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Fall 2008
By J. Stephen McNally, CPA
What is the role of a plant controller? The answer may seem straightforward enough: the plant controller is responsible for personally coordinating the completion of all plant accounting and financial reporting activities related to his or her location. More specifically, the plant controller is responsible for cost accounting, financial closing and reporting, internal control and Sarbanes-Oxley compliance, tax, fixed asset accounting, inventory management, and related activities. But does the plant controller’s role stop there? No.
The plant controller is essentially the chief financial officer of his or her location, and as such, must embrace a variety of roles. Indeed, the plant controller may be a talent scout, coach and judge, strategic business partner, treasure hunter, great communicator, corporate citizen, and master of ceremonies. In short, the plant controller must be a well-rounded leader who can wear many hats with style.
Plant Accounting & Financial Reporting
The plant controller’s primary responsibility, without question, relates to the performance of traditional plant accounting and financial reporting activities. But this one job has many aspects. To begin, there is cost accounting, which typically includes the analysis and reporting of daily production, purchase price variances, raw material yields, filling yields, production put-away losses, expense budget variances, and related information. As cost accountant, the plant controller also will likely develop cost estimates for new product initiatives based on the results of special batch runs or on reasonable assumptions, ultimately leading to a decision for the given initiative. As cost accountant, the plant controller also manages cost-related reserves, performs reconciliations, and participates in special projects as appropriate.
Next on the plant controller’s list of responsibilities is the financial closing process, typically performed monthly. To ensure each step of the process is completed timely and accurately, the plant controller will likely create and monitor a closing check list. For example, during the close, a plant controller will need to ensure that all production orders are closed, in-hand invoices are processed, subsystem posts are tied out, manual journal entries are posted, and reserve accounts are reconciled. Once the numbers are final, the formal analysis and reporting of the plant’s financial performance can begin. This analysis will likely include an assessment of risks and opportunities as well as a forecast of performance for the remainder of the year.
Another plant controller responsibility, which became more critical after passage of the Sarbanes-Oxley Act of 2002, is to ensure that internal controls are appropriately designed and operating effectively. To do so, the plant controller must have a solid understanding of the plant’s operations and staff, including inherent risks, recent trends, potential changes, segregation of duty concerns, and other insights that could affect the plant’s internal control environment. If internal control deficiencies are discovered, the plant controller must appropriately report and execute an action plan to resolve such issues.
In this role, the plant controller may also perform due diligence in support of the plant’s quarterly management representation process, complete formal control self-assessment testing, and support internal or external auditors during their reviews.
The plant controller, as resident tax expert, is expected to have an understanding of federal, state, and local tax requirements and related issues. Some issues may include the guidelines regarding real vs. personal property when making capital investment, when capital and other expenditures are subject to sales and use tax, and other tax considerations, such as electric usage excise taxes, appropriate accounting for Social Security as well as federal, state, and local income taxes, and corporate income taxes.
In addition to being the resident tax expert, the plant controller may also be responsible for fixed asset accounting, including capital project reviews, asset capitalization, idle asset reporting, and the physical inventory of fixed assets. Likewise, the plant controller may be accountable for inventory management, ensuring that the plant’s inventory controls are adequate, reconciling inventory balances monthly, identifying overage and aging material issues, and coordinating periodic physical inventories. Depending on the nature and complexity of the plant’s operations, the plant controller may also handle accounts payable, accounts receivable, cash management, information technology, and other activities. Finally, in addition to reporting the plant’s financial performance monthly, the plant controller will likely drive the plant’s strategic or annual operating planning process.
Talent Scout, Coach, and Judge
Managing the plant accounting and financial reporting processes is a key aspect of the plant controller’s role, but providing leadership and direction to the finance team is equally important. Indeed, the ability to manage and engage the finance team may be a top priority. When wearing this hat, the plant controller moves between the roles of talent scout, coach, and judge.
As talent scout, the plant controller must ensure the finance team consists of sufficient and appropriate talent. To do so, the plant controller must assess the financial needs of the plant, meeting with cross-functional business partners to discuss their expectations of the finance team and to get their feedback regarding what the team does well and what it needs to do better. The plant controller must assess the finance team’s current talent, meeting with each member to discuss their self-assessment of personal strengths and weaknesses, career goals and objectives, and developmental needs and desires. With this insight, the plant controller can ensure that the local finance organization is appropriately aligned with the plant’s needs and can begin recruiting for any unmet talent needs.
Once the finance team is fully staffed with the appropriate talent, the plant controller becomes both coach and cheerleader. Specifically, the plant controller must ensure that the team is engaged and that each member is delivering against both the plant’s needs and their own personal career and developmental objectives. With formalized annual objectives, which are clear, concise, measurable, and aligned with the overall goals and objectives of the plant, the plant controller can monitor each finance associate’s progress throughout the year, providing ongoing feedback as appropriate. At times, the plant controller will need to coach staff through challenging assignments, whether from a technical or a behavioral perspective. Other times, the plant controller will need to be a cheerleader, encouraging the team that progress is being made and that their efforts are being noticed and are appreciated. For example, when implementing a new system, and the significant business process changes that go along with it, everyone will experience moments of self-doubt, frustration, and burnout. During these dark moments, the plant controller’s leadership, can-do attitude, encouraging words, and willingness to listen can make a profound difference.
In leading the finance team, the plant controller must also assume the role of judge, assessing the team’s progress in general and each associate’s performance in particular. Any feedback from these judgments should be clear, concise, and formalized in periodic performance appraisals, bringing attention to both an individual’s strengths and weaknesses, and setting expectations going forward. By delivering formal judgments in a professional and respectful manner, the plant controller can help an employee understand and accept the need for change. Finally, as resources are limited for most organizations, the plant controller will need to determine how to divvy salary increases across the team. Thus, as judge, the plant controller must determine who will be compensated above, at, and below average.
Strategic Business Partner
The plant controller typically gets involved in nearly every facet of his or her plant’s local operations. Indeed, the plant controller not only is the leader of the finance team, but also an overall leader of, and strategic business partner for, the entire plant staff. Most importantly, the plant controller is the plant manager’s sounding board and trusted advisor. The plant controller will participate in staff meetings, thereby keeping a finger on the pulse of the operation, updating the staff on the plant’s financial performance, and asking the tough questions that come natural to a CPA. As a strategic business partner, the plant controller is a key player when it comes to planning sessions, defining the location’s business continuity plans, and developing plant policies with cross-functional implications. If the plant is unionized, the plant controller will provide financial insight to, and may become a key member of, management’s collective bargaining committee. Likewise, the plant controller may be tapped as the plant’s lead or co-lead for major initiatives such as the implementation of major business process applications. Finally, the plant controller is a key member of the welcoming committee for corporate executives and other plant visitors.
Treasure Hunter
The plant controller’s fourth hat is that of treasure hunter, as he or she is always looking for savings initiatives and other opportunities to reduce the plant’s total delivered cost. The plant controller works with plant staff to identify cost savings projects, provides the appropriate analysis in support of the due diligence process, and then becomes a vocal champion in support of these initiatives, especially if capital investments are required. For example, if third parties are used for outside storage, there may be a savings opportunity to build an on-site warehouse at the plant; or investing in more efficient and reliable equipment may increase throughput and reduce the cost of maintenance. The plant controller can also provide thought leadership to support the plant’s continuous process-improvement initiatives. The plant controller should always keep his or her antenna up for local, state, or federal tax credits and other incentives that become available, and then aggressively go after these incentives, such as training grants, enterprise zone tax reduction opportunities, energy credits, and so on. Finally, the plant controller can play a key role in ensuring that vendor claims are successfully settled by "auditing" the claim package to ensure the evidence is complete and accurate. As a treasure hunter, the plant controller can significantly benefit the plant’s financial performance by asking the right questions and focusing on the right areas.
