davidson In light of numerous recent changes in society, the workforce,

A: Yes. The biggest issue is communicating with the IRS,

the marketplace and the law, we recently asked some of your

either trying to talk to someone there on the phone or

peers for their perspective on issues affecting the present and

communicating with it through the mail. It can take 45

future state of the CPA profession.

minutes to an hour just to get someone at IRS to answer the

THOSE INTERVIEWED WERE:

phone, and if you send something through the mail it can

Jessica B. Gatzke, CPA, MST, tax manager at Scribner Cohen and Company, S.C. in Milwaukee and former chair of the

be tough getting the IRS to realize you’ve corresponded with them before they send you another notice.

WICPA Young Professionals Committee and former member of

This is an ongoing problem, but it has become more of

the WICPA Board of Directors.

a problem in the past year because some IRS staff have

Joy L. Hertlein, CPA, CGMA, CFO of New Berlin Plastics and current secretary/treasurer of the WICPA Board of Directors.

William B. Coleman, CPA, CGMA, CITP, president of Coleman

been reassigned, and some have been shifted to handle the Affordable Care Act. There simply are not enough people to answer our questions, and with retirements, there is not enough institutional knowledge to answer involved

& Williams, Ltd. in Milwaukee and a coordinator of the Young

questions.

Entrepreneurial Scholars (YES) Program, which promotes

Q: What else might need fixing there?

diversity in the CPA profession.

Bart Adams, CPA, CGMA, partner with Sikich LLP in Brookfield and former chair of the WICPA Board of Directors.

JESSICA B. GATZKE, CPA, MST Q: As a tax manager at Scribner Cohen, you have plenty of dealings with the Internal Revenue Service, and you know what works well there and what doesn’t. Are there major issues the profession faces that directly relate to the IRS?

www.wicpa.org

A: Another difficulty at the IRS is the trend to rely too heavily on computerizing matching programs, that is, using a computer program to match their records of taxable interest with what is reported by our client. That works fine for ordinary interest, but for pass-through income reported on a Schedule K 1, the reporting is too complicated for computer matching.

A second major challenge for us here is staying on top of all the tax laws that are out there. For example, the Medicare and high income surtaxes are complicating the issue even more.

On Balance

November|December 2013

11

JOY L. HERTLEIN, CPA, CGMA

WILLIAM B. COLEMAN, CPA

Q: Besides working in industry, you have been a WICPA member since 1987. You currently serve on the WICPA Industry Fall Conference Task Force and have served on the board in other capacities.

With you having those experiences, what do you see as the foremost challenges for the profession?

A: One of the biggest challenges facing our business would be understanding the demands and requirements that are being imposed by the Affordable Care Act and then developing

A: Definitely one of the biggest challenges we face is getting more minorities into the CPA profession. Minorities are grossly underrepresented. One problem is that our profession is the least known in the minority community. It’s very difficult to get people to sign on to a program they know very little about. The color of this country is

ways to address those requirements. We (New Berlin Plastics)

changing. In 20 years, it will not look anything like it does now,

don’t have a group health plan in place now and haven’t for

and we are going to have to work to ensure the workforce

a number of years. We provide a stipend each month to our

reflects that.

more than 50 employees to purchase an individual policy.

The YES Program is designed to encourage minorities to enter

The requirements of the Affordable Care Act will entail a

the profession. We have to get young people interested, and

significant cost to the company, not just for the insurance but

one way we do that is through that program’s accounting

for the additional administrative requirements. Those include

clubs, which target people in the ninth grade.

reporting requirements to the federal government and additional requirements that are meant to ensure that the plan we develop meets the requirements of affordability in order to avoid the penalties for not complying. The whole thing is further complicated because the matter of affordability is based on each employee’s level of household income.

Q: Encouraging greater participation by minorities also relates to another major issue that you believe the profession faces, right?

A: Certainly one of the major issues that we will be facing in the next years is that a great number of CPA partners will be

Q: Another concern of yours is the shortage of accounting professors. What’s going on there?

retiring. There will not be enough people to fill the vacuum that

A: This is a concern for both the CPA profession and the

We still have little besides the traditional programs for

business community. I don’t believe there is a shortage of

recruitment and education, and I have not seen anything

students who are interested in accounting, and that is in good

special outside of the usual things that we do. There is no

part due to the efforts of both the AICPA and the WICPA,

special recruiting or encouraging of students to enter the

which encourage students to enter the accounting field and to continue there.

The problem is at the teaching level. There is a shortage of Ph.D.s in the field. It is more lucrative to go into private practice, and so only a relatively few go on to get a Ph.D., and the result is that there is not enough teacher supply to meet the student demand. Both the AICPA and the WICPA are actively working on programs to support individuals who pursue a doctorate in accounting.

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Q: More efforts to increase diversity in the CPA profession are occurring on a national level now. How important are these efforts to ensure diversity in the CPA ranks?

On Balance

November|December 2013

will be created.

profession.

There are several reasons for this low participation, including some issues related to the lifestyle of CPAs — it generally is not attractive to young people. Also, the study required takes five years, and students say, “Why bother?”

The CPA profession has to make it easier for people to enter the profession, and it has to more aggressively market to students.

www.wicpa.org

BART ADAMS, CPA, CGMA Q: Sikich LLP, headquartered in Naperville, Ill., merged with Kolb+Co., of Brookfield on Aug. 1, 2013. How might the rationale for that merger fit in with the major challenges that face the CPA profession?

A: One of the biggest issues facing today’s CPA industry is the matter of providing value to employees and customers in a rapidly changing world marketplace, all of which entails the need to recognize how we deliver services to our customers and how we respond to competitors who are not just around the block anymore, but around the world.

Also, capital is an issue. Today it is necessary to invest a substantial amount of money in technology and training for even an entry level employee. This very fact of needing more capital is driving a lot of consolidations of CPA firms. When we merged, it was not just about ownership. Each firm was able to provide services that the other wasn’t. And, we looked at the merger in terms of being able to provide additional services to our clients and to offer an attractive environment to the kind of employees that we needed to retain and recruit.

Q: Are other challenges peculiar to these changing times?

