On Balance January | February 2017

January | February 2017 | Vol. 13 No. 1 A publication of the Wisconsin Institute of CPAs | wicpa.org

Dreaming Kenesha A. Crafton, CPA | 6 Federal tax supervisor, RSM Plus: Why diversity matters in the CPA profession | 12 New CPA Exam tests higher-order skills | 16 The future of peer review in Wisconsin | 20

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A publication of Wisconsin Institute of CPAs | wicpa.org

January/February 2017 Vol. 13 No. 1

ANALYSIS SKILLS

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Features

Columns

6 Dreaming big

24 TAX

Kenesha A. Crafton, CPA raises her professional profile while promoting diversity in accounting.

Tax reform amidst a transitioning administration

The organization continues to support efforts including scholarship programs and Junior Achievement to attract more minorities to the accounting profession.

A new version of the Uniform CPA Examination, which debuts April 1, 2017, will use task-based simulations and increase in length from 14 to 16 hours.

26 INDUSTRY

40 years of the FASB and more

Learn the history of the Financial Accounting Standards Board, how it changed financial reporting standards and its continuous influence on the accounting profession.

WICPA’s peer review administration transitions to Illinois CPA Society.

By Joann Noe Cross, Ph.D., CPA, CMA, CGFM, CGMA

29 FINANCIAL PLANNING

By Michael D. Akers, CPA, CBM, CFE, CGMA, CIA, CMA, Ph.D.

20 The future of peer review in Wisconsin

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By Sarah E. Hughes, CPA, CFP®, PFS

By Maren Dale

16 New CPA Exam to test higher-order skills

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A new president and a new year likely will bring major tax changes in 2017.

By Cynthia M. Hodnett

12 AICPA diversity, inclusion initiatives help strengthen the future of the profession

relevant

Departments 2 Odds & Ends | news briefs 3 Outlook | chair’s letter Membership Matters | member benefits

Scientific investing in the real world

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Consider several common factors that can influence your available income in retirement.

11 In Touch | president & CEO’s message 22 Kudos | members in the news

By Kevin M. Reardon, CFP®

By Tammy J. Hofstede

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Odds & Ends 2013 Apex Award for Publication Excellence 2016–2017 WICPA OFFICERS/BOARD MEMBERS Chair Steven G. Handrick, CPA, CGMA Chair-elect William L. Komisar, CPA, J.D. Past-chair Jean M. Hansen, CPA, MBA, CGMA Secretary-treasurer Katherine L. Hauser, CPA, CGMA Directors Michael D. Akers, CPA, CBM, CFE, CGMA, CIA, CMA, Ph.D. Lucien A. Beaudry, CPA, J.D. Ryan J. Hanson, CPA, CGMA Debra L. Lenz, CPA, CGMA, CIA, CRMA Terri M. Lillesand, CPA Matthew A. Los, CPA Scott D. Miller, CPA, ABV, PFS, CVA Matthew J. Schaefer, CPA, CGMA Wendi M. Unger, CPA AICPA Council Rick E. Dreher, CPA, CGMA Neil R. Keller, CPA, ABV, CVA President & CEO Dennis F. Tomorsky, CPA, J.D., CGMA Chief Financial & Operating Officer Tammy J. Hofstede Vice President of Communications Amy E. Gaeth Editor Cynthia M. Hodnett Copy Editor Joan Bahr Design & Layout Brett Stallman Advertising Manager Ellen Engel Printing Delzer

IRS updates 2017 lodging, meals per diem rates Read the 2017 per diem rates for lodging and meals (http://tinyurl.com/2017perdiem).

2017 State Business Tax Climate Index, report released The Tax Foundation has released both the 2017 State Business Tax Climate Index (http://tinyurl.com/bizclimateindex) and its report (http://tinyurl.com/bizclimatereport).

Check out some tips for retaking section of CPA Exam An article in Journal of Accountancy, “Tips for retaking a section of the CPA Exam,” offers four paths to a passing grade (http://tinyurl.com/cpaexamtips).

Johnson Block & Company acquires La Crosse CPA firm Johnson Block & Company acquired Franke & Turnbull CPAs in La Crosse. Johnson Block & Company also has locations in Madison, Mineral Point, Viroqua and Dodgeville. It provides governmental, nonprofit and for-profit auditing services, individual and business tax services, bookkeeping and information technology and human resources consulting services.

Sikich LLP acquires technology firm Sikich LLP in Naperville, Ill., acquired SCS, a technology firm in Glendale, Calif. SCS, a Microsoft Gold Certified partner with annual revenue of more than $9 million, specializes in Microsoft Dynamics NAV solutions. The acquisition closed on Nov. 1, 2016.

Wipfli LLP joins Chamber of Digital Commerce Wipfli LLP joined the Chamber of Digital Commerce, the world’s largest trade association representing the digital asset and currency industries. The chamber’s mission is to promote the acceptance and use of digital assets and blockchain-based technologies. Through education, advocacy and working closely with policymakers, regulators and industry, the chamber’s goal is to develop a pro-growth legal environment that fosters innovation, jobs and investment.

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, W233N2080 Ridgeview Pkwy, Suite 201, Waukesha WI 53188; 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 2017 On Balance.

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WANT YOUR BUSINESS MENTIONED IN ODDS & ENDS?

Email your announcement to cynthia@wicpa.org.

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OUTLOOK | CHAIR’S LETTER “Being a CPA offers so much opportunity and opens so many doors for an individual with the CPA designation.”

Prepare today for the future of our profession

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his issue of On Balance focuses on the future of the CPA profession. This theme is embodied in the WICPA’s strategic goals approved by the board of directors last fall.

As your board chair, my two goals are increasing both member involvement and the number of candidates sitting for and passing the Uniform CPA Examination. Both of these issues are critical to the future of the CPA profession.

Most of us have served with organizations, whether it be as volunteers on not-for-profit boards or members of social organizations such as Rotary, Kiwanis, Optimists or a young professionals group. Some studies show that these organizations need to get members involved at the time they join, or the chances of them remaining members drop significantly.

If members of these organizations do not get involved, the organizations will experience significant turnover in membership and will wither away and become irrelevant. The same is true for the WICPA. While member involvement is not going to be practical for 100 percent of our membership, 20 percent of them want to get involved. However, they need to be encouraged. Increasing member involvement is important to carrying forward the leadership of the profession.

We need all CPAs to become members of the WICPA to help it carry out the initiatives that we cannot do as individuals.

In fall 2016, we published our Thank You! publication, recognizing the involvement and milestones of WICPA members. This publication detailed the many volunteering opportunities that the WICPA offers.

Sharing how giving back to the profession that has been good to us as CPAs is the best way to keep the WICPA relevant and fresh. It shows that you care about the future

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of our profession. Review this publication to see if there is a volunteer opportunity that interests you, then sign up to participate in the opportunity (http://tinyurl.com/wicpatypub).