The Great Communicator
Communication is critical for success in any relationship and across any organization. To be successful, therefore, the plant controller must be a great communicator within the finance team, across the plant, throughout the overall organization, and even into the local community. First, ensure all members of the local finance team have the information they need to effectively do their work and are aligned with the plant’s priorities. The plant controller can drive this alignment by sharing the company’s overall vision, mission, and objectives, and then supporting each member in developing their personal objectives. To facilitate the effective sharing of information within the team, the plant controller can use tools such as financial leadership team huddles, overall plant finance team meetings, as well as one-on-one updates and informal discussions. The plant controller must also ensure that financial concerns and points of interest are shared cross-functionally, and must gain insight into the plant’s operational performance and related issues via plant staff colleagues. As a key leader of the plant, the plant controller must ensure the plant’s perspective is considered in corporate decisions by building a network of both financial and cross-functional contacts across the company. The plant controller can leverage this network to ensure senior management is aware of plant-related performance, risks and opportunities, and other pertinent issues. Lastly, the plant controller may be called upon to be a corporate spokesperson, who clearly articulates the plant’s or company’s message accordingly.
Corporate Citizen
The sixth hat of the plant controller is that of corporate citizen. Specifically, the plant controller must strive to build strong relationships between his or her company and the local community and key community leaders, including government officials and business leaders. For example, the plant controller could financially support local charities, actively participate in local events, be a guest speaker, or share financial expertise by joining a charitable board. By doing so, the plant controller can help maintain a positive business environment for his or her company within the local community, resulting in intangible benefits and goodwill.
Master of Ceremonies
Although there are many hats worn by the plant controller, one of the most rewarding is that of master of ceremonies. When working with a highly engaged team, especially when in the midst of significant change, it is easy to overlook individual milestones and achievements along the way. As master of ceremonies, the plant controller should not let these occasions go unnoticed. Sometimes, formal recognition via an award ceremony, public celebration, or financial incentive is appropriate. Other times, the recognition could be as simple as a handwritten note or a verbal thank you. Either way, it is the plant controller’s responsibility to show sincere appreciation for a job well done.
Conclusion
The plant controller is required to wear a variety of hats, from the traditional, to the somewhat expected, to the less expected. Indeed, the many hats of the plant controller make the role one of the most interesting available to a CPA.
J. Stephen McNally, CPA, is finance director and controller for Campbell Soup’s Napoleon, Ohio, operations, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at j_stephen_mcnally@campbellsoup.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By William J. Holmes, CPA
When AICPA issued SAS 107, Audit Risk and Materiality in Conducting an Audit, as part of its set of "Risk Assessment Standards," it indicated in SAS 107 that the auditor’s consideration of materiality is a matter of professional judgment. This judgment is to be largely influenced by what the auditor perceives to be the needs of financial statement users, as discussed in FASB Concepts Statement No. 2 (CON 2), Qualitative Characteristics of Accounting Information, in connection with discussions of materiality. Specifically, CON 2 defines materiality as the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been influenced by the omission or misstatement.
It has been a long-held belief in the accounting profession that materiality judgments are primarily quantitative in nature, but CON 2 notes that whether an item is large enough for users of the information to be influenced by it will be affected by the nature - as well as the amount - of the item. That is, items too small to be thought material if they result from routine transactions may be material if they arise in abnormal circumstances. In other words, magnitude (quantitative materiality) by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made (qualitative materiality), will generally not be a sufficient basis for a materiality judgment. This is confirmed by SAS 107, which concludes that materiality judgments are made in light of surrounding circumstances, and involve both quantitative and qualitative considerations.
Furthermore, the more important an item is, the finer the "screen" should be used to determine whether it is material. For example, CON 2 observes that a failure to separately disclose a nonrecurrent item of revenue may be material at a lower threshold should that revenue turn a loss into a profit or reverse the trend of earnings from a downward to an upward trend. CON 2 further notes that amounts too small to warrant disclosure or correction in normal circumstances may be considered material if they arise from abnormal or unusual transactions or events. Consequently, the relative, rather than the absolute, size of a judgment item determines whether it should be considered material in a given situation.
The SEC also weighed in on the issue of materiality. Staff Accounting Bulletin (SAB) 99 further stressed the need to consider both qualitative as well as quantitative factors in assessing the materiality of a misstatement. In reaching its conclusions, SEC staff relied upon the guidance set forth in CON 2 as well as court decisions, and noted that the concept of materiality in accounting literature is in substance identical to the formulation used by the courts in interpreting the federal securities laws.
SAB 99 notes that "one rule of thumb... suggests that the misstatement or omission of an item that falls under a 5 percent threshold is not material in the absence of especially egregious circumstances." However, SEC staff concludes that while it "has no objection to such a ‘rule of thumb’ as an initial step in assessing materiality... quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. Materiality concerns the significance of an item to users of a [company’s] financial statements. Therefore, a matter is material ‘if there is a substantial likelihood that a reasonable person would consider it important.’"
Supplementing its guidance in SAB 99, SEC recently issued SAB 108, Quantifying Financial Statement Misstatements. Its objective is to address consistency and eliminate hanging balance sheet errors. In assessing materiality, the SEC wants registrants to consider both a balance sheet approach and an income statement approach. The balance sheet, or Iron Curtain, method requires consideration of all balance sheet errors and the effects of correction. The income statement, or Rollover, method requires consideration of all income statement errors and effects of correction. The SEC takes the position that measurement of materiality of errors should be under both methods with final determination based on a combination of the two methods - a dual measurement approach.
The principles and concepts set forth in CON 2, SAB 99, and SAB 108 may cause an auditor to evaluate misstatements as material even though they are below a materiality level determined when establishing the overall audit strategy. For example, an illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue. Thus, in making such judgments about the materiality of misstatements of lesser amounts than an established materiality level, the auditor should consider whether such misstatements could reasonably be expected to influence the economic decisions of financial statement users. Factors to be considered include, but are not limited to, the potential effect of the misstatement on trends; the change of a loss to income; the effect on a company’s compliance with loan covenants; the possible existence of fraud or illegal acts and violations of contracts; and the failure to meet investor earnings expectations.
The professional literature is quite clear that the quantification of a misstatement is merely the starting point in assessing whether such misstatement is material to the financial statements taken as a whole. In addition to the quantitative assessment of materiality, the auditor must consider the qualitative factors that would reasonably be expected to affect the decisions of users.
William J. Holmes, CPA, is director at Marks Paneth & Shron LLP in New York. He can be reached at wholmes72@msn.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Jonathan Liss and Matthew D. Melinson, CPA
Many CPAs in public accounting, private practice, industry, and government either entirely or partially practice in the state and local tax area. Of PICPA’s 20,000 members, over 2,600 cite state and local tax as an area of interest. To be successful, these CPAs must maintain a strong combination of technical skills and business relationships. Below are some of the organizations that serve as valuable technical and networking resources.
National Organizations
The Council on State Taxation (COST), founded in 1969, holds regional meetings that offer great networking opportunities. COST also advocates on behalf of its membership in the legislative, judicial, and administrative areas. Its reputation as a nationwide voice of corporate multistate taxpayers has garnered respect from the National Conference of State Legislatures, the Federation of Tax Administrators, and the National Governor’s Association.