A: Yes, integrating the various generations of workers in the workplace. We now have different generations that differ in their perspective of how they should do their job. In some cases, baby boomers believe they need to be at their desk and be very visible. But members of Generations X and Y might feel more comfortable providing their work online. This can cause misunderstandings about how hard some are actually working at their job, when often they are working just as hard as the older workers.

Another challenge the profession faces relates to succession planning, from both a management and ownership perspective, especially with the baby boomers now reaching retirement age. A lot of “baby boomer managers” and owners are soon going to have to decide on a change of ownership. But transferring a business 20 years ago is far different from how a transfer will take place in the next 20 years.

More creativity will be needed as the seller may be looking for all cash, and they may have a perception of the firm’s value that is not what it was historically.

The potential buyer may not have the requisite cash, and that may mean a more gradual transition of ownership. Owners will have to be more flexible. New managers will likely have a different vision for the company.

Daniel N. Davidson is a freelance writer in Milwaukee. Contact him at davidsondn@aol.com.

www.wicpa.org

On Balance

November|December 2013

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2 0 14

KNOW SOMEONE WHO STANDS OUT IN A CROWD? The hustle and bustle of daily routines can make days and years pass by before we take a moment to reflect on colleagues who have

impacted our lives and the lives of others. those who stand out, and give back to them

Take a moment today to think about for giving you so much.

CONSIDER NOMINATING: • An exceptional co-worker.

• A mentor.

• Someone who sparked your passion for the profession.

• Someone who shares his or her talent and gift with others.

• Someone who gives back countless hours to the community or nonprofit group.

ACCEPTING NOMINATIONS FROM MONDAY, SEPT. 2-FRIDAY, NOV. 22, 2013.

9 AWARD CATEGORIES Show your appreciation today by submitting your nomination at

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On Balance

November|December 2013

www.wicpa.org/awards www.wicpa.org

{ In Touch | president & CEO’s message } “Whether you’re employed in public accounting or a role serving one organization, you are facing a variety of challenges.”

Issues facing the CPA profession: The answers have changed

360b / Shutterstock.com

P

rofessor Albert Einstein was once criticized by a teaching assistant for giving the identical exam to the same students two years in a row. Einstein’s response: “It’s alright, the answers have changed.”

Whether you’re employed in public accounting or a role serving one organization, you are facing a variety of challenges. While some of these challenges are new, many issues remain unchanged from prior years or have evolved in various ways. In many of these cases, the answers have changed.

One issue that all CPAs continue to face is finding and retaining accounting talent. While the general challenge remains the same, employers are becoming increasingly innovative in their responses. Rather than relying on old style interviews and expecting new hires to “just figure it out,” most employers are applying thoughtful “behavioral-based” interview questions and following up with intentional onboarding processes along with collaboratively designed professional development opportunities for professionals throughout their careers.

Interpersonal style tests such as DISC, Myers Briggs and Predictive Index are routine in many organizations and enhance workplace productivity through improved communication and conflict resolution training.

Similarly, work-life integration processes in workplaces that increase worker flexibility also increase operational efficiency.

Regulatory changes continue to strain resources as CPA firms and other businesses struggle to keep up with new developments and manage the increasing risks of inadvertent noncompliance. Although burdensome, many regulatory changes have had some silver lining by creating new service opportunities for CPAs in public practice to guide clients through regulatory minefields with minimum inconvenience and cost. Other changes, such as evolving changes in financial reporting for nonpublic companies, may reduce burdens and costs, while increasing efficiencies for smaller businesses.

www.wicpa.org

There are challenges in both accounting education for students and continuing competency enhancement for professionals.

Recent advancements in both information technology and neuroscience research relating to how the brain learns are changing the way accounting and other subjects are taught.

Long student lectures and eight-hour live seminars have been determined to not provide the most effective learning for many technical subjects.

Many professors and continuing professional education instructors use blended learning techniques that combine shorter lectures with student discussion and feedback, along with online learning and other competency enhancing activities to accomplish “deep learning” with improved retention, recall and application of knowledge.

As you respond to your own professional challenges, remember that the answers may have changed.

Dennis F. Tomorsky, CPA, J.D., CGMA is president & CEO of the Wisconsin Institute of CPAs. Contact him at 262-785-0445 ext. 3014 or dennis@wicpa.org.

15

STATE AND LOCAL TAX DUE DILIGENCE:

WHAT’S THE EXPOSURE?

By Jon P. Skavlem, CPA and Phillip A.H. Roemaat, J.D., CPA

A

s the U.S. economy continues to recover from the last recession, the pace of business acquisitions, mergers, recapitalizations and venture capital transactions has accelerated. Globally and in the U.S., initial

involves state and local taxes income, franchise, sales and use, withholding, unclaimed property and other levies. It is no secret that state and local budgets were rocked by the recession. In an effort to close fiscal deficits, they passed aggressive new tax

public offering activity in the first half of 2013 was

laws and ramped up enforcement efforts, initiating

more than double the first half of 2012. Private

more nexus actions, bringing technology to audits,

equity investors have been especially busy. A

and adding new staff. 1

necessary outgrowth of this has been an increased

As the owners of a company contemplate selling,

demand for tax due diligence work on the part of

the historical state and local tax filings and activities

CPA firms and corporate tax departments.

will be a focus of a sophisticated buyer. In the

1

16

A key area of tax due diligence investigations

Katz, “State Insecurity,” CFO Magazine (April 2011), www.cfo.com/magazine (click on “View Back Issues”).

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November|December 2013

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past, the potential buyer focused primarily on the

and warranties such that the seller continues to

entity’s federal return positions. With the advent of

have responsibility to pay prior state and local tax

FIN 48 (now ACS 740), it became clear that state and

obligations. In most states but not all, past income

local tax exposures often exceeded federal exposures.

and franchise tax liabilities remain with the entity if

Professional due diligence teams now routinely inquire

the buyer acquires an ownership interest, e.g. stock

about such issues as sales and income tax nexus,

acquisition.

combined reporting, pass-through entity taxes and compliance with unclaimed property laws.

It’s important for both the buyer and seller to

To help mitigate risks for both the buyer and the seller, the agreement may include baskets and caps.