My second goal is increasing the number of candidates sitting for and passing the CPA Exam. This past year, an AICPA study found that the primary reason successful exam candidates passed the exam was encouragement by peers, leaders of their companies and family. We all remember when we sat for the exam, and many of us passed the exam due to persistence and someone telling us we could do it. Without accounting graduates sitting for and passing the exam, we have no CPA profession.

We have more students in accounting than ever before.

However, the number of candidates sitting for the exam has remained flat. And, the number of candidates who do not continue with the exam after not passing a part of it is on the rise. Being a CPA offers so much opportunity and opens so many doors for an individual with the CPA designation. Students have invested all the hard work of satisfying the educational requirements in order to take the exam. Let’s help them achieve their goal by providing encouragement.

Steven G. Handrick, CPA, CGMA is chair of the WICPA Board of Directors. Contact him at On Balance January | February 2017 shandrick@new.rr.com.

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Save the Date Thursday, May 4 at 5 p.m.

Harley-Davidson Museum , Milwaukee ®

Join us at the WICPA’s largest membership event of the year as we: • Recognize and thank our longevity members (10, 25 and 40-year members)

• Honor our Excellence Award recipients

• Elect the 2017–2018 WICPA Board of Directors

• Tour the Harley-Davidson Museum®

Enjoy dinner, drinks and entertainment.

Thank you to our event sponsors!

Event & Excellence Awards Sponsor:

Event Sponsors:

Register to attend at wicpa.org/Banquet or watch for your invitation in March.

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MEMBERSHIP MATTERS "We’ll continue to work on your behalf, providing opportunities and resources to help you further your career and enhance the profession."

Are you reaping the benefits of membership?

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ver the past few months, the WICPA has offered many exciting opportunities that can help further your career, including conferences, networking events and other member benefits.

By all accounts, associations are synergistic in nature. That is, the effect of a collection of people is greater than just one person. As a WICPA member, you have an army — albeit small! — working at the WICPA on your behalf to help: • Enhance your network with more than 7,700 highly dedicated peers.

• Broaden your knowledge through digital, on-demand and in-person continuing education opportunities that provide cutting-edge, quality content.

• Take charge of your career with vast resources that show you are dedicated to staying connected in your profession.

• Save money through special discounts with access to valuable products and services through the WICPA’s membership marketplace.

Member benefit providers Over the past year, you’ve read about each of our affinity partners, the support they provide and services they offer.

We also have a number of member benefit providers that offer powerful incentives with savings of up to 40 percent on business-critical products and services. Get to know:

Shutterstock.com

Business Outfitters by Lands End – Discount on WICPA logo wear. Learn more at wicpa.org/logowear.

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SESCO management consultants – Discounts on HR support, HR hotline, HR System development and other services. Learn more at sescomgt.com.

UPS – Save up to 30 percent on shipping with special services and discounts. Learn more at savewithups.com/wicpa.

Wiley CPAexcel – 20 percent discount on CPA test prep materials by using coupon code “WICPA” at checkout. Learn more at efficientlearning.com/cpa.

Wolters Kluwer – 40 percent off select Books of the Month and 25 percent off all other CCH® publications by using discount code “Y5605.” Learn more at http://tools.cchgroup.com/associations.

See a full listing of businesses and services at wicpa.org/marketplace.

Gleim CPA Review – 20 percent discount on all review course material. Learn more at www.gleim.com/accounting/ products.

We’ll continue to work on your behalf, providing opportunities and resources to help you further your career and enhance the profession.

What we can promise is you’ll have some fun along the way!

Roger CPA Review – Savings of up to $434 with 15 percent off all courses and products. Learn more at rogercpareview.com/wicpa.

Correction: Kevin M. Reardon, CFP®, president of Shakespeare Wealth Management, Inc.®, was misidentified as a CPA in the November/ December 2016 “Membership Matters” column. We regret the error.

Ellen Engel is advertising manager at the WICPA. Contact her at 262-785-0445 ext. 4513 or On Balance January | February 2017 ellen@wicpa.org.

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Dr Photography by John Sibilski

WICPA member Kenesha A. Crafton, CPA, spent a recent afternoon mentoring attendees at NABA’s Central Region Conference at the Hilton in downtown Milwaukee.

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Kenesha A. Crafton, CPA promotes diversity in the accounting profession

By Cynthia M. Hodnett

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oday, Kenesha A. Crafton, CPA is a federal tax supervisor at RSM in Schaumburg, Ill. However, Crafton plans to be the chief financial officer for a Fortune 500 company one day.

With a CPA designation, accounting degrees and accounting positions under her belt, Crafton is headed toward achieving her goal.

As she works to raise her professional profile, Crafton also works to raise the profile of a profession that has not had wide appeal among minorities.

Although minorities make up about 30 percent of the U.S. population, they represent only 2.5 percent of the accounting profession, according to the 2015 American Institute of Certified Public Accountants National Commission on Diversity and Inclusion Report.

The accounting profession provides many career opportunities as other high-paying fields such as law and medicine, she said.

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However, the accounting profession doesn’t require as many years of training. This is a message that Crafton and other minority accounting professionals are sharing with young minority students.

“There’s always a need for accounting professionals from different areas of expertise at every company,” she said. “Minority students aren’t being exposed to the profession enough. Most of them have never met a CPA, and most of them aren’t aware that so many great opportunities exist in accounting. I do know there needs to be more outreach and more exposure to them at a younger age. We can’t wait until they get to college. It has to start in the high schools.”

With so few minorities in the accounting profession, Crafton believes it's critical that individuals see more role models like her in the community. A WICPA member, Crafton is also the Central Region Student Services Director of the National Association of Black Accountants (NABA), overseeing more than 300 students majoring in accounting and finance.

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“I was encouraged by family to believe that if I worked hard enough, I could accomplish anything I wanted to.”

Josh Wheeler, CPA, president of NABA’s Milwaukee Chapter, has personally experienced Crafton’s efforts to improve diversity in the accounting profession.

“When it comes to my professional career, Kenesha has been a person who has continued to motivate me through both her words and her personal determination to be the best accounting professional that she can be,” Wheeler said. “I have gotten the continued motivation from her to further my career through additional accounting certifications and a postgraduate education.”

Overcoming challenges A graduate of the University of Wisconsin-Whitewater, Crafton majored in accounting because it combined her love for both math and solving complex problems.

However, earning an accounting degree wasn’t without challenges, she said. While the numbers came easy, combining them with the technical skills and rules of accounting was sometimes difficult.

“At Whitewater, a lot of the students in my accounting courses had already seen it in their junior and senior years in high school,” she said. “I didn’t take any accounting courses until I got to college.