The Institute for Professionals in Taxation (IPT), founded in 1976, promotes equitable tax administration and minimizing the cost of tax administration and compliance. IPT is especially strong in the areas of property and sales/use tax, and has heightened its focus on income tax in recent years. IPT has its own professional credential, the certified member of the institute (CMI) designation, and holds its members to a strict code of ethics and professional conduct.
The Tax Executives Institute (TEI), founded in 1944, consists of in-house tax professionals, including accountants, lawyers, and other business professionals responsible for the tax affairs of their employers. TEI’s mission is to enhance and improve the tax system; serve its members, their employers, and society by facilitating interaction among its members and their staffs; and effectively advocate its members’ views. The Philadelphia Chapter of TEI holds monthly breakfast meetings of its state and local tax committee that cover a variety of technical, legislative, and audit issues. The committee regularly hosts prominent state tax attorneys, CPAs, and representatives of state and local revenue departments.
AICPA’s state and local tax technical resource panel meets periodically to discuss state and local tax developments and to advocate on behalf of members on legislative issues. The group provides resources to all AICPA members related to professional standards and ethics, legislation, regulation, and administration.
The American Bar Association tax section’s state and local tax committee meets three times annually and produces annual publications related to property and sales/use tax. The committee also produces a state and local tax edition of the ABA Tax Lawyer for ABA members.
Governmental Organizations
The Federation of Tax Administrators (FTA), organized in 1937, provides administrative services to state tax authorities and administrators. The FTA is a resource for research and information exchange, and intergovernmental and interstate coordination. FTA membership includes all 50 states, the District of Columbia, and Puerto Rico. The FTA has working relationships with the four regional tax administrators’ associations - Midwestern States Association of Tax Administrators, Southeastern Association of Tax Administrators, Western States Association of Tax Administrators, and Northeastern States Tax Officials Association, which includes Pennsylvania and the city of Philadelphia.
The Multistate Tax Commission (MTC) is a joint agency of state governments established to improve the administration of state tax systems as they apply to interstate and international commerce. The organization is charged with facilitating equitable apportionment; promoting uniformity through the development of model statutes and regulations; facilitating taxpayer convenience and compliance; and avoiding duplicative taxation. The MTC was created in 1967 through the Multistate Tax Compact, an interstate compact statute enacted by each member state. There are currently 20 member states, seven sovereignty members, and 21 associate (including Pennsylvania) and project members.
Pennsylvania Area Organizations
The Philadelphia Bar Association’s state and local tax committee advocates probusiness tax initiatives. It meets quarterly to discuss multistate and state and local tax technical developments. Often the group hosts prominent members of governmental organizations to make presentations.
The Greater Philadelphia Chamber of Commerce’s state and local tax committee meets periodically at the Chamber of Commerce’s headquarters in Philadelphia to discuss current developments in Pennsylvania and Philadelphia taxation.
In the western section of the state, there is the Pittsburgh Organization of State Taxes (POST). This longstanding networking group meets periodically to discuss technical developments among the area’s state and local tax practitioners.
PICPA, of course, has its own State and Local Tax Committee. The committee meets each quarter in Harrisburg, though there are numerous subcommittees that have additional meetings or conference calls. The committee meets regularly with the Pennsylvania Department of Revenue and has developed a popular annual Q&A session with the Department. The committee also delves into legislative reform. Recent efforts included supporting Senate Bill 1063 regarding local EIT collection reform, which Gov. Rendell signed into law July 2, 2008, as Act 32 of 2008; and supporting Act 166 of 2002, which tied ACT 511 earned income and net profits definitions to state-level personal income tax definitions. The Greater Philadelphia and Pittsburgh chapters also have their own Legislation and Local Tax committees, which are very active in legislative and advocacy efforts related to city and regional taxation.
For more information on PICPA state and local tax committees, visit www.picpa.org/getinvolved.
Jonathan Liss is director of state tax audits and planning for Rohm and Haas Company, and is a member of the COST board of directors. He can be reached at jliss@rohmhaas.com.
Matthew D. Melinson, CPA, is a managing director with SMART Business Advisory & Consulting LLC, is PICPA’s Greater Philadelphia Chapter president, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at mmelinson@smartgrp.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Edward R. Jenkins Jr., CPA
In June 2008, the IRS published proposed regulation changes regarding Internal Revenue Code (IRC) Section 6694. The proposed changes are expected to enhance the IRS’s ability to hold unscrupulous and unethical tax return preparers accountable for their actions. Under the revisions, however, intent is irrelevant. In other words, a tax return preparer cannot claim ignorance as an excuse, as the law will still apply to someone who unintentionally causes an understatement of tax return liability.
The burden of these regulations will need to be considered within the context of the profession’s other ongoing challenges, including finding and retaining employees, transitioning to International Financial Reporting Standards, and the head-spinning rate of new and revised rules with which all practitioners must deal. If there is any good news in this, it is that much of the voluminous IRC changes are aimed at conforming current regulations to a changed definition of the tax return preparer.
Changes
The changes to IRC Section 6694 are significant. The statute was changed to cover preparers of all tax returns - defined in IRC Section 7701(a)(36) - instead of just income tax return preparers. That means IRC Section 6694 now applies to preparers of income tax, estate and gift, excise, exempt organization, and employment tax returns.
-- The definition includes any person who prepares a substantial portion of a return, not just the nominal signer.
-- Employees of taxpayers are carved out of the definition of "return preparer."
-- Fiduciaries who prepare returns are also carved out of the definition of tax return preparer.
The revised statute instituted a new standard for the level of confidence a preparer must have with respect to the likelihood that any tax return position will be upheld on examination: a reasonable belief that the tax return position would "more likely than not" (more than 50 percent) be sustained on its merits. That standard should be familiar to CPAs as a result of FIN 48.
-- This confidence level is higher than the "substantial authority" standard for taxpayers, which in general terms means there is at least a 40 percent chance the tax return position will survive on examination.
-- Therefore, if a taxpayer self-prepares a return, they are held to a lower standard of care than a tax return preparer.
IRC Section 6694 increases penalties as well. The first-tier penalty of $250 went to the greater of $1,000 or 50 percent of the compensation derived from the preparation of the return. The willful or reckless conduct penalty went from $1,000 to the greater of $5,000 or 50 percent of the compensation derived from the preparation of the return. Preparation of a faulty return will be fined on all income derived by the preparer, which may include the fee for preparation plus any fees charged for related research, letters, communications, and opinions. Circular 230 was also recently changed to reflect penalties arising from the American Jobs Creation Act of 2004 (AJCA), which provides for penalties up to 100 percent of the income derived from the representation activity.
The revisions to the statute also change the standard of conduct for practitioners in two ways. Practitioners cannot sign a return without disclosure of a tax position, unless the return position meets the more-likely-than-not standard. The proposed regulations permit the substantial-authority standard if penalty provisions are discussed with the taxpayer. The old standard was "realistic possibility," which was consistent with the AICPA Statements on Standards for Tax Services. Also, practitioners cannot sign a return with disclosure of a tax position unless the position has a reasonable basis - at least 15 percent likelihood - in law. The old standard was "not frivolous" or "patently incorrect." Disclosure is generally made on Form 8275 or 8275R and is required to be attached to a return. The proposed regulations provide four additional ways of meeting the adequate disclosure requirement.