Baskets provide a minimum amount before the

understand all material state and local filing positions

purchaser can recoup funds from the seller for the tax

before concluding a sale. If a substantial liability is

liabilities it assumed. Caps define the maximum amount

identified, it can threaten the viability of the deal or

that a buyer would have to return to the seller for its

drastically reduce the sale price. Given that the price

exposure. Additionally, an escrow fund may be provided

is often pegged to a multiple of earnings, changing

so that the tax claims of a purchaser will be satisfied

the earnings to reflect unrecorded taxes that would

after the transaction closes. However, the due diligence

otherwise be assumed by the buyer can have a substantial impact. If the deal is cancelled, the buyer and seller are both at a loss given the amount of professional fees incurred during due diligence and negotiations.

During the sale process, sell-side risk identification of state and local tax issues should commence well in advance of sale, typically six to 12 months before engaging investment bankers, attorneys and other

and negotiation processes are not exact and amounts put in escrow for potential state and local tax exposures may prove inadequate or the terms of the warranty period too short.

State and local tax: Areas of risk State and local tax exposures can be many in number and varied in nature. This article is the first of two articles. This article focuses on tax due diligence

key professionals. For the buyer, a due diligence team

generally and how it relates to state income and

normally reviews the historical prior year state and

franchise taxes. The second article, which will appear in

local filing positions after a letter of intent (or a similar

the January/February 2014 On Balance, will highlight

document) and nondisclosure agreement are executed.

sales and use taxes and ways to remediate state

It should not be assumed that state and local tax exposures can be side-stepped by the buyer if the deal is structured as an asset purchase. Sales and use tax and withholding taxes are treated as successor liabilities

and local tax exposure that might affect a pending transaction.

Income, franchise, and gross receipts taxes

in many states. They can be pursued against either the

When assessing a company’s state and local tax

buyer or the seller unless a tax clearance certificate is

risk, income, franchise, and gross receipts taxes are

obtained or similar procedure is followed.

the conventional starting point. Due diligence efforts

Another way to deal with this risk is to carefully craft the buy-sell agreement’s tax representations

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should focus on where the company’s activities are versus what states and localities it files returns in. The

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17

operational territory of employees and location of the

Business Tax, which imposed both an income and a

company’s property is a good first indicator of where

gross receipts tax.11 Since these are not income taxes,

the company should be filing. For companies that sell

they generally have different nexus thresholds and can

tangible personal property, e.g., retailers, manufacturers,

create liabilities even if the company posts a net loss for

distributors, etc., Public Law 86-272 can provide

the year.

protection, although limited in nature, from income taxes nexus.2 An emerging jurisdictional concept among states is that of “economic nexus.”

Under this concept, a taxpayer is deemed to be doing

A growing number of states, including California, Illinois, Michigan, Massachusetts, Minnesota, New York, Texas and Wisconsin, require corporations that conduct a “unitary business” to file a combined return.

business in a state based on the amount of economic

In some cases, combination on a worldwide basis is

activity, e.g. sales, it has within a state even if the

necessary in the absence of a proper election to exclude

taxpayer lacks traditional measures of nexus such as

foreign affiliates. Proper due diligence requires a target

physical presence. Businesses dealing in intangibles,

company’s filing position be examined to determine if a

e.g. software, or providing services, are particularly

return should have filed on a combined basis and if so,

exposed to economic nexus risk. State and local tax

what entities were includible under state law.

3

due diligence should focus on states like California, Colorado and Connecticut if investigation reveals activity but no returns have been filed.

Multistate apportionment can also entail state tax exposure risk. Sales factor sourcing rules for service and intangibles companies are complex. Failure to understand when to apply the cost-of-performance approach, e.g., proportionate method and the plurality method4 versus benefits derived5 can lead to material income, franchise and other business entity tax liabilities.

Do not overlook local tax filings in the due diligence process. Many municipalities have income or other business entity taxes that can be material. New York City, Philadelphia, Louisville and various communities in Ohio impose such taxes.

If available, the target’s tax calendar of due dates provides a convenient roadmap for someone outside the company to understand where it files and due dates to be aware of. Reviewing on-going and prior year audits can bring other state exposures to light. Organizing these documents in advance of a buy-sell transaction

While income taxes often create state and local tax

(both in a paper and electronic format) is recommended.

exposure, a number of states impose taxes based on stock.7 Other taxes that can come into play include gross receipts taxes, like Washington’s Business and Occupation Tax8, Ohio’s Commercial Activities Tax9, the Texas Franchise Tax10 and the now defunct Michigan

Jon P. Skavlem, CPA is a director in the State and Local Tax group at Baker Tilly Virchow Krause, LLP in Milwaukee. Contact him at 414-777-5333 or jon.skavlem@bakertilly.com.

Phillip A.H. Roemaat, J.D., CPA is a manager in the State and Local Tax group at Baker Tilly Virchow Krause, LLP in Milwaukee.

Contact him at 414-777-5445 or phillip.roemaat@bakertilly.com.

Interstate Income Law, 15 U.S.C. §381 through §384 (known to state and local tax practitioners as P.L. 86-272), 3 See Cal. Rev. & Tax § 23101 Compare, N.C. Gen. Stat. § 105-130.4(l)(3) and Tex. Tax Code Ann. §171.103(a)(2) with Cal. Rev. & Tax § 25136 for taxable years beginning prior Jan. 1, 2013 and 72 Pa. Stat. Ann.§ 7401(3)(2)(a)(17), 5 See, e.g. Wis. Stat. § 71.25(9)(dh)(1); 18-125 ME Code R. § 801.05E(1); Cal. Rev. & Tax § 25136 for taxable years beginning after January 1, 2013, 6 Ga. Code Ann. § 48-13-72, 7 Pa. Stat. Ann. § 7602, 8 Wash. Rev. Code § 82.04.220 a, 9 Ohio Rev. Code § 5751.02, 10 Tex. Tax Code. Ann § 171.001, 11 Mich. Comp. Laws Ann. §§ 208.1201, 208.1203 2 4

18

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On Balance

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19

H T L A E THE ROAD TO H : M R O F E R E R A C AY W E H T G N O L A S EXPECT BUMP

BY DONNA PINSONEAULT

20

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C

PAs are navigating through challenges when consulting with clients about health care reform.