That learning curve wasn’t as steep for them as it was for me.”

Connecting with faculty and other students of color at Whitewater, Crafton overcame those challenges.

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She credits the late Robert A. Gruber, Ph.D., CPA, CGMA, CMA as a major influence. Gruber, a former accounting professor and Master of Professional Accountancy program coordinator at the university, paid the first year of WICPA membership for each of his students, she said.

“I was grateful that he paid for me to join the WICPA because I learned a lot about the profession,” she said. “He knew how important it was to get that type of exposure before starting your accounting career.”

This encouraged Crafton to pursue a recurring five-year accounting internship at Johnson Controls, Inc. before transitioning to the IRS. By 2008, Crafton earned bachelor’s and master’s degrees in accounting from UW-Whitewater. Around that time, she took a position as a revenue agent with the IRS. She was in the IRS’ Large Business and International Division, working with corporations with at least $10 million in assets.

Eight years later, she took her current position at RSM. There, she manages tax duties for typically 10 to 20 clients, mostly in manufacturing and distribution industries.

Determination and perseverance As her career progressed, Crafton continued to strengthen her professional circle. In 2014, she rejoined the WICPA. Unlike

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her first time as member of the organization, this time, she volunteered in various roles. Her involvement included identifying speakers for the WICPA Tax Conference and writing an article on federal government careers for CPA2b. She also coordinated diversity efforts between NABA and WICPA, including mentoring students in the Young Entrepreneurial Scholars (YES) program. YES is a collaborative program of WICPA, NABA, and Pre-College Divisions of UW-Milwaukee and UW-Oshkosh to increase the number of minorities in accounting and business careers.

Also, while juggling a busy schedule, Crafton earned her CPA designation in 2014.

“I remember when she was studying for the CPA Exam as a wife, mother and full-time accounting professional,” Wheeler said. “She would tell me how she would get home from work, have to fulfill her motherly duties, and then late at night, she would stay up as late as 2 a.m. to get her study time in. I was extremely impressed with the determination and perseverance she showed in studying for the exam.”

That determination and perseverance comes from her family and a desire to be a positive role model, Crafton said.

“I’m the first in my family to go and graduate with a bachelor’s, master’s and professional certification,” she said. “I’m constantly

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reminded that it’s possible. I have a 4-year-old daughter, and it is my duty to be a role model for her. I don’t want to ever tell her that I didn’t do it because I didn’t try or I let something hold me back.”

‘Challenge yourself to mentor’ Crafton is also motivated to see others succeed. It’s the main reason she remains active with organizations such as the WICPA. As a member, she plans to encourage decision makers in the accounting profession to make it a priority to promote diversity and inclusion in the profession. These priorities can be addressed is by encouraging mentorship, she said.

“I know the impact that having a mentor can have on a young person because I’m aware of the impact it made in my life,” she said. “Challenge yourself to mentor someone who doesn’t look like you. Not just black and white, but men mentor women, women mentor men. Older CPAs, go find a younger professional and transfer your knowledge. That’s the only way that the profession will keep growing.”

Cynthia M. Hodnett is the communications manager at the WICPA. Contact her at 262-785-0445 ext. 4516 or cynthia@wicpa.org.

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Join the WICPA Educational Foundation Board!

The WICPA Educational Foundation is seeking members to serve on its Board of Directors.

Some of the opportunities include: • Assisting in efforts to attract students to the profession • Providing strategic governance in accordance with the WICPA Educational Foundation mission

• Attending Educational Foundation Board of Directors meetings and being involved in subcommittees The foundation plays a pivotal role in supporting educational programs to improve awareness and perceptions by educating students, educators and the public about the exciting opportunities available to CPAs.

To apply, visit wicpa.org/EFBoardApplication through Feb. 28, 2017.

Questions? Contact jessica@wicpa.org.

Earn CPE by Speaking at WICPA Breakfast Programs Speakers are needed for Eau Claire, La Crosse, Madison, Milwaukee, Northeast Wisconsin, Waukesha and Wausau.

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Earn CPE while sharing your expertise, developing leadership skills and promoting your organization.

Visit wicpa.org/speakers to sign up.

wicpa.org

IN TOUCH | PRESIDENT & CEO's MESSAGE "CPAs who embrace and leverage technological innovations will have greater success than those who are loath to change."

CPA profession forecast: Sunny with a strong chance for disruption

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n the sunny side, the strong demand for certified public accountants is expected to continue for the foreseeable future, and the number of accounting majors and graduates is at an all-time high. On the disruptive side, the future demand for CPAs will be fueled by both the “silver tsunami” of retiring baby boomers, as well as the recent trend of fewer accounting graduates taking the Uniform CPA Examination.

CPA firm mergers and consolidations are expected to continue as retiring CPAs seek exit strategies. And, the expansion of CPA services into new areas of consulting that add value to clients’ business operations will also continue.

CPA skills that mitigate cybersecurity risks and validate information relied upon by decision makers will become increasingly valuable and indispensable. And, the types of information CPAs report upon and attest to will extend beyond historical financial performance to increasingly include integrated reporting that reflects the value of an organization’s human capital and other non-financial assets.

Data analytics and artificial intelligence will replace annual audit processes and sampling with continuous validation of all transactions. Drones will be deployed for inventory observations, and tasks previously assigned to train entrylevel accountants will be automated, leaving more strategic activities for CPAs earlier in their careers.

CPAs who embrace and leverage technological innovations will have greater success than those who are loath to change.

The tendencies of CPAs to focus on short-term historical performance, rigid processes, and risk aversion will be replaced by an increasing focus on longer time frames, future performance, agility, and risk management.

Certified public accountants employed in business, nonprofit, government and education will continue to face

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the same talent shortages as CPA firms. Also, all CPAs will be expected to continuously enhance their executive, leadership and technology skills that will have increasingly greater value to employers and clients than mere technical skills.

CPA firm business models will evolve as workload compression from annual compliance-focused services is gradually replaced with continuous consulting services that improve business results through better decision making throughout the year. This trend will improve work-life integration. It will also increase leveraging of technology that will decrease the leveraging of human capital that has historically driven talent out of accounting firms, and more recently out of the profession entirely due to extremely heavy early career workloads.

Dennis F. Tomorsky, CPA, J.D., CGMA is president & CEO of the WICPA. Contact him at 262-785-0445 ext. 4519 or dennis@wicpa.org.

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AICPA diversity, inclusion initiatives help strengthen the future of the profession

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merican Institute of Certified Public Accountants’ (AICPA) diversity and inclusion initiatives are continually expanding in order to effectively meet the needs of AICPA members.

To understand where best to focus these efforts, AICPA collaborates with and listens to members and

By Maren Dale state societies to learn more about their unique needs and challenges.