Difficulties
The IRS is aware of practitioner concerns regarding the application of the IRC Section 6694 penalties in addition to potential Circular 230 penalties. The IRS intends to provide revenue agents with balanced guidance on when tax return preparers should be referred to the IRS Office of Professional Responsibility (OPR) for sanctions under Circular 230 and the 100 percent monetary penalty imposed by the AJCA. The IRS is clear in the preamble to the proposed regulations that an IRC Section 6694 penalty would not automatically generate an OPR referral for practitioners to then become subject to Circular 230. Note, IRC Section 6694 applies to all tax return preparers, and Circular 230 applies only to those who practice before the IRS.
IRS policy prior to what was expressed in the proposed regulations was a mandatory referral of Circular 230 practitioners to OPR when the following penalties had been asserted:
-- IRC Section 6695(f) (negotiation of a check), Section 6700 (promoting shelters), or Section 6701 (aiding/abetting an understatement)
-- IRC Sections 6694(a) and (b) when closed and agreed, sustained in appeals, or closed unagreed
-- Enjoining actions under IRC Section 7407 and Section 7408
-- IRC Section 6701(a) with respect to appraisers
Reliance on information provided by others is a significant issue. Current regulations allow a tax return preparer to rely in good faith upon information provided by a taxpayer or other advisers, without verification. The proposed regulations include the caveat that a tax return preparer cannot rely on taxpayers’ interpretation/application of federal tax law to their facts and circumstances. A tax return preparer can rely on other advisers’ advice, so long as it does not conflict with information the tax return preparer knows or should know. The proposed regulations create the expectation that a tax return preparer will make an inquiry if information is incomplete or the information appears to be incorrect or inconsistent with other information available.
The basis of the new IRC Section 6694 penalty calculation is "income derived, or expected to be derived, from services rendered to prepare a return or claim for refund or from providing advice with respect to positions taken on the return or claim that give rise to the understatement." Consider a preparer in a firm who earns roughly $45 per hour, but the firm charges $450 per hour for his time. What is the "income derived" from the preparation or advice of the tax return preparer?
Proposed regulation 1.6694-1(f) attempts to define "income derived, or expected to be derived," from preparation of a return or claim. The IRS must determine if the firm is responsible for the behavior giving rise to the penalty, or if the individual is responsible. If the firm is responsible, then the base is the fees derived from the return preparation. If the individual is responsible, the base is the compensation received from the firm for the preparation of the return, advice, or claim.
Interim guidance and the proposed regulations harmonize the standard for both preparer and taxpayer at "substantial authority," as defined in IRC Section 6662. Treasury Reg. 1.6662-4(d) explains the "substantial authority" basis and that regulation includes explanations of the protocol by which authority for tax return positions is evaluated. That regulation establishes IRS expectations for preparers’ documentation and research of tax return positions. The proposed IRC regulations permit the lower "substantial authority" standard for preparers, as long as the preparer advises the taxpayer about understatement penalties that could apply to the return. That advice must be documented contemporaneously for penalty relief to apply for the tax return preparer.
The IRS has asked for practitioner guidance on the proposed regulations. One area is the one preparer per firm or tax return rule. The IRS believes increasing tax and accounting complexity has created the need for greater specialization within firms. Therefore, the IRS is developing a theory of "One Preparer per Tax Return Position." Thus, a nonsigning preparer in a firm that provides advice to the signing preparer for a particular return issue would be primarily responsible for that issue, rather than the signing preparer.
While the "One Preparer per Tax Return Position" theory may make sense, the administrative challenges and changes to the process of tax return preparation and quality control could be significant in order to implement the desired change. The IRS believes facts and circumstances in each case will determine whether an IRC Section 6694 penalty will be assessed against the signing preparer or a nonsigning specialist on a particular tax return position. The documentation levels needed within a firm to identify who is to blame when a return position is questioned are frightening.
Another problem arises when a return is prepared that has an issue that would create an understatement and generate an IRC Section 6694 penalty, except for the existence of other audit issues that offset the understatement. The statute specifically looks to the net liability in IRC Section 6694(e) and provides for abatement of penalty if there is no understatement. Note that the standard in IRC Section 6694(e) is any understatement, as distinguished from "substantial understatement" in IRC Section 6662(d). It should also be noted that the understatement is determined without regard to any administrative or judicial action by the taxpayer. Thus, if a taxpayer decides not to litigate because of the hazards of litigation, and you think the understatement would be reversed if litigated, you still are subject to the penalty. That disconnect in interests of the parties could create a conflict in some circumstances.
The unavoidable answer seems to be a more time-consuming and expensive tax return preparation process with greater financial burden placed on taxpayers. Theoretically, taxpayers are presented with a higher quality product. It is likely, however, that clients assume they are already getting a top-quality tax return product, and they will not see the added value despite the higher invoice they must pay.
Possible Solutions
Practitioners may want to consider making the following changes to the return and claim preparation process and the process of rendering advice.
Even though SSTS No. 9 was never finalized, consider each practitioner’s system of quality control. Much of the documentation required by the changes to IRC Sections 6694, 6695, and 7701 is to be prepared contemporaneously. The return/claim preparation process should contemplate a means by which the following are accomplished:
-- Tax return positions are identified.
-- Research and documentation effort is assessed.
-- Research is used to assess confidence levels.
-- Documentation is prepared that conforms to Treasury Regulation 1.6662-4(d)(3), and a standard memorandum methodology, such as IRAC, is used.
-- The additional tax returns now covered by the statute should be brought into the system of quality control.
-- The processes should identify who was responsible for the conclusion on each tax return position.
Firms should consider providing additional training in tax research and writing to promote effective and efficient documentation processes. Of particular import is training that captures best practices in research and writing methods and that harnesses the power of the office technology that is available.
Practitioners should look to FAS 109/FIN 48 working papers to leverage the documentation that is included therein as much as possible.
Firms should establish reasonable frameworks to guide staff in determining levels of confidence of tax return positions being sustained on examination. There are differences between FIN 48 and the documentation standards under IRC Sections 6694 and 6662. Contemporaneous documentation is vital, particularly when you consider time gaps, likely employee turnover, and advancement.
Intra-firm resolution processes should be established to resolve differences of opinion among staff assigned to engagements regarding confidence levels and documentation expectations.
Standard language that describes the penalty regime applicable to taxpayers should be developed and incorporated into the firm’s engagement letters and other appropriate communications. Clients need to know the standard for return preparers is "substantial authority" rather than "more likely than not" under the proposed regulations’ interpretation of the statute.
Conclusion
The changes wrought by the IRS’s proposed regulations will be critically important to CPAs. The potential penalties under IRC Section 6694 are much more significant, and they are in addition to the potential 100 percent of fees derived penalty under the AJCA. Therefore, substantial changes will be necessary for each preparer’s system of quality control.
Edward R. Jenkins Jr., CPA, is managing member of Jenkins & Co. LLC in Spring Grove, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at edwardj@wemanagetaxes.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Peter N. Calcara and Ellisith B. Henry
As the clock was winding down for the General Assembly to craft a spending plan for the Commonwealth’s coming fiscal year, PICPA was able to achieve two major legislative victories this past July: enactment of earned income tax collection reform and important CPA Law amendments.
Earned Income Tax Collection
More than four years of PICPA members’ grassroots lobbying culminated in Gov. Rendell’s July 2 signing of Senate Bill 1063, creating a new, more efficient tax collection system that could yield more than $200 million for municipalities and school systems and improve Pennsylvania’s business climate through tax standardization, coordination, and accountability.