Like drivers threading their way through ever-changing construction zones, CPAs are keeping their eyes open and expecting bumps in the road.

Jim Bra

ndenb

“You want to have all the answers,” said Jim Brandenburg, CPA, MST, partner at Sikich LLP in Brookfield, “but there are still a lot of uncertainties.” Brandenburg focuses on tax issues at Sikich, which opened its first Wisconsin office in August 2013. The firm assists clients, mostly closely held medium-sized businesses, with planning and compliance. He also follows tax legislation at the federal and state level.

“With health care reform, we look at what has been enacted and what is potentially coming down the pipeline in additional regulations and guidance,” he said. “We look at the content of proposals and the makeup of Congress so we can get a handle on what might happen and how to plan with it.”

Although the employer mandate was delayed, Brandenburg pointed out that tax issues that affect 2013 returns remain a key concern. For example, a 0.9 percent tax assessed on earned income applies to single or married individuals. The extra 0.9 percent applies to earned incomes over $250,000

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urg, CP A, MST

for married couples and $200,000 for single taxpayers.

The new surtax on investment income also warrants attention.

“The surtax creates the potential for taxpayers whose income exceeds the threshold to pay an additional 3.8 percent on investment income on top of their regular income tax,” Brandenburg said.

Although specific details of the proposed rules had not been finalized when we went to print, the 3.8 percent surtax applies to the lesser of 1) investment income or 2) adjusted gross income over the threshold amount of $250,000.

“Clients with significant levels of investment income or significant levels of earned income will be affected by the surtax,” he said. “Someone who a year ago was in the top rate of 35 percent may see a tax rate increase to nearly 40 percent, plus the new 3.8 percent surtax on investment income that could result in an overall marginal rate of nearly 44 percent.”

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21

. abawa, J.D Barbara Z

employees with some peace of mind about what is going on,” she said.

Penalties for noncompliance are harsh, according to Mary Pat Dixon, J.D, CPA, a manager in the Benefits and Compensation group within the tax practice of Grant Thornton LLP in Chicago.

COMPLIANCE MATTERS Guiding clients through issues related to compliance with health care legislation is equally challenging. Barbara Zabawa, J.D., an attorney with Whyte Hirschboeck Dudek in Milwaukee, encourages CPAs to advise clients not only about government expectations but also about the expectations of their clients’ employees as consumers of health care.

“The Patient Protection and Affordable Care Act created protection from retaliation for employees who file or vocalize complaints about an employer’s or insurer’s compliance,” Zabawa said. “Employers can’t demote or fire an employee who voices concerns without facing a possible lawsuit. It’s important for employers and insurers to do a good job explaining their position related to the Act to mitigate any employee complaints that may arise.”

Additional confusion is bound to occur as awareness grows about health care exchanges and penalties for employers who do not provide coverage.

“An employer can help clear up some of the confusion which would not only diminish possibilities for employee claims, but also provide

22

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“A big challenge within the employer mandate is knowing who actually falls within that 95 percent threshold for full-time employees at 30 hours per week,” Dixon said. “Employers who pay a flat fee for a service or have variable employees who work, for example, 25 hours one week and 40 hours the next, may not have good controls in place,” she said.

“They may go over the threshold when all things are considered.”

Additional consideration may have to be given to independent contractors or people hired from a staffing agency.

“If they are considered a common law employee, the employer may have been misclassifying them,” she said. “That could trigger not only health care related penalties but raise questions related to taxes on those wages as well.”

Dixon questions whether clients are paying attention to what some refer to as the “Cadillac tax.”

Scheduled to take effect in 2018, the excise tax will be imposed on high cost insurance plans that provide high levels of benefit.

“The tax will be 40 percent on amounts above $10,200 for individual coverage and $27,500 for non-individual coverage,” she said. “Though a long way out, our advice is to minimize the effects of that over time.”

Staying on top of the rapidly changing information may be not possible for an individual CPA.

www.wicpa.org

Brandenburg advises CPAs to do their groundwork by taking advantage of seminars, webinars and other opportunities to learn more.

“Focus on areas that your clients need to know about,” he said. “Then make connections with other professions who know areas you may not be as familiar with. Talk with your clients’ insurance carriers, attorneys or third party administrators, as well as colleagues in your own firm.”

Zabawa said taking advantage of association memberships can be especially helpful for clients who are independent health care providers.

“There has been a pattern of consolidation, integration and merger with health care providers and patient plans,” she said. “It’s important to have that diversity in the marketplace, and the Affordable Care Act has come at a time when information sharing networks and medical record sharing systems are available.

Independent providers can help shift the focus from creating volume in services to ensuring value.”

Dixon advises including stakeholders with various roles when consulting with clients.

“With penalties on the horizon, we include legal, human resource, tax Mary Pa t Dixon, and payroll professionals in J.D, CPA the conversations” she said.

“Everyone needs to be aware of requirements and take some sort of ownership so nothing slips through the cracks.”

Donna Pinsoneault is a freelance writer in Brookfield.

Contact her at 262-821-9483 or dpinsoneault@gmail.com.

FOR MORE INFORMATION: Wisconsin Health Information Organization: www.wisconsinhealth.org.

Wisconsin Statewide Health Information Network: www.wishin.org.

Wisconsin Office of the Commissioner of Insurance: www.oci.wi.gov.

From the IRS website: Questions & Answers on the New Tax on Net Investment Income (Section 1411) www.tinyurl.com/taxfaqs.

Cynthia M. Hodnett is editor of On Balance magazine.

Contact her at 262-785-0445 ext. 3004 or cynthia@wicpa.org.

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istockphoto.com

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2013

holiday hours

it’s time to

renew

WICPA offices will be closed on the following dates: Thanksgiving, Thursday and Friday, Nov. 28 and Nov. 29 Christmas, Tuesday and Wednesday, Dec. 24 and Dec. 25 New Year’s Eve, beginning at noon, Tuesday, Dec. 31 New Year’s Day, Wednesday, Jan. 1, 2014

your dues keep your vital member benefits coming If you have not yet renewed your 2013–2014 membership, visit www.wicpa.org/renew for quick and easy online payment to keep your valuable member benefits coming, including On Balance magazine.