Then, the AICPA works to develop resources, partnerships and programs designed to help them.

For instance, an ongoing and critical need in the accounting profession is to attract more minority students. To address this, AICPA supports a number of initiatives, including leadership skills workshops and scholarship programs.

Wisconsin members have also told us that efforts to attract more young adults, regardless of their background, into the profession

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continues to be important. One way AICPA has addressed this is to partner with Junior Achievement ( JA). Through this partnership, both groups have developed and launched an online finance and accounting career cluster aimed at middle and high school students that introduces them to opportunities and foundational concepts of becoming a CPA.

Different initiatives, singular goal Regardless of the specific initiative, these efforts all are designed to drive a singular goal: to help strengthen the accounting profession through diversity and inclusion.

“When we have diversity in our workforce and are more inclusive, things ultimately work better and complex problems are solved, collaboration thrives and innovative ideas are generated,” said Kim Drumgo, director of diversity and inclusion for the AICPA. “Simply put, the culture of respect generated through inclusive practices garners a best-in-class work environment that works for everyone.

Anthony J. Newkirk, senior manager of diversity and inclusion for the AICPA, agrees, but adds that committed leadership and sound strategies are needed to drive change.

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“Building a diverse and inclusive environment requires leadership commitment, an action-oriented strategy and diligence for changing organizational culture,” Newkirk said.

“Fostering inclusion is the active and intentional process of leveraging differences in a way that valued every member of the organization while achieving the company’s goals.

AICPA tools and resources have provided many firms and other organizations with insight into where they are and where they would like to be.”

The two focus areas: The pipeline and the professionals AICPA groups its diversity and inclusion efforts into two categories: • Pipeline: The goal is to increase the number of underrepresented minorities who study accounting, take and pass the Uniform CPA Examination and pursue a career as a certified public accountant.

• Professionals: Tools and resources for firms and professionals to foster inclusive work environments that will attract, recruit, develop, retain and advance diverse talent.

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AICPA pipeline initiatives The following is an overview of current initiatives underway at AICPA: Junior Achievement Finance & Accounting Career Cluster: The diversity and inclusion team partnered with JA to develop and launch an online finance and accounting career cluster. Through this partnership the AICPA provided resources at a national level to middle and high school students participating in JA programs to introduce young people to opportunities and foundational concepts of becoming a CPA. Annual Accounting Profession Diversity Pipeline Symposium: Each year, the AICPA co-hosts this symposium, which was established by Howard University’s School of Business’ Center for Accounting Education.

AICPA guides the discussion with stakeholders in the accounting profession’s pipeline and guides them to their sphere of influence in the pipeline implementation plan.

The next symposium is in May 2017. More details to come in the months ahead.

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AICPA/NAF Recognition Program: The National Academy Foundation (NAF) Academies of Finance (AOF) and AICPA partnered to launch the AICPA/NAF Recognition Program in the fall of 2015. The program allows high school students to work through designated courses and engage in AICPA resources in order to receive an AICPA recognition certificate.

It is implemented in more than 300 NAF AOFs nationwide.

The Accounting Scholars Leadership Workshop (ASLW): This annual student leadership conference is hosted by the AICPA Foundation and provides accounting profession leadership skills to underserved accounting student populations.

The next program will occur in May 2017, and applications will be available in January 2017.

National Diversity Pipeline Campaign: Based on the findings from the Young Minority Influencer & Pipeline Research Study the AICPA created a strategic national awareness campaign. The campaign kicked off during the fall 2016 and will include a spring 2017 tour to campuses and universities across the country.

Historically Black Colleges and Universities (HBCU)/ National Commission on Diversity and Inclusion (NCDI) Ambassador Program: This program is intended to strengthen HBCUs accounting department academics and diversity and inclusion mentoring.

The professional “Diversity is about differences,” said David W. Gay, CPA, managing partner at Ernst & Young LLP in Milwaukee.

“Inclusion is about celebrating those differences. For local companies to succeed in the global business community, we need to embrace both. Organizations that maximize the power of different opinions, perspectives and cultural references rise to the challenges of our current environment, while at the same time helping to build a better working world.”

Inclusion Solution Newsletter: Offers up-to-date information on trends in diversity and inclusion that can be used to help organizations foster inclusion in work environments.

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D&I Webcast series: Recent topics have included Unconscious Bias, Understanding D&I, Inclusion versus Assimilation and more. New topics will be added early in 2017.

Accounting Inclusion Maturity Model (AIMM): This free resource helps firms evaluate their current diversity and inclusion maturity level and efforts based on four core areas: workforce, workplace, marketplace, and community and supplier relations.

Recruitment and Retention Toolkit for PCPS: The toolkit helps leaders — particularly at midsize and small firms — by helping them integrate diversity recruiting and retention techniques into broader day-to-day business activities.

Diversity and inclusion at the AICPA While the institute strives to provide diversity and inclusion best practices and resources to its members, it’s also focused on inclusiveness within its organization. In 2015, AICPA launched its internal diversity and inclusion initiatives and recently trained more than 30 inclusion champions to promote inclusion throughout the AICPA work environments. Most recently, AICPA was awarded the Triangle Business Journal 2016 Leaders in Diversity Award in September 2016.

Consultation is available Resources are often even more robust when they are backed by support and expert consultation. That is why AICPA is making a concerted effort to promote the consultative resources of its experienced diversity and inclusion team.

“We are here to help, and one of our formal objectives is to expand our consultation for firms and state societies,” said Florence Holland, lead manager of pipeline initiatives, diversity and inclusion for the AICPA. “The scope of our work includes, but is not limited to, providing expert consultation, assisting with conference sessions and workshops, offering NCDI members as speakers, and providing educational resources.”

Learn about more AICPA diversity and inclusion efforts at http://tinyurl.com/aicpadiversity.

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ANALYSIS SKILLS

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he next version of the Uniform CPA Examination will take effect April 1, 2017 (Q2 testing period), and represents the first major changes to the CPA Exam since 2011.

This article will provide an overview of those changes.

Why is the exam changing?

By Michael D. Akers, CPA, CBM, CFE, CGMA, CIA, CMA, Ph.D.

To protect the public interest, the CPA Exam is designed to provide assurance that newly licensed CPAs have the appropriate technical knowledge and skills to complete the tasks they will encounter. Periodically the AICPA conducts practice analysis to determine that the CPA Exam is testing the appropriate knowledge and skills. Analysis, which began in 2014, found that as business and the accounting profession continues to evolve the exam needed to be modified. The exam, which historically has tested remembering, understanding and application skills, is being modified to test higher-order cognitive skills, including critical thinking, problem-solving, analytical ability and professional skepticism.

What are the sections of the new exam and testing time allowed?