At the bill-signing ceremony, attended by PICPA member Cheri H. Freeh, chair of the PICPA Local Tax Reform Subcommittee, Gov. Rendell acknowledged the efforts of PICPA and other stakeholders in the long battle to reform. "Today marks the culmination of a tremendous grassroots effort by the business community, local government, and professional associations and, ultimately, the legislature," said Gov. Rendell in signing the bill. "This fixes what is now, probably, the most complex and confusing local taxing environment in the nation, with more local earned income tax collectors - 560 - and more local taxing jurisdictions - nearly 2,900 - than all other states combined."
"The passage of Senate Bill 1063 will bring a significant amount of improvement to the way earned income taxes are collected in Pennsylvania," said Freeh. "Of course, there will always be suggestions to make the system even better, but this legislation is definitely a step in the right direction. A very large step."
PICPA members are no strangers to the problems that plague the system because of their unique position in the process. Many have been motivated to lobby state legislators to change the local EIT collection system for the last several years. In fact, it was the top legislative issue at the June 10 PICPA Day on the Hill event.
"CPAs routinely struggle with the arcane and cumbersome approach to EIT collection," said Freeh. "The enactment of Senate Bill 1063 is fantastic news to PICPA and its members. Consolidated EIT collection brings Pennsylvania into the 21st century. These reforms signify new opportunities for Pennsylvania’s competitiveness."
Now titled Act 32 of 2008, the new law requires the Commonwealth’s Department of Community and Economic Development (DCED) to issue a single set of rules and regulations that apply to all collectors, taxpayers, and employers. DCED also will develop uniform notices, forms, reports, returns, schedules, and codes to be used by municipalities, school districts, and tax collection districts. Employers are required to withhold local income taxes and remit them to one collector, even if an employer operates in multiple counties, and the law strengthens reporting requirements so that each earned income tax dollar is tracked from the time it is withheld until it is disbursed.
Lastly, but not least, Pennsylvania’s number of earned income tax collectors will be reduced from 560 to 69 - roughly congruent with Pennsylvania’s counties, although not a function of county government.
Senate Bill 1063 requires DCED to promulgate temporary regulations establishing uniform forms, reports, and returns for taxes levied prior to Jan. 1, 2010. The bill provides for full implementation of the new collection system on Jan. 1, 2012. At that point, tax collectors would be required to follow the new distribution and recordkeeping requirements.
PICPA thanks our many legislative partners, without whom this bill would not have been enacted: Sens. Pat Browne, CPA, and Jane Earll, and Reps. Gordon Denlinger, CPA, Dave Levdansky, and Steve Nickol.
CPA Law
Gov. Rendell signed Senate Bill 838 into law July 10, amending and modernizing Pennsylvania’s CPA Law. As a result, Pennsylvania CPAs will have greater mobility across state lines, allowing them to seamlessly serve clients conducting business in multiple jurisdictions. Not one negative vote was cast against the bill, now Act 73 of 2008, as it moved through the legislative process. The mobility provisions of Act 73 went into effect Sept. 8, 2008; education and experience changes will be effective in 2012.
"Passing this law aligns Pennsylvania CPAs with a national effort to not only increase our ability to serve our clients practicing in multiple states, but also to better protect the public interest by providing the State Board of Accountancy with stronger enforcement authority," says Eric Wallace, PICPA president.
Sen. Jake Corman (R-Centre), prime sponsor of Senate Bill 838, said, "This legislation is an important part of making Pennsylvania competitive in the global marketplace."
The CPA Law was last amended in 1996, years before the boom in Internet usage, which has dramatically changed the business world. Today, electronic filing and online commerce are the norm, and many companies have effectively become borderless because of the ease of conducting business over the Internet.
Senate Bill 838 was imperative for Pennsylvania-licensed CPAs to remain competitive with CPAs in other states, according to the National Association of State Boards of Accountancy. The law provides interstate practice mobility under "substantial equivalency," meaning that the education, examination, and experience requirements of another state are comparable to the requirements in the CPA Law. As a result, Pennsylvania CPAs will be able to provide services in all other states that embrace substantial equivalency, with no additional fees or restrictive paperwork.
To reach substantial equivalency standards, Pennsylvania increased the minimum amount of education required to obtain a CPA certificate and license from 120 to 150 hours, which is already the standard in 43 other states. It is important to note, however, that CPA candidates may still sit for the exam with only 120 hours. CPAs currently licensed in Pennsylvania will be grandfathered into the new policy, and will not need additional education to practice in other states.
Act 73 also increases the ownership share that non-CPAs may hold in accounting firms. Previously, an accounting firm must have been at least two-thirds owned by CPAs. The new law changes that to a simple majority, or 51 percent.
Along with Sen. Corman, PICPA acknowledges and thanks the following legislators who helped make passage of this legislation possible: Sens. Pat Browne, CPA, and Tommy Tomlinson, as well as Reps. Bill Adolph, Craig Dally, Gordon Denlinger, CPA, John Maher, CPA, Mike Peifer, CPA, and Mike Sturla.
Make Change Happen
Senate Bills 838 and 1063 were passed as a result of the work and dedication of PICPA members. Through testimony, letter-writing, phone calls, legislative visits, and donations to the CPA-PAC, our members made a profound change on the business climate in Pennsylvania.
Now is your chance to get involved by joining PICPA’s advocacy efforts. We are already working on legislative fixes to problems regarding the levying of the local Business Privilege Tax and the definition of net profits. In addition, PICPA will be working with legislators to develop a PA-40X form for amended tax returns and to defeat the sales tax on professional services issue that resurfaces again and again.
Go to PICPA’s Web site to sign up to be a Key Person or make an investment in CPA-PAC. Together, we can make a difference.
Peter N. Calcara is PICPA vice president of government relations. He can be reached at pcalcara@picpa.org.
Ellisith B. Henry is PICPA manager of government relations. She can be reached at ehenry@picpa.org.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Anna C. McAleer and Kristin Wentzel, PhD
Many college accounting programs emphasize the use of Excel in their undergraduate curricula because of the high demand within the profession for tech-savvy graduates capable of manipulating complex spreadsheets. At La Salle University, we recently moved away from a traditional, broad-based introductory computer science course to one that is specifically tailored to the needs of business students. This redesigned course emphasizes the use of Microsoft Office to help students understand and apply these applications in a business environment. Furthermore, to emphasize the interdependence of accounting and technology, La Salle also experimented last year with a linked, or "double," course format where the introductory computer skills course was tied to the introductory financial accounting course.
Tailored for Business Students
La Salle requires all business majors to enroll in the new computer science course mentioned above. (Liberal arts majors still take a general introductory computer science class.) Some first-year student rosters were linked so that these students attended both their computer science and accounting courses as a cohort group. An advantage of the double format is that business school faculty, who teach both courses, can more easily construct assignments that emphasize both accounting and technology concepts. While pure team teaching is not used, the pairing concept allows faculty to work together to structure sequencing and coordinate assignments. All intro tech courses use the same text and general syllabus, but the faculty in the mathematics and computer science departments teach unlinked computer science sections, with no coordination with the introductory accounting sections.
The majority of introductory financial accounting textbooks include Excel-based problems, but first-year students generally do not have the expertise to create the spreadsheets necessary to successfully analyze the data without direct involvement from the accounting instructor. Since most introductory financial accounting courses do not allocate enough time for instructors to bolster students’ Excel skills, a goal of this revamped computer science course includes teaching students to download financial statements and insert the data into an Excel spreadsheet. The focus then turns to manipulating the data using formatting techniques and formula calculations. This exercise instructs the students on making the spreadsheet user-friendly for decision makers, using appropriate input tables, and organizing data for analysis.