Pay your dues in the “Renew My Membership” section on the Members page. For information regarding your membership or username and password, contact Jessica Barillari at 800-772-6939 ext. 3025 or Jessica@wicpa.org.

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

GR WTH It’s what CGMA stands for.

Officially, of course, it’s Chartered Global Management Accountant.

A new designation representing accomplished professionals that drive and deliver business success, worldwide.

Find out more at cgma.org

www.wicpa.org CGMA_HalfPage_ADS.indd 1

On Balance

November|December 2013 1/30/12 11:16 AM

25

kudos Odd & Ends Jeffrey W. Danen, CPA, CVA, tax manager at Hawkins Ash CPAs, LLP in Green Bay, recently earned his certified valuation analyst credential.

Jamie L. Davister, CPA, a manager at Schenck SC in Green Bay, recently celebrated her 15th anniversary at the firm.

Jeffrey W. Danen, CPA, CVA

Brian T. Falk, CPA was recently promoted to senior accountant at RitzHolman CPAs in Milwaukee.

Andrew D. Faust was recently promoted to senior accountant at RitzHolman CPAs in Milwaukee.

Reenie S. Fluyeras, CPA was recently promoted to supervisor at RitzHolman CPAs in Milwaukee.

Jamie L. Davister, CPA

Thomas G. Jacoby, CPA, a shareholder at Schenck SC in Appleton, recently celebrated his 35th anniversary at the firm.

Daniel L. Kaminski, CPA, executive vice president of Johnson Bank, was recently appointed head of Johnson Bank Wealth, according to madison.com.

Melinda A. Kekstas, CPA, a supervisor at Schenck SC in Green Bay, recently celebrated her 10th anniversary at the firm.

Thomas G. Jacoby, CPA

Curtis J. Larson, CPA was recently named director of human resources at Equity Cooperative Livestock Sales Association in Baraboo, according to Agri-View Madison.

Hannah R. Lehman, CPA was recently hired as director of finance and process integrity at Breakthrough Fuel in Green Bay, according to the Green Bay Press-Gazette.

Shelby L. Pecor, CPA was recently promoted to supervisor at RitzHolman CPAs in Milwaukee.

Melinda A. Kekstas, CPA

Gregory J. Pitel, CPA, a supervisor at Schenck SC in Green Bay, recently celebrated his fifth anniversary at the firm.

Janean A. Robenhorst, CPA, a supervisor at Schenck SC in Green Bay, recently celebrated her 15th anniversary at the firm.

Edward M. Thelen, CPA, CGMA, a financial analyst at HumanaOne in Waukesha, recently received the Toastmaster of the Year award for District 35. The district encompasses Wisconsin and the western half of the Upper Peninsula of Michigan.

Janean A. Robenhorst, CPA Janean A. Robenhorst, CPA

Steven M. Thompson, CPA, a partner at Wipfli LLP in Green Bay, was recently named the partner-in-charge of the firm’s health care practice.

Bauj Vang was recently promoted to senior accountant at RitzHolman CPAs in Milwaukee.

Michael W. Van Wagenen, CPA, a partner at Reilly, Penner & Benton, LLP in Milwaukee, recently retired after almost 37 years at the firm.

Bauj Vang

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Bischel & Company joins KerberRose Bischel & Company, S.C. in Green Bay joined KerberRose S.C. on Aug. 1, 2013. Bischel & Company’s owner, Stephen J. Bischel, CPA and his staff, relocated to KerberRose’s Green Bay office at 2202 Woodale Ave.

WICPA wins two publication awards The WICPA has earned two 2013 APEX Awards for Publication Excellence in the Most Improved Magazines & Journals category for On Balance and in the Meetings & Events Materials category for the 2012 WICPA Tax Conference brochure.

The WICPA’s awards were among 971 APEX Awards of Excellence presented in 138 individual categories. The awards are presented annually to writers, editors, publications staff and business, nonprofit, agency and freelance communicators.

Award winners were selected for excellence in graphic design, editorial content and the success of the entry in achieving overall communications effectiveness and excellence.

Winter, Kloman, Moter & Repp named among top workplaces Winter, Kloman, Moter & Repp, S.C. in Brookfield has been named one of the Milwaukee Journal Sentinel’s 2013 Top Workplaces. Recognition as one of the top workplaces is based on employee feedback through an anonymous survey. The employee survey is conducted by Workplace Dynamics, LLP, a leading research firm on organizational health and employee engagement.

Scholarship named in honor of WICPA members celebrates 30 years The University of Wisconsin-Milwaukee’s Leer/ Tellier Scholarship fund, which is celebrating its 30th anniversary this year, has awarded more than $700,000 in accounting scholarship since its inception. Five or six $10,000 scholarships are awarded annually to full-time junior, senior or graduate accounting majors. The scholarship is named in honor of Jerry A. Leer, CPA, UWM emeritus professor and Peter J. Tellier, CPA, a consultant at SVA Certified Public Accountants in Brookfield. Leer and Tellier are also UWM alumni and WICPA members.

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memorials Donald W. Peterson, CPA, ABV, ASA, MBA, CMC, CMA (1949–2013) Donald W. Peterson, CPA, ABV, ASA, MBA, CMC, CMA died July 24, 2013, according to the Appleton Post-Crescent. He was 64. Peterson earned a Bachelor of Business Administration and a Master of Business Administration from the University of Wisconsin-Oshkosh. He later worked as a staff accountant at Schumaker, Haass, Baier & Riedl. He earned his certified public accounting license in 1973. Eight years later, he became shareholder in the merged firm, Schumaker, Romenesko & Associates, S.C. Next, he became shareholder-in-charge of the firm’s Appleton office and later shareholder-in-charge of technology. Later, he became director of the firm’s litigation support services until his retirement in 2004. After retiring, he continued to work at the firm, now known as Baker Tilly. The Little Chute resident joined the WICPA in 1973.

Eldor “Katzie” W. Kannenberg, CPA (1920–2013) Eldor “Katzie” W. Kannenberg, CPA died July 3, 2013, according to sheboyganpress.com. He was 92.