The exam will retain its four existing sections — Auditing and Attestation (AUD), Business Environment and Concepts (BEC), Financial Accounting and Reporting (FAR), and Regulation (REG). Testing time for each section is four hours. The new exam increases the length of the testing time from 14 to 16 hours as both BEC and REG increased by one hour.

What are the skills tested?

The AICPA provides a blueprint for the skills tested in each section, which are linked to tasks representative of work performed by newly licensed CPAs. The table below shows the skills tested by each section: Section

Remembering and Understanding

Application

Analysis

Evaluation

AUD

30-40%

30-40%

15-25%

5-15%

BEC

15-25%

50-60%*

20-30%

FAR

10-20%

50-60%

25-35%

REG

25-35%

35-45%

25-35%

*Includes written communication

What are the testing items and the distribution of items by section?

Multiple-choice questions (MCQ) and task-based simulations (TBS), including Document Review Simulations (DRS) will be used in all four sections. BEC will also include three written responses. AUD, FAR and REG will be approximately 50 percent MCQ and 50 percent TBS as compared to the current exam that is weighted 60 percent MCQ and 40 percent TBS. BEC will be approximately 50 percent MCQ, 35 percent TBS and 15 percent written response as compared to the current exam that’s weighted 85 percent MCQ and 15 percent written. Beginning with the 2016 Q3 testing window ( July 1, 2016), the AUD, FAR and REG sections will use a new simulation item known as the Document Review Simulation and each of these sections will continue to use the DRS with the new exam. DRS will be added to BEC with the new exam. A CPA is required to analyze, interpret, review and prepare documents. DRS will provide candidates with a document that they will be required to review and edit. Candidates will also examine other documents, such as contracts, emails and invoices, as part of the analyses. The following table compares the distribution of the items on the current and new exam.

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MultipleChoice Question

MultipleChoice Question

Task-Based Simulations

Task-Based Simulations

Written Communication

Written Communication

Section

Current Exam

New Exam

Current Exam

New Exam

Current Exam

New Exam

AUD

90

72

7

9

N/A

N/A

BEC

72

62

0

5

3

3

FAR

90

66

7

9

N/A

N/A

REG

72

76

6

9

N/A

N/A

With the exception of REG, the number of MCQ decreases. TBS increase for each section. Each section will have five testlets.

AUD, FAR and REG will have two MCQ testlets and three TBS testlets. BEC will have two MCQ testlets, two TBS testlets and one testlet for the three written responses. Since the tasks of a newly licensed CPA require knowledge that pertains to all four sections, the 2017 exam will incorporate greater integration across sections. For example, in the AUD section, a TBS designed to evaluate the audit procedures to assess the fair value of a financial instrument would include valuation concepts that would be tested more thoroughly in FAR.

Is there additional testing time during the year?

With the exception of 2017, Q2 when the new exam launched, beginning with April 1, 2016, each quarters’ window is expanded by 10 days into what has been considered dark months.

Are breaks allowed during the exam?

Approximately midway through each section, candidates will be offered a 15-minute break that may be used or declined.

This break does NOT count toward the testing time. Consistent with the current exam candidates may take optional breaks between testlets that DO count toward testing time.

Is there an additional cost?

Fees charged by NASBA and AICPA will remain the same. Prometric’s hourly fees will remain the same; however, fees will increase slightly because the length of the exam is increasing.

How soon will I receive my scores?

The table below shows the dates the scores will be released. It’s expected that by Q1 of 2018 the existing average 20-day rolling score release timeline will resume.

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Test Window

AICPA/Board of Approximate Examiners Review Release Date of Exam Performance Candidate Scores Data/Standard Setting

2017 Q2 April 3-May 31, 2017

10 weeks

Aug. 14

2017 Q3 July 1-Sept. 10, 2017

10 days

Sept. 20

2017 Q4 Oct. 1-Dec. 10, 2017

10 days

Dec. 22

Will candidates receive credit for sections passed on the current exam after the new exam becomes effective?

Yes, candidates will receive credit for sections completed prior to the launch of the new exam, subject to the 18 month rule.

For more details on the new exam, visit http://aicpa.org/ Become-ACPA/CPAExam/nextexam.

Michael D. Akers, CPA, CBM, CFE, CGMA, CIA, CMA, Ph.D. is accounting department chair and professor at Marquette University in Milwaukee. Contact him at 414-288-1453 or michael.akers@marquette.edu.

Volunteer for

Reading Makes¢ents

Sponsored by the Wisconsin Institute of Certified Public Accountants Educational Foundation

APRIL: National Financial Literacy Month Visit classrooms this April to help students get smart about money during Financial Literacy Month.

Go to the local elementary school of your son, daughter, niece, nephew or neighbor during the month of April and read to students about the basics of money.

THE WICPA EDUCATIONAL FOUNDATION WILL PROVIDE • Prize for each student • Handout to teach kids about saving • Financial literacy curriculum to leave with the teacher

FOR MORE INFORMATION

Visit wicpa.org/reading, or contact: Mary Murray | 262-785-0445 ext. 4510 | mary@wicpa.org wicpa.org

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January | February 2017

19

F

By Tammy J. Hofstede, WICPA chief financial and operating officer

or more than 25 years, the WICPA has administered the peer review program for Wisconsin CPA firms. The WICPA staff and Board of Directors participated in extensive discussions about the administration process, measured the commitment of staff resources to administer the program, and evaluated the future complexity of practice monitoring.

The board determined that the best interest of WICPA and its members is to outsource the administration of the program. This will allow WICPA staff to focus on strategic objectives identified by the board that will benefit our members, now and in the future.

After careful examination of several state CPA societies that administer the AICPA Peer Review Program, the Illinois CPA Society has been selected to administer the peer review program of Wisconsin firms. They have dedicated, experienced full-time staff who will offer the kind of assistance to Wisconsin firms that you have come to expect.

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What does this mean for Wisconsin firms?

The transition will be effective April 1, 2017. Firms will continue to select their team captain from qualified reviewers, just as they have always done. Wisconsin firms will work with the Illinois CPA Society staff in all aspects of their review, from scheduling through acceptance, including payment of fees. Some members of the WICPA Peer Review Committee will continue to serve on the Illinois CPA Society Peer Review Committee.

During the transition, if a firm’s field work commences prior to April 1, 2017, the WICPA will administer that firm’s peer review through acceptance and completion, including any monitoring action (if applicable). If a firm’s due date is on or after April 1, 2017, and the review has not commenced, the Illinois CPA Society will administer the review through acceptance and completion, even if it was originally scheduled through WICPA. Firms with due dates in 2017 will receive further communications to clarify the transition timing for their particular situation.

We are pleased to partner with the Illinois CPA Society in administering this important program, and will work closely together to ensure a smooth transition for all of our firms.