In the doubled sections, instructors can easily incorporate the Excel-based accounting assignments to emphasize the link between accounting and technology. For example, when students download financial information, they can then analyze the various components of a company’s balance sheet, create pie charts to show the relative size of debt and equity components, and draw conclusions about the use of debt versus equity for financing. Students then submit a Word document that includes graphs to support their written conclusions.
Student Perceptions
Students’ comments at the end of the semester suggested that the linked courses illustrate the interdependence of accounting and technology more effectively than stand-alone computer science courses, even when all sections use the same text designed specifically for business students. We surveyed all students enrolled in our introductory accounting course regarding their perceived knowledge of Excel skills and their perceptions of the interdependence between accounting and technology. Overwhelmingly, students who participated in the linked sections more significantly recognized technology as a useful tool in accounting, and more strongly agreed that accounting and technology were related than those students who took the new computer science course in an unlinked format. Furthermore, students in the linked sections reported significantly higher perceptions regarding their ability to download financials and work with the data, most likely because the students examined similar company data in both their accounting and technology courses.
From a pedagogical standpoint, the joining of technology and accounting early in the curriculum better prepares students for subsequent courses in accounting and finance, and better prepares students to enter an accounting profession that relies heavily on technology. Furthermore, based on our survey findings, there appears to be an advantage to formally linking the two courses using coordinated assignments to more strongly emphasize the role of technology in accounting and to enhance students’ ability to incorporate their Excel skills into accounting courses.
Anna C. McAleer is an instructor in the accounting department of La Salle University in Philadelphia. She can be reached at mcaleer@lasalle.edu.
Kristin Wentzel, PhD, is an associate professor in the accounting department of La Salle University. She can be reached at wentzel@lasalle.edu.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Douglas P. Hepburn, CPA, PFS, CFP
Premium financing for life insurance has been around for years, but its popularity exploded in 2003 when investors identified life insurance policies purchased in the secondary market as a potential portfolio holding. This has fueled the growth of the life settlement industry and raised important ethical issues surrounding the question of insurable interest. Yet, premium financing continues to be an estate planning tool that requires careful consideration.
Typical premium financing arrangements involve a permanent policy, such as universal life or equity indexed universal life, where the cash value of the policy is used as collateral for a loan financing the premiums.
In many instances, policies can be structured with lower initial expenses and no surrender charges. This process maximizes the policy cash surrender value, thereby minimizing the additional collateral required by the lender.
Premium financing loans have variable interest rates that are fixed from three to 12 months. The rates are based on a widely accepted index, such as the London Inter Bank Offered Rate, plus a spread. The borrowing rate is seldom higher than the crediting rate in the policy, leaving little opportunity for interest rate arbitrage.
Equity indexed universal life provides policy crediting rates based on the returns of one or more equity indexes and usually has a minimum guaranteed rate of return. These products have the potential to exceed the borrowing rates of the premium loan without the downside risk of negative returns associated with traditional variable policies. The fluctuation of the targeted indexes, however, makes it difficult to accurately model these policies or make long- term projections.
During the term of the loan, the policy owner may opt to defer the interest or pay it currently. By deferring the interest until death, the loan value will likely grow faster than the cash value. The result being additional collateral requirements and a reduced net death benefit.
Planners should consider the facts and circumstances of each case to determine whether this course is appropriate. As a planning point, it may be possible to pay the loan interest from annual gifts to the trust, depending on the number of beneficiaries. This effort would minimize the need for additional collateral while maximizing the net death benefit.
Premium financing is most often used with larger, illiquid estates that expect significant estate tax liabilities, such as those with privately held businesses or vast real estate holdings. Younger clients only rarely employ premium financing.
It is more often used for those whose life expectancy is less than 20 years from the date of purchase. Rarely do all assumptions used in a financial strategy remain valid for the life of the client. For that reason, it is critical to test any options against a worst case scenario prior to implementation so an action plan for recovery can be developed in advance. Once implemented, the strategy should be monitored regularly and adjusted to avoid having to make a major course correction at the last minute. The easiest exit strategy is to repay the loan at death. The downside here is that the longer the insured’s life, the greater the opportunity for something to go wrong. If the interest is deferred and paid from the death benefit, the net proceeds may no longer be sufficient to meet the client’s needs.
Repayment of the loan is the safest strategy, but it is often complicated by a limited ability for the grantor to make gifts. To make repayment easier, explore placing an income generator within the trust using a widely accepted discounted gift or sale technique.
Surrendering the policy is an exit strategy that deserves careful consideration since it could trigger gift or income taxes, depending on who is guaranteeing the loan and who ultimately repays it. As a last resort, if the financing arrangement cannot be unwound without significant pain, a life settlement may be the only option.
If an owner of a policy receives a payment in exchange for a life insurance policy, that transfer is considered a life settlement. These payments were once limited to situations where the insured had a terminal condition. In recent years, investors have recognized that they can purchase policies for a fraction of the death benefit with very little risk. This approach has become increasingly popular as an exit strategy for unwanted policies. It is even being pitched as a source of revenue for seniors who purchase insurance, then sell the policy after the two-year contestability period has passed. This development has raised ethical concerns among regulators and the insurance industry because of the high transaction costs and the potential for unintended consequences.
Despite the negatives surrounding these life settlements, premium financing remains a viable strategy for successful clients, provided they are fully informed of all the potential implications and have an exit plan if their situation changes.
Douglas P. Hepburn, CPA, PFS, CFP, is an advisor representative of Multi-Financial Securities Corporation. He can be reached at dhepburn@hepburnadvisors.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Wilhelm Dingler, JD
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Bollinger Inc. provides this column. For more information, contact Bollinger at robert.connolly@bollingerinsurance.com.
As of the writing of this article, gas prices sprinted past $4 per gallon, the stock market was flirting with a dreaded bear market, and, according to an AP-Yahoo News poll conducted by Knowledge Networks in June 2008, 47 percent of those polled believed gas prices will cause them "serious hardship." Belts will be tightening, fortunes will be shrinking, and investments in college funds and retirement plans appear to be in jeopardy. It is only a matter of time before wealth management issues become fodder for claims against accountants.
This is part of the "gatekeeper liability" phenomena, in which clients feel their accountants are the sentry to all things financial in their lives. And if something goes wrong, watch out. The sentry gets the blame first.
It is not difficult to envision claims being made against accountants, with accusatory fingers pointing at them for a reduction in the value of a client’s portfolio, retirement account, or other sources of wealth and net worth. "I entrusted my financial well-being to my accountant. Now I am nearing financial ruin! I cannot afford college tuition for my children as expected, and I cannot retire as I had once planned. It must be my accountant’s fault!"
One of the best ways to avoid such claims is the diligent and repeated use of engagement letters. An engagement letter defines the parameters and expectations for you and your clients. The following scenario illustrates the point.
Mr. Jones has been a tax client for the past 15 years. Each January, you send an organizer; each February, the organizer is dutifully returned; and each April, Mr. Jones timely files a return prepared by you. During the year, this client will call you occasionally, and sometimes the conversation will touch on the market, investments, and tax planning, even though your engagement has been limited to tax preparation. The client is nearing 60 and plans to retire in the next 18 to 36 months. Recent market volatility, however, has significantly eroded the value of the client’s investment and retirement portfolio, so much so that retirement is not feasible in the hoped-for time frame. In fact, it is likely that Mr. Jones will not be able to retire for 5 to 12 years based upon the state of his portfolio. Your long-standing client then turns around and sues you on the "gatekeeper" theory of liability, claiming that you, with superior financial knowledge and professional resources, were entrusted with the client’s financial well-being.