Kannenberg studied business administration at Marquette University before serving in the Army Air Force in World War II. Stationed in Italy, Kannenberg achieved the rank of first lieutenant. After graduating from Marquette, Kannenberg earned his certified public accountant license and returned to West Bend in 1952, establishing his firm, Kannenberg & Marx. The firm later changed its name to E.W. Kannenberg and Co., and finally Kannenberg, Kieckhafer and Co. The West Bend resident joined the WICPA in 1952.

Janet C. Poulsen, CPA (1938–2013) Janet C. Poulsen, CPA died Aug. 1, 2013, according to the Journal Times. She was 75. Poulsen began her career as an elementary school teacher at Jerstad School at Racine Unified District and later at St. Sebastian School in Sturtevant, according to the newspaper. After staying home and raising her children, Poulsen returned to school and earned her certified public accounting license in 1985. She worked for SC Johnson in Racine for 20 years. The Racine resident joined the WICPA in 1986.

Avery G. Smith, CPA (1939–2013) Avery G. Smith, CPA died Sept. 3, 2013, according to The Lakeland Times. He was 73. Smith earned a degree in accounting from Northwestern University. Smith earned his certified public accounting license in 1966. He later owned and operated Avery Smith, CPA in the Lakeland area from 1966 to 2003. The Land O’Lakes resident joined the WICPA in 1969.

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By Jamey G. Rappis, J.D. and Jason M. Feltz, CPA

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For those in the accounting profession, dangling over the “fiscal cliff” at the end of 2012 is but a distant memory. Jan. 1, 2013 brought taxpayers the oddly named American Taxpayer Relief Act of 2012 (ATRA).

Incredibly lengthy and complex, ATRA was supposed to bring certainty to many areas of the tax law and provide tax relief for most Americans.

KNOW YOUR TAX RATE When ATRA was passed, many breathed a sigh of relief because the United States economy had been rescued from the fiscal cliff. The lower tax brackets, ranging from 10 to 35 percent, were basically unchanged, and it looked like the only increases were on the top 1 percent of all filers. But there are several hidden rate increases that apply at much lower levels.

For example, Alternative Minimum Tax (AMT) continues to be an issue for many taxpayers. Joint filers have an exemption of about $80,000, and single filers an exemption of about $50,000, against a flat 26 to 28 percent AMT. However, when a joint filer is more than $150,000 of income or a single filer more than about $112,000, the exemption begins to disappear. If you combine the exemption phase-out with the 28 percent AMT rate, the taxpayer becomes subject to an effective 35 percent AMT rate rather than the published 26 or 28 percent rate. We often see clients with income between $150,000 and $450,000 exposed to the 35 percent marginal AMT rate rather than the published lower regular or AMT tax rates.

The Affordable Care Act of 2010 (ACA) pushed the Medicare rate on earned income from 2.9 percent to 3.8 percent on those with wages or self-employment income more than $250,000 for joint filers or $200,000 for single. A second, and similar, new tax applied beginning in 2013 — the 3.8 percent surtax on net investment income (NII). This NII tax applies to many categories of income (what many would consider “passive” income).

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{ Tax | tax planning }

Looking toward 2014: Last minute tax information, tips and strategies

PLANNING TIPS TO DEAL WITH THE NII 3.8 PERCENT SURTAX As previously discussed, the ACA created a new 3.8 percent surtax on NII of higher income individuals starting in 2013. NII is generally the sum of the gross income received from interest, dividends, annuities, royalties and rents — unless derived from a source in the ordinary course of business — plus income from passive sources plus capital gains. You can then reduce by allowable deductions properly allocable to the gross income or net gains. [IRC sec. 1411(c)(1)(B)] The state income tax associated with the portion of the taxpayer’s income that is NII may be treated as an allocable deduction against the NII. Generally, investment advisory fees exceeding the 2 percent of Adjusted Gross Income (AGI) floor will also reduce NII. The following “types” of income are excluded from the NII calculations:

• • • • •

{ Tax | tax planning }

When adjusted gross income moves more than $250,000 for a single filer and more than $300,000 for joint filers, new phase-out of itemized deductions and personal exemptions began in 2013. The effect of these phase-outs is a 1 percent rate increase for loss of itemized deductions and another 1 percent rate increase for each personal exemption in the tax return. These increases apply whether the taxpayers are earning ordinary income or receiving passive income like capital gains.

For single filers with taxable income more than $400,000 and joint filers more than $450,000, Congress added the new 39.6 percent top bracket. On its face, this appears to be a slightly less than 5 percent rate increase more than the former 35 percent top rate, but often the end result will be even worse. Take into account the deduction phase-outs and the new NII surtax, and the actual top rate will be getting close to 44 percent.

Active business income.

Qualified retirement plan distributions.

Other IRA distributions.

Any type of self-employment income.

Interest income from tax-exempt bonds, veteran’s benefits, and other such items that are excluded from gross income under the income tax rules.

BONUS DEPRECIATION AND SEC. 179 In a series of legislative changes beginning in 2010, Congress enhanced the allowable amount of the IRC Section 179 first year depreciation deduction, and had also temporarily restored first year bonus depreciation. ATRA retroactively increased the annual Section 179 limit to $500,000, and the asset addition phase-out threshold to $2 million for tax years beginning in 2012, and also extended those amounts to tax years beginning in 2013. At present, the Section 179 limitation is scheduled to revert to $25,000 for tax years beginning in 2014.

ATRA also provided a one-year extension for 50 percent bonus depreciation. Simply put, 50 percent bonus depreciation applies to certain original use property acquired and placed in service through Dec. 31, 2013. The property must be acquired and placed in service before the end of 2013.

Although the ATRA was intended to bring certainty to the tax law, it may have missed its mark. However, with competent tax planning, there hopefully won’t be as many surprises at the end of this year.

Jamey G. Rappis, J.D. is a partner and National Tax Technical Director at CliftonLarsonAllen LLP in Milwaukee. Contact him at 414-721-7625 or jamey.rappis@CLAconnect.com.

Jason M. Feltz, CPA is a tax partner at CliftonLarsonAllen LLP in Oshkosh office. Contact him at 920-232-2228 or jason.feltz@CLAconnect.com.