If you have any questions, please contact Jessica Murphy at jessica@wicpa.org or 262-785-0445 ext. 4502.

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Wealth Management, Inc.®

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AFF

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I N I T Y PA R T N E R

January | February 2017

21

kudos Carla Biwan-Hameister, CPA was named vice president of Huberty CPAs & Trusted Advisors in Sheboygan and Minocqua.

Tyler J. Metz was hired as a staff accountant at Vrakas S.C. in Brookfield.

Rebecca A. Meyer, CPA was promoted to manager – government at Schenck SC in Green Bay.

Kelly L. Block, CPA was promoted to senior manager at Schenck SC in Manitowoc.

Kelly L. Block, CPA

Gary G. Born, CPA, CGMA was named president of Huberty CPAs & Trusted Advisors in Ripon and Markesan.

Jonathon T. Brandt, CPA was promoted to supervisor at Schenck SC in Appleton.

Ting Chau, CPA was promoted to senior accountant at Dwayne Johnson & Associates, S.C. in Waukesha.

Linda J. Evraets, CPA

Linda J. Evraets, CPA was promoted to senior manager at Schenck SC in Sheboygan.

Sara R. Feider, CPA was promoted to supervisor at Schenck SC in Sheboygan.

Greg G. Feucht, CPA, CVA was named secretary/treasurer at Huberty CPAs & Trusted Advisors in Fond du Lac. John F. Hager of Hager, Dewick & Zuengler, S.C., Green Bay, was selected by his peers for inclusion in the 2017 edition of The Best Lawyers in America®.

Rebecca A. Meyer, CPA

Renee C. Hilbelink, CPA was promoted to supervisor – government at Schenck SC in Sheboygan.

Justin J. Schneider, CPA was promoted to senior manager at Schenck SC in Sheboygan.

Jeffrey T. Sheahan was hired as an accounting support specialist at Vrakas S.C. in Brookfield.

Emily Swiecichowski, CPA was promoted to senior accountant at Schenck SC in Milwaukee.

Charlotte L. Towle, CPA was promoted to supervisor at Schenck SC in Wausau.

Mary B. Vandenbusch, CPA was promoted to senior manager – government at Schenck SC in Green Bay. Nathan G. Volkomener, CPA was named managing shareholder and board chair at Huberty CPAs & Trusted Advisors offices in Fond du Lac and Plymouth.

Nathan G. Volkomener, CPA

Allen W. LaCrosse, CPA was promoted to manager at Schenck SC in Milwaukee.

Rebecca S. Lund, CPA was promoted to senior manager at Schenck SC in Appleton.

Want your

Frank C. Windt, CPA was promoted to senior manager at Schenck SC in Milwaukee.

Daniel J. Young, CPA, CVA, managing partner at Schenck SC in Green Bay, was selected as a recipient of the University of Wisconsin-Green Bay Distinguished Alumni Award for 2016.

Nathaniel J. Logan, CPA was promoted to supervisor at Schenck SC in Appleton.

Jason R. Londo, CPA was promoted to supervisor at Schenck SC in Appleton.

Justin T. Schmitt, CPA was promoted to supervisor at Schenck SC in Appleton.

David Schneider, CPA was promoted to supervisor at Schenck SC in Green Bay.

Collin T. Hayes, CPA was promoted to supervisor at Schenck SC in Appleton.

John F. Hager

Jennifer Powers, CPA was promoted to senior manager at Schenck SC in Wausau.

Daniel J. Young, CPA, CVA

Michael A. Zuleger, CPA was promoted to senior manager at Schenck SC in Appleton.

promotion or award mentioned in Kudos?

Email your announcement and photo in JPG format to cynthia@wicpa.org.

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memorials

Clenton T. Hall, CPA (1989–2016)

Katey L. Pasqualini

Kim Radtke

(1990–2016)

(1988–2016)

CPAs remembered as rising stars

By Cynthia M. Hodnett

R

itzHolman CPAs staff members Brian T. Falk, CPA, Clenton T. Hall, CPA, Katey L. Pasqualini and Kim Radtke often left lasting impressions on many accounting students they met at networking events.

“Clenton, Katey, Kim, and Brian all said that you are not expected to know everything when you first start,” said Vincent Dombrowski, president of Beta Alpha Psi at the University of Wisconsin-La Crosse. “And, it is important to not be afraid to ask questions, and not be afraid to make mistakes, because mistakes are going to happen. But it's important to learn from your mistakes. They were great people, and were funny. They got quite a few laughs during the presentation between the little banter among themselves or funny experiences at RitzHolman.”

Dombrowski is one of many individuals who fondly remember the four accounting professionals.

Hall, Pasqualini and Radtke died Nov. 2 when an allegedly intoxicated driver struck their vehicle head on while traveling the wrong way on eastbound I-94, said Tricia Knight, CPA, partner and member of RitzHolman CPAs’ tax team.

All three were senior accountants on the firm’s tax team and WICPA members. They died as a result of their injuries. Falk, an audit supervisor at the firm and WICPA member, was seriously injured.

The four were returning from La Crosse where they presented at a recruiting and networking event with UW-La Crosse accounting students.

“We are shocked and saddened to hear about the automobile accident that severely injured and took lives of the RitzHolman accountants who had graciously shared their stories about their careers,” UW-La Crosse Chancellor Joe Gow said.

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“Their message and willingness to share their passion for the profession will have a lasting effect on the UWL students and faculty who heard them speak. Our thoughts and prayers go out to their families and loved ones during this difficult time.”

The group’s professionalism and outgoing personalities made them perfect candidates to represent the firm at recruitment and networking events, Knight said.

Hall and Pasqualini, both 26, and Radtke, 28, were “dynamic, top performers and very supportive of their colleagues,” Knight said.

“We’re a close-knit family here, so it’s been really hard for us,” she said. “This has been devastating to all of their families, colleagues, clients and friends. But there’s a bright spot that came out of this horrible tragedy. All three of them were organ donors. That shows the type of people they were.”

Falk, 28, who began at the firm as an intern in 2011, is a highly respected leader and a role model to young professionals on the audit team, Knight said.

“He has a long road ahead of him, but he’s very strong and spiritual, and he’s a fighter,” she said.

Hall and Pasqualini both received accounting degrees from UW-Whitewater and began their careers at the firm as interns. Radtke earned both bachelor and master’s degrees in accounting from UWkk-Milwaukee. Falk earned an accounting degree from Marquette University.

Knight said the firm has honored the memories of the deceased professionals by establishing scholarships in their names at several Wisconsin universities. Contact her at tricia@ritzholman.com for more information.

Cynthia M. Hodnett is the communications manager at WICPA. Contact her at 800-772-6939 ext. 4516 or cynthia@wicpa.org.