The defense of this situation may seem obvious: "I was Mr. Jones’ tax preparer, not his financial planner or advisor." To which our legal system responds, "Prove it." True, our legal system places the burden of proof and persuasion on the plaintiff, but once that person can put together a cogent set of facts demonstrating potential liability, the burden of proof shifts to the defendant. At that point, you must go about proving that you were not the person in whom the client placed or reposed confidence and trust for financial well-being. In the absence of a well-crafted engagement letter, your ability to prove the nature and scope of what your engagement was, as well as what it was not, is daunting. Our legal system gives us hope that the truth will win out, but at what cost? With an engagement letter for every engagement, the scope of the undertaking and the expectations of the client are clearly enumerated. It becomes the basis upon which one can establish the defense of your actions. Without the engagement letter, the litigation devolves into a messy "my word vs. your word" battle, where one can hemorrhage legal fees until ultimately settling the nuisance suit to make the case go away. All for want of an engagement letter.
Wilhelm Dingler, JD, is an attorney in the professional liability department of Marshall, Dennehey, Warner, Coleman & Goggin in Philadelphia. He can be reached at wxdingler@mdwcg.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Marge O’Reilly-Allen, CPA, PhD, and David Wagaman, CPA
The accounting profession is facing yet another challenge: a severe shortage of doctorally qualified faculty to teach the next generation of accountants. A growing demand for accounting professors has resulted in an inadequate supply of accounting PhDs, and accounting programs are experiencing great difficulty recruiting new faculty members. The situation is growing worse, and will not improve unless both academia and the accounting profession work together to develop long-term solutions.
Strong Demand, Short Supply
The shortage of PhD faculty in almost all business disciplines has been developing for well over a decade, and is projected to worsen due to several contributing factors: more undergraduate business enrollments, an increased number of MBA programs globally, and a growth in the number of business schools striving to meet or maintain accreditation from the Association to Advance Collegiate Schools of Business (AACSB), which requires a substantially PhD-qualified faculty. Accounting and finance face the most severe shortages. As these majors continue to become more specialized, it is becoming more difficult to hire qualified faculty.
Enrollment in accounting has rebounded since the declines in the late 1990s, and, in fact, is increasing at an astonishing rate. A 2008 AICPA study, Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits, reports three major increases since the last survey three years ago:
-- Accounting enrollments across all degree programs have increased by 19 percent, to a total of 203,638 students.
-- Total graduates in bachelor’s and master’s degree programs have increased by 19 percent, to 64,221. This is the largest number of graduates since the survey began in 1971-1972.
-- Eighty-three percent of bachelor’s and master’s degree graduates in accounting are produced by accounting and/or business accredited programs, while 40 percent are specifically from accounting accredited programs.
The surge in accounting enrollments and the increased number of AACSB-accredited business programs has increased demand for accounting faculty during a period when the number of accounting PhDs granted annually has decreased dramatically. A 2005 study by the American Accounting Association (AAA) and the Accounting Program Leadership Group (APLG) projects that the supply of graduating PhDs will meet only 50 percent of the demand for new professors from 2005-2008, with a projected demand of 942 new professors but a projected supply of 471 new PhDs. The shortage is most acute in tax and audit areas, with only 27 percent of the tax and 23 percent of audit requirements expected to be met. AACSB estimates the shortage of qualified business PhDs - including accounting and tax faculty - will more than double from the 2007 shortage of 1,100 to 2,400 by the year 2012.
The inadequate supply of accounting faculty has been exacerbated by the number of existing baby-boomer faculty beginning to retire. The exodus will increase over the next decade, since the most prevalent age of existing accounting PhD holders is 63.
Many schools conduct initial recruiting and interviewing at the annual meeting of AAA, and the latest placement data illustrates the difficult hiring environment that many schools are experiencing. The AAA Placement Center reports that the number of resumes at the annual meeting from 1992 to 2007 decreased from 180 to 96, and the number of schools recruiting increased from 110 to 222.
Why the Shortage?
The reasons for the waning interest in pursuing a PhD in accounting are varied, but the most common include the following.
Economic Cost - The average time to complete a PhD program is five to six years, so there is a considerable opportunity cost. Often those who truly desire to pursue a career in academia cannot afford to sacrifice years of salary at a well-paying job or the possibility of having to relocate to enter a doctoral program. While most PhD programs provide modest stipends and waive tuition, these amounts do not come close to the salaries that can be earned elsewhere.
Life Style Issues - PhD programs are incredibly stressful and have a high attrition rate. Of those who enter doctoral programs, almost 50 percent find the program too stressful and others are overwhelmed by the combination of coursework, research obligations, and teaching duties.
Fewer PhD-Granting Programs - There has been a decline in the number of universities that offer PhD programs in accounting. During the past decade, three new programs became available while at least 11 programs have become inactive. Universities are reluctant to fund PhD programs due to budgetary and incentive issues. MBA programs are generally profitable and are featured prominently in college rankings, while PhD programs are expensive to administer and require considerable faculty resources to support the program. With fellowships, tuition waivers, and stipends of $8,000 to $25,000, it is too expensive for many universities to have PhD programs.
Lack of Flexibility - Most programs ceased admitting part-time students years ago.
The PhD shortage poses a serious threat to the future of the accounting profession. The problem, if left unchecked, could damage the reputation and excellence of accounting programs. Without qualified full-time faculty, accounting programs will be forced to rely on more part-time faculty, increase the size of accounting classes, and possibly eliminate specialized courses or even entire programs. Ultimately, there will be fewer qualified entry-level professionals entering the workforce.
Increasing the Supply of PhDs
The accounting profession recognizes the responsibility to help address the faculty shortage. Major CPA firms, the AICPA, and the Institute of Management Accountants (IMA) launched initiatives to encourage professionals to pursue PhDs. The profession’s Accounting Doctoral Scholars program is a joint effort between accounting firms and CPA state societies, including PICPA, that will be administered by AICPA. The program will provide funding for up to 30 new candidates each year for four years for a total of 120 newly trained PhDs. Information can be found at AICPA’s www.adsphd.org site. Other examples include Deloitte USA’s Doctoral Fellowship Program, which provides grants of $25,000 annually to accounting doctoral students; KPMG’s PhD Project, which provides scholarships for minority doctoral students; AICPA’s fellowship program for minority doctoral students; and IMA’s Foundation for Applied Research financial support program for doctoral students specializing in the management accounting area.
The five-year commitment to a doctoral program is, without a doubt, a deterrent to many who may consider pursuing a PhD. Coursework is usually a two-year part of the program, with qualifying examinations and completing a dissertation taking up to three years. Doctoral programs might want to consider efficiencies to shorten these programs. Another suggestion is for PhD programs to reconsider admitting part-time candidates. This flexible option may be an enticement for working professionals who cannot afford to leave their jobs to pursue full-time studies. Part-time PhD candidates have been shown to succeed as well as full-time students, and many graduate within a year of the full-time students.