1Protection of historic structures is typically done by what is known as a façade easement.

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By Paul R. Rozek, MPM

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{ Technology | IT risks }

Why take risks with IT risks?

As a practitioner with more than 30 years of experience auditing controls in IT systems, I have found one consistent theme in business today. Some organizations put a priority on understanding and minimizing their IT risks, and some should prioritize it more. Organizations in the latter group have more to lose if those risks are realized.

Virtually all companies today are in a situation where IT is significant and involves various business needs, from strategic decision making to continuity of operations, to enabling projects that facilitate major organizational change. Yet, that importance is underscored by high investments, pervasiveness of technology throughout business functions, required reliance on systems’ integrity, and negative impacts when IT does not work.

So how does the message of the need to control IT risks get to senior financial executives? There are numerous sources of information available related to IT risk, including organizations such as the American Institute of CPAs, Information Systems Audit and Control Association and Financial Executives International, plus websites such as cfo.com, cio.com, and nist.gov. However, when I boil the ocean of available information sources into a list that I can effectively use, two sources have risen to the top.

The first resource has been the Corporate Executive Board’s Audit Director Roundtable (CEB). Each year, the CEB surveys numerous members to pinpoint both emerging and recurring IT risks. The CEB then isolates those IT risk areas that should get the attention of management and internal audit over the next six to 12 months. Common challenges associated with their list of key IT risks include: • Emergent sophistication and proliferation of technologies.

• Expansion in the number and types of access entry points into corporate networks.

• Volume of business data that must be stored, processed, or transmitted.

Key IT risks identified in their 2013 survey include cyber security, data governance and privacy, mobile device management and cloud computing.

The survey is invaluable to help you know where your peers may be spending their dollars to control IT risks to support your efforts to fund similar initiatives and help ensure your future competitive status does not suffer.

{ Technology | IT risks }

My other favorite resource is a publication titled “Beating IT Risks,” by Ernie Jordan and Luke Silcock. In this book, the authors offer a list of seven categories of IT risks that companies should address on a continuous basis. The list is constructed in a manner to help management and internal auditors understand the implications of each IT risk category and the interrelationships between the IT risk categories. The book covers these IT risk categories: • Projects and portfolio management.

• IT service continuity.

• Information assets (including physical and information security).

• Service providers and vendors.

• Applications.

• Infrastructure.

• Strategic and emergent risks.

An eighth category I would have liked the authors to include is “Audit, risk, and compliance.” Even if there are well-designed and operationally-effective controls for each of these seven IT risk categories, diligence in performing self-assessments and independent assessments is critical to ensure controls continue to be effective over time. And, compliance requirements seem to be ever-changing, with more financial ramifications today if compliance is not achieved timely.

What can you specifically do to minimize your risks? Perform an IT risk assessment and find out what you may not know. An assessment can be used to quickly identify an incomplete design

of an IT control or a potential deficiency in the operational effectiveness of an IT control. In my opinion, an effective method to communicate the results of an IT risk assessment, is qualitative. It reduces the degree of interpretation and negotiation between parties when determining the the impact of IT risks to the organization. However, if it is easy to quantify the potential financial impact of an IT risk, then such data can help to prioritize any remediation activities.

As we know, management has the discretion to be riskadverse or risk-tolerant. However, the next time a server is down, check how much work is being done in the office. When an IT application’s data cannot be relied upon to make effective business decisions, will alternative methods of processing such data appear? And, if a security breach happens, the cost and effort to eradicate hackers or malware from all systems can reach or exceed $100,000.

Progressive firms know their IT risks. Ensure adequate controls are deployed and maintained to ensure the security, integrity, and availability of IT operations. Conduct training for IT and business personnel to help them understand management expectations relative to IT controls. And, trust but verify.

Conduct self-assessments by IT personnel and independent auditors to ensure IT controls are operating effectively on an ongoing basis to reduce potential IT risks.

Paul R. Rozek, MPM is an associate director of Risk Services for Schenck SC in Milwaukee. Contact him at 414-463-4411 or paul.rozek@schencksc.com.

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{ Human resources | workplace culture }

Designing a winning workplace culture

By Diane Kelly

Culture trumps strategy. This isn’t just a cliché, but a mantra for many workplaces, including Baker Tilly Virchow Krause, LLP (Baker Tilly).

The firm has been consistently recognized as a best place to work by several organizations, including Accounting Today magazine. How does an accounting firm create a best place to work?

“For Baker Tilly, maximizing employee performance through accountability and inspiration comes from being authentic to our values, which creates an environment where our people can develop new skills and gain knowledge,” said Timothy L. Christen, CPA, chair and chief executive officer of Baker Tilly. “This approach to continuous professional development helps employees build business acumen, deepen their industry expertise and advisory skills, and hone their leadership abilities.”

But in order to create a successful workplace culture, organizations also need to have the business processes and structure in place. One such process is the performance management program.

ESTABLISHING CLEAR EXPECTATIONS Having formalized performance management programs helps organizations create a culture which inspires employees to do their personal best. A well-designed and executed program helps employees chart their career goals and track their progress. It should also be an ongoing communication process and a partnership undertaken by the employee and manager to establish clear expectations and a mutual understanding of: • Essential job functions.

• What successful performance looks like in concrete terms.

• How an employee’s successful performance contributes to the overall goals of the team and the firm.

• How job performance will be measured and assessed.

• How to deal with barriers to performance.

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{ Human resources | workplace culture }

While performance reviews are part of the larger approach Baker Tilly GROW (Growth and Retention of Women) was designed to provide women, at all levels in the firm, internal of performance management, they do not define the and external, opportunities to network, share information, entire process. Organizations also need to help employees acquire skills and develop rewarding professional relationships. create development plans that support their career plans GROW was designed to uphold Baker Tilly’s core values, and and professional growth. The use of 360° assessments, emphasize the importance of creating and maintaining a work communication style assessments and executive coaching and environment that promotes diversity. Although the primary mentoring programs are additional ways in which we help focus of GROW is to improve the growth and retention of cultivate the right culture. Our learning and development women at our firm, this platform enhances the professional programs focus on developing the whole person — beyond just development and work-life programs for all the technical skills needed to be successful.