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23

{ Tax | Reform }

Tax reform

amidst a transitioning administration

T

he 2016 presidential election concluded with what some thought to be an unlikely outcome: a Donald J. Trump victory.

In the aftermath, we’ve been left speculating as to which of his campaign promises will come first and which might need to be revised. He has a very ambitious plan for his first 100 days, much of which was laid out in his “Voter Contract.” Several of the items seem to stem from the perspective of a Washington outsider and, dare I say, a businessman.

By Sarah E. Hughes, CPA, CFP®, PFS

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On Balance

Comprehensive tax reform is certainly top of mind and a clear priority for Congress and the president-elect. The current Congress has been motivated to pursue tax reform for quite some time, but having a Republican president should expedite some of the provisions. This will be especially true if Congress uses budget reconciliation legislation rules to allow passage of the plan with only a

January | February 2017

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{ Tax | Reform }

“There currently are two plans for tax reform. The first is the House Tax Reform Blueprint, which Republicans have worked on for the past few years, and the second is the plan Trump discussed during his campaign.”

simple majority of 51 votes versus the usually required 60-vote majority.

There currently are two plans for tax reform. The first is the House Tax Reform Blueprint, which Republicans have worked on for the past few years, and the second is the plan Trump discussed during his campaign. The two plans align in some ways, such as setting individual tax rates at 12 percent, 25 percent and 33 percent.

For individuals, in addition to the rate reductions noted above, Trump has proposed capping itemized deductions at $100,000 (single) and $200,000 (married filing jointly) in an effort to limit deductions for the wealthy and bridge the gap between the middle and upper classes. He also wants to eliminate the alternative minimum tax, which currently limits or eliminates certain deductions. But the real impact of an itemized deduction cap on higher-income taxpayers remains in question.

Throughout his campaign, Trump has promised to repeal Obamacare and with it the 3.8 percent net investment income tax, which will reduce tax for higher-income taxpayers. Despite this particular item that will focus on higher-income taxpayers, the reduction in overall rates is expected to bring all taxpayers in all tax brackets some tax relief.

With respect to the corporate tax rate, Trump’s plan differs from the House Blueprint in that Blueprint suggests a 20 percent rate, and the Trump plan suggests a 15 percent rate (including on pass through entity income). Trump has said that he would work with House Republicans on these matters and has made some moves to align his plan with the Blueprint. For example, he recently announced that he would support the immediate expensing of new business investments for manufacturers (with the additional elimination of a net interest expense deduction). Despite some of the differences, there is plenty of overlap between the two plans, which should allow for speedy compromise and action.

Even with the lowering of the U.S. corporate rate, companies operating in Europe could still be worse-off due to the passage of

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the EU’s harmful tax competition directive. However, some of the outcomes of the Base Erosion and Profit Shifting (BEPS) project could continue to make some foreign jurisdictions more attractive.

Comprehensive tax reform must be carefully designed to ensure that companies truly are better-off bringing jobs back to the US. The Trump plan also repeals the estate tax and will not tax built-in capital gains at death of $5 million ($10 million for married couples). The tax rate on any gains above these thresholds is yet to be determined, and there are specific exceptions carved out for small businesses. It is important to note that since the capital gains tax is likely (although not confirmed) to be imposed at death, family businesses in particular should still plan for the death of a family member.

Further, as evidenced by previous administrations that have tried to repeal the estate tax, it is likely that any repeal may take place over time and is always at risk to be reinstated. This is particularly true if the budget reconciliation rules are used to pass any parts of the tax reform proposals since those have some automatic sunset provisions after 10 years. Over the past few years, taxpayers were planning in an environment where income taxes were, in some cases, higher than the estate tax. A reversal of this situation will cause many to again revisit their planning.

Any tax reform, in particular those currently proposed with such large rate reductions, is not free and must be paid for. As you have likely heard, there is much tension about this in Washington.

Based on varying reports, there would need to be unprecedented economic growth and/or unprecedented spending cuts to pay for the plans. And while we can certainly debate these issues, what we cannot deny is the need to continue to prepare for tax reform amidst this new administration.

Sarah E. Hughes, CPA, CFP®, PFS is the executive director of Private Client Services at Ernst & Young LLP in Milwaukee.

Contact her at 414-223-7391 or sarah.hughes@ey.com.

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25

{ Industry | Financial Accounting Standards Board }

40 years of the

FASB AND MORE

26

On Balance

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wicpa.org

{ Industry | Financial Accounting Standards Board }

“Each year the FASB issues 15 to 20 ASUs and another 15 to 20 become effective. It is tough to keep up with the changes, but the FASB doesn’t seem to be slowing down.”

I

n 1972 the American Institute of Certified Public Accountants (AICPA) was

By Joann Noe Cross, under significant pressure Ph.D., CPA, CGFM, from Congress to address the CGMA, CMA public’s perception that financial reporting standards were being developed to accommodate the needs of the largest public accounting firms in the United States and their clients.

The result was the creation of the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB). The Financial Accounting Foundation was intended to provide the funding for FASB standard setting operations and the FASB was intended to deliberate and promulgate the financial reporting rules most likely to inform investors about a business’s operations and prospects.

A short history of standard setting in the U.S. This organizational structure followed nearly 40 years of standard setting activities conducted by the AICPA and financed by large public accounting firms and the large corporations.

Congress and others had seen the corporate failures of the early 1960s as a sign that something was wrong with this approach and had been calling for reform as early as 1963.

However, it was the events of the late 1960s that pushed the issue onto center stage. By the end of the 1960s, investors were flocking to Wall Street (so much so that the NYSE couldn’t keep up with the volume of transactions being processed in the existing non-computerized environment). Also, colleges and universities were experiencing rapid growth in the academic accounting field and in its brand new academic spin-off, finance (which corresponded to an increased passion for theoretical

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research, including research into questions such as why corporations failed).

Since its earliest days, the Securities and Exchange Commission (SEC) had been adamant that due to the litigious climate in the United States all reporting and assurance had to be rule-based, a principle that apparently had not been followed faithfully enough by the AICPA in its standard setting activities. From the very beginning the FASB set out to be responsive to all financial statement users, not just to the preparers and their service providers.

Fast forward another 40 years. The passage of the SarbanesOxley Act in 2002 changed the way the FAF and FASB were funded. Originally funded by donations made to the Financial Accounting Foundation (to reduce perceived influence that big donors had on standard setting), the Sarbanes-Oxley Act legislated funding of the FAF by means of fees paid by public companies to the SEC and the newly created Public Companies Accounting Oversight Board (PCAOB). From that moment, the FASB became more attuned to the needs of investors in publicly held companies as determined by the SEC and the PCAOB.

The FASB today Now, the FAF appoints seven individuals to serve on the FASB for five-year terms (renewable for a second term). Legally, the FASB is a standard setter for firms that meet the definition of “public,” and it has been designated by the SEC to set standards of financial reporting for those companies. Non-public companies that are required by a bank or bonding agent to report under Generally Accepted Accounting Standards (GAAP) also follow FASB standards.

The FASB deliberates questions of financial reporting. It seeks to find the optimal solution for achieving a meeting of the minds: a single way of reflecting complicated and contentious

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27

{ Industry | Financial Accounting Standards Board }

issues and makes changes in their standards by means of Accounting Standards Updates (ASU). The FASB frequently uses a telling phrase to explain why it is issuing a new Accounting Standards Update: “the purpose of this update is to reduce diversity in practice.”

After the FASB has decided to take on a particular issue or to respond to a question in practice, an exposure draft is developed that includes a detailed examination of the question and its implications for practice as well as a proposed reporting solution.

The Exposure Draft acts as a solicitation for letters addressing both the pros and the cons of the proposed reporting.

During Board deliberations, the FASB carefully considers all sides before voting on the proposed Update. A proposal needs four of the seven members to vote for the proposal before it can be issued.

Final issuance of an Update is delayed until the FASB staff can vet

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all parts of the changes to ensure they are consistent and accurately reflect the FASB deliberations.

ASUs are effective from one to three years after issuance to give companies plenty of time to analyze and anticipate the change. In recent years, the FASB has taken to allowing non-public entities extra time to adopt the more difficult portions of an update or to implement an ASU for interim reporting with a year delay.

Each year the FASB issues 15 to 20 ASUs and another 15 to 20 become effective. It is tough to keep up with the changes, but the FASB doesn’t seem to be slowing down.

Joann Noe Cross, Ph.D., CPA, CGFM, CGMA, CMA is professor and co-chair of the accounting department at the University of WisconsinOshkosh. Contact her at 920-424-1311 or crossj@uwosh.edu.

wicpa.org

{ Financial planning | Scientific investing }

Scientific investing in the real world

T

By Kevin M. Reardon, CFP®

wicpa.org

urn on CNBC, open The Wall Street Journal, view your favorite financial websites, or consult your Twitter account, and you’ll see glaring headlines telling you to buy or sell a given security or suffer death by a thousand cuts. All of us would gladly act on this “advice” if we knew it would help our situation, except we know tomorrow will have another headline with different advice.

a self-proclaimed expert with definitive knowledge on how to invest. By the time you consult with the experts, you’re amazed to find people of high intelligence saying exactly opposite things.

Steering clear of the media is only half the battle, as every individual, including your brother-in-law, is

Academic research has uncovered various factors of return that have been proven to add value over

Whether you’re concerned about your own retirement assets or periodically advise your clients, there is a better way to make investment decisions.

Factors of return

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29

{ Financial planning | Scientific investing }

Proven Factors of Return

TABLE 1 time, which we employ in managing assets. We focus on the four strongest factors that have been identified. Table 1 references the four factors discussed below, using a five-year moving average to analyze each factor.

The blue on the bar chart indicates when the given factor has added value, the red indicates a period when a factor did not work. Notice that each factor is not only positive more

30

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times than it is negative, but also the degree to which it works (the height of the blue bar) is greater than the instances it doesn’t work (the negative decline of the red bar).

Equities versus fixed income: It is known that equities have outperformed fixed income over time. The first item in Table 1 indicates that this happens most of the time and by a large margin.

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{ Financial Planning | Investing } } { Financial planning | Scientific investing

Benefits of Rebalancing

TABLE 2 Size: The second item shows small-cap equities outperform large-cap equities over time. This happens most of the time and by a large margin.

Value versus growth: In item three, it’s been proven that value stocks outperform growth stocks over time. Again, this happens most of the time and by a large margin.

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Profitability: Companies with top quartile profits outperform all other companies. This factor works almost all of the time and by a large margin.

The above factors were analyzed across a multitude of economic cycles, geo-political environments, inflationary and tax environments, etc. These results demonstrate the persistence

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31

{ Financial planning | Scientific investing }

of the factors. These factors have also been tested across foreign and emerging markets, and each of the four factors has been proven to add value. In many instances, the factors provide additional value in the foreign markets relative to their domestic counterpart.

Investment application We are all looking for a magic bullet when investing, achieving high returns without risk. This magic bullet does not exist. However, we are able to increase our odds of success considerably by tilting a real world portfolio towards the factors listed above; owning investments focused on profitable smallcap value equities (all four of the factors).

In Table 1, each factor was proven to work on its own. By using each factor together, you are further maximizing your probability of success. It’s important to keep in mind the graph indicates each factor works over time, but not every time.

Rebalancing Although we concede there is no magic bullet, there is an additional investment discipline that adds value over time. Rebalancing is the process of selling a portion of your investments that are doing well and buying more of the investments that have recently lagged. Table 2 compares a static 60/40 portfolio to one that is rebalanced once per year. The result is a portfolio that achieves higher returns and lower risk, getting us as close to a magic bullet as we can hope.

Relating this discipline to the four factors listed above, we will be forced to sell some value holdings and purchase underperforming growth holdings, sell some of our equity

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holdings to buy fixed income, sell some small-cap equities to buy large cap, etc.

Different market cycles may cause the rebalancing to occur in exactly the opposite order listed, but it will still be effective.

Although we firmly believe in the proven factors of return listed above, it’s important to hedge our bets and ensure a real world portfolio always has some components that are moving forward.

Real-world portfolios There are numerous mutual funds and Exchange Traded Funds (ETFs) created around utilizing these factors of return.

Implementing this strategy across different types of accounts, such as taxable, tax deferred, and tax free accounts can be challenging as the benefits of rebalancing may be done at the peril of a client’s tax liability. Householding is a solution to this problem, which is the deployment of an investment strategy across all different types of accounts in the most tax efficient manner possible.

Applying scientific knowledge to real world investment portfolios has been a long time coming, and has been made possible with enhancements in technology. Rather than listening to your brother-in-law’s investment ideas, you can stack the odds of success in your favor by relying on factors that have been scientifically proven to succeed over time.

Kevin M. Reardon, CFP® is president of Shakespeare Wealth Management, Inc. ® in Pewaukee. Contact him at 262-814-1600 or Kevin@ShakespeareWM.com.

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Everything you care about is in this house.

Things your family just can’t afford to lose.

We can help you protect it with a Home and Highway® policy from West Bend.

You’ll benefit from the convenience of one policy, one bill, one deductible, and one agency. And because you’re a member of the WICPA, you could also receive a discount on your annual premium.

To find out what else the Home and Highway has to offer, contact this Official Supplier of the Silver Lining.

Professional Insurance Programs at (414) 277-0154 or info@profinsprog.com or to find an agency near you, visit thesilverlining.com.

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