“ALL BUSINESSES associates here. GROW focuses on areas involving “We realize our potential by helping our men and women such as: SHOULD PROVIDE employees realize theirs,” said Charlie Judy, • Career advancement.

SPHR, CPA, Baker Tilly’s chief human resources A CULTURE THAT • Flexible work arrangements. officer. “Maximizing employee performance • Mentoring, networking.

INSPIRES HARD through inspiration and accountability is • Benefits.

WORK, ONGOING fostered by providing tailored professional By having work options that address multiple PROFESSIONAL situations, offering competitive benefit programs, development opportunities for employees at every point in their career.”

DEVELOPMENT AND and implementing strong practices and innovative strategies, organizations can actively work to OPPORTUNITIES improve the work life of employees at any level.

“GROW” EMPLOYEE FOR GROWTH.” “The GROW committee has worked with many ENGAGEMENT people across the firm on programs for flexible It is also important to engage employees early in their careers. work arrangements, networking opportunities, professional Try to give employees more responsibility early in their careers development, recruiting and benefits,” said Kim Herlitzka, to gain exposure to the many facets of the organization. This principal of Baker Tilly Search & Staffing, LLC and chair of the helps employees better plan their professional development GROW committee. and career within that organization. Create a culture where Businesses that provide a culture that inspires hard work, employees know they have a collaborative support team in a ongoing professional development and opportunities for flexible work environment that rewards their performance and growth and also encourages work/life balance grounded in their you’ll create loyalty and increase employee engagement. mission and values will help define them as great places to work.

We’re also committed to employing diverse individuals at all Diane Kelly is director of learning and development at Baker Tilly levels within the firm. This commitment is supported through Virchow Krause, LLP in Milwaukee. Contact her at 414-777-5540 or diane.kelly@bakertilly.com. programs designed to enhance the employee experience.

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Becoming a fraud-resistant organization

By Melodi Bunting, CPA, CMA, CGMA

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“Amazing stories, but hard to believe that could happen!” “Great presentation and examples, but that would never happen in our organization.”

These were among the comments made by attendees at a recent fraud event. Despite the many stories in the news or the statistics published by the Association of Certified Fraud Examiners (ACFE) remarkably many organizations have still not taken adequate steps to protect themselves.

Occupational fraud continues to be a serious problem that extends beyond the monetary loss. Fraud damages an organization’s reputation and integrity — causing irreparable harm to employees, creditors, investors and other stakeholders who all suffer the repercussions.

While the total cost of occupational fraud is impossible to determine, as organizations often do not know they are being victimized, it’s clear that money spent proactively rather than reactively yields a greater return.

Is your organization taking steps to detect, deter and prevent occupational fraud? The three legs of the fraud

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{ Fraud | preventing revenue loss }

{ Fraud | preventing revenue loss }

FRAUD MAY OCCUR EVEN WITH THE BEST FRAUD PREVENTION PROGRAM IN PLACE, THUS THE FRAUD POLICY INCLUDES MECHANISMS FOR REPORTING AND INVESTIGATING POTENTIAL FRAUDULENT ACTIVITIES.” triangle — pressure, rationalization and opportunity — explain what causes someone to commit that type of fraud. Employers can minimize the risk of fraud by creating an organization that reduces rationalization and opportunity.

Consider the following steps to becoming a fraudresistant organization:

Develop internal controls

employees does not foster a healthy work environment, blind trust opens the door for occupational fraud to occur. When something appears suspicious it is important to follow through with questioning and investigating.

Listening to an employee’s explanation is only the first step, as other corroborating evidence should support it.

Examine the tone at the top

If management’s actions demonstrate fraud is a serious The backbone of fraud prevention issue that will not be tolerated, that is an organization’s internal control attitude will pervade the company.

Employee structure. The five components Paired with an open door policy that Accused of of internal control defined by the fosters communication, a company can Committee of Sponsoring Organizations create a fraud-resistant company culture.

Stealing 30 of the Treadway Commission (COSO) are Involvement of the board of directors, Million from especially the audit committee, is also intended to protect both the physical and intangible assets of the company, part of creating this environment.

Dixon, Ill. as well as to comply with various Evaluate current policies regulations. An effective system of (KWQC 4/28/12) Many companies have an ethics internal control reduces the opportunity policy without realizing that a fraud to commit fraud — and since small policy is also important. The fraud policy specifies the companies are especially vulnerable to occupational prevention and detection measures, as well as specifies fraud, it is imperative to implement strong compensating guidelines for conducting investigations. These policies controls. Performing employee screenings to optimize should be communicated to employees on a regular hiring decisions is a critical component of making the basis, but policies without action are not sufficient. Taking controls operate as intended, and in order to ensure immediate and decisive action on all fraud is critical. their effectiveness, regular reviews to address changing

’

conditions are absolutely essential.

Trust but verify Every employee has the potential to succumb to the elements of the fraud triangle. While being suspicious of

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Train your employees Everyone in the organization is an essential part of preventing and detecting fraud. An organization that fosters continual learning provides employees with

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{ Fraud | preventing revenue loss }

SURVEY PARTICIPANTS IN THE ACFE’S “2012 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE” ESTIMATED A TYPICAL ORGANIZATION LOSES 5 PERCENT OF ITS REVENUES TO FRAUD EACH YEAR training. And, providing a comprehensive fraud risk effective detection method is a tip line, complemented by management and detection educational program to key management review and internal audit. employees further enhances the If any of these elements are missing company’s fraud resistance. in your organization, it’s important to Former create a timeline for implementation, Report suspected Goldman as investments made on preventative fraud measures can ultimately save the Trader Found Fraud may occur even with organization considerable time and the best fraud prevention Liable for money. program in place, thus the fraud BillionMelodi Bunting CPA, CMA, CGMA is senior policy includes mechanisms lecturer and director of online programs at for reporting and investigating Dollar Fraud’ Edgewood College in Madison. Bunting also potential fraudulent activities. developed the college’s Fraud Detection and According to the ACFE’s “2012 Prevention Graduate Certificate. Contact her at (NPR 8/1/13) 608-663-4218 or mbunting@edgewood.edu.

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