The current situation also raises a controversial question: Is a doctoral degree necessary to teach accounting? Since many accounting PhD graduates in recent years do not have professional experience, critics often offer the following analogy: surgery should be taught by a doctor who has actually performed surgery, and not by an academic who has never been in the operating room. Therefore, accounting courses should be taught by experienced professionals, not by academics who have no professional experience. This view is somewhat extreme. However, as mentioned previously, the faculty shortage is most acute in the areas of auditing and taxation. These are the most practical areas in accounting, and a strong case can be made that these courses should be taught by faculty members with professional experience. Acknowledging the inadequate supply of PhDs - AACSB refers to PhDs as academically qualified, or AQ - and the need to develop alternate strategies to staff classrooms, AACSB states:
"Many faculties - traditional research and others - will resolve their shortages by recruiting more professionally qualified (PQ) faculty. For schools that have a teaching and practice mission, it is legitimate to skew the faculty complement toward practice-oriented faculty, including those who do not have doctoral degrees (AQ), providing those faculty have expertise as teaching and practicing professionals."
To help increase the supply of professionally qualified faculty, AACSB recently launched a Bridge Program targeted toward accounting professionals and business executives interested in a second career as a university teacher. Accounting professionals with a master’s degree and professional experience of significant duration and responsibility are eligible to apply to the program.
Accreditation
Accreditation indicates a school’s commitment to quality, and more business programs are pursuing specialized business accreditation. AACSB is regarded as the premier accreditation for business programs. To illustrate the significance of AACSB accreditation, some firms are beginning to limit their recruitment and employee education efforts to schools that have AACSB accreditation. In 2006, for example, Intel Corp. revised its employee tuition reimbursement program to only reimburse for business courses completed at AACSB-accredited programs.
That said, AACSB accreditation is often cited for exacerbating the PhD shortage problem. AACSB standards relating to faculty resources can be challenging to satisfy, especially for smaller, teaching-oriented institutions, and there are alternative accreditations that some schools may find more appropriate for their missions. Whether the presence of alternative accreditations for business programs is desirable or not is beyond the scope of this article. However, organizations that employ accounting and business talent may want to consider the following points. First, the faculty shortage is most severe at schools that have the highest standards for faculty, such as AACSB-accredited schools. Second, if employers deem a teaching-oriented program to be important, and they value a program in which students get a practical perspective in their business and accounting courses, they may want to broaden their horizons. Students from institutions that have attained an alternative accreditation, or even those from unaccredited programs, may fill their needs very effectively. Finally, AACSB may want to consider allowing some flexibility in who meets "academically qualified" requirements.
Conclusion
For many years there was a great concern about an insufficient number of students majoring in accounting to meet the demand of employers. Fearing an imminent crisis, the profession and academe coordinated efforts to attract more talented young men and women to the accounting field. Having been successful in achieving greater enrollments, such a coordinated effort should now be directed toward solving another vital question: who will teach accounting students in the future?
Marge O’Reilly-Allen, CPA, PhD, is chair of the accounting department at Rider University in Lawrenceville, N.J., and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at oreillyallen@rider.edu.
David D. Wagaman, CPA, is a professor at Kutztown University of Pennsylvania in Kutztown, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at dwagaman@kutztown.edu.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By James J. Newhard, CPA
There was a short article in the February/March 2008 issue of My Business about an owner of a small business who clearly expressed the integral need for a CPA: engaging "...a good accountant will usually help you make money." I was envious of the succinct clarity he expressed. Too often, we practitioners fail to be this clear in delivering our message to clients and potential clients.
The dilemma is CPA professionals want to manage expectations, and thus we hesitate to overstate or oversell expectations. Yet we know, when utilized properly, we can keep a client compliant, keep a client’s time focused on productive business, and bring to that business a menu of essential services that should make or save money by cutting off bleeding, redirecting or re-establishing business priorities, and generally making the business stronger.
The services that are in your practice "wheelhouse" - what you like, what you are good at, and what you want to do - should not be a mega menu. This goes far beyond the age-old generalist v. specialist discussion.
The rationale here is as follows:
-- Proficiency - Dabbling builds familiarity, but frequency builds proficiency, which leads to expertise. With proficiency and expertise, the training, managing, and directing of your staff become easier.
-- Competitive image - Your "menu" communicates the level at which you are choosing to compete. A huge menu of services can water down your image to that of competing at the price level, a la Wal-Mart; while focused services communicates a high level of proficiency and service.
-- Keeping it simple - A simple message of which services you most want to provide is easier to communicate to clients and more effectively conveys that desire to prospects.
When defining the forte of services unique to your practice, consider not only your skill set, but also the time demands of different tasks, your staff support, the flexibility and demands of scheduling, and nonstaff resources, such as technology. Next, consider the value assessment - a revenue standpoint for you and an expense/investment standpoint for the client. How closely do they align? If you determine that some services are not premium or high-rate services, you then have to weigh the compensating benefits, such as potential entrée to more profitable engagements, the creation of practice opportunities in the community, implications to cash flow, and the intrinsic value of doing something you enjoy. These assessments will tell you how much your practice should concentrate on these service areas, and what you are doing, or are not doing, to promote and present the desired engagement opportunities.
The April 2008 Journal of Accountancy featured an article on niche marketing. The most important aspect of the article, from a practitioner’s point of view, is the necessity for a "niche champion." A niche champion, who may need to be the principal in a small practice, is an individual with superior knowledge of the industry, marketplace, and competition; who knows the industry vendors and media; and who publishes articles, presents seminars or speeches, and so forth. But for the small practitioner, the niche champion needs as much passion as expertise. From a marketing perspective, the in-house discussions can be about a marketing budget and the amount of dollars that can or should be allocated, but for the practitioner, the investment of time may be even more critical and precious than the dollars.
The goal of connecting the service areas, industry areas, networking areas, and targeted clientele should, as much as possible, contain common threads to better build, enhance, and grow a practice. Understanding the integral aspects of your selected core services and niches will also help define succession opportunities, mergers and acquisition opportunities, and alliances. For example, with the recent focus on the 101-3 nonattest services relative to independence, a practice focused on small business accounting and tax planning will have opportunities to align with a practice focused on audits and review, as will a practice with a business valuation focus. This is important, because when the analysis of identifying who and what can help you succeed, your list should include your personnel, your referral network, your resources, your passion and commitment, your skill set/expertise, and any other professionals with whom you can align and cross-refer as complementing practices.
No matter how your client base is built, your ultimate success will always be rooted in doing what you do well. When you focus on what you do well, be sure to publicize what you do and make sure you tell your clients so you can better serve them and their goals.
James J. Newhard, CPA, is an individual practitioner in Paoli, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at jjncpa@bee.net.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Geoffrey D. Bushko, CPA, JD
As the countless candidate placards adorning people’s lawns will testify, election season has arrived. While there are numerous elections that will take place in November, the election drawing the most attention is, of course, for president of the United States. This election cycle brings us two new candidates, Sens. John McCain (R) and Barack Obama (D), but the tax issues up for debate are relatively similar to those in the last presidential election. But make no mistake, no matter which candidate prevails, the country is in for changes to the tax system.
Individual Taxes
Businesses that conduct operations via pass-through entities, such as partnerships and limited liability companies, are likely to be curious about the potential repercussions of each candidate’s tax proposals regarding individuals. The owners of these entities have enjoyed a variety of individual tax benefits from President Bush’s tax cuts in 2001 and 2003. While Sen. McCain would like to make those tax cuts permanent, with an exception discussed below, Sen. Obama would look to retain some of the tax breaks such as lower tax rates for low income and middle class taxpayers, while eradicating others by increasing capital gain and dividend taxes for high income taxpayers (presently stated as individuals who earn $250,000 or more per year).
Corporate Taxes
Corporate taxpayers will also watch this election with great interest. Sen. McCain has indicated he would like to reduce the highest corporate tax rate from 35 percent to 25 percent. Sen. McCain has called for the immediate elimination of the 35 percent tax rate, with the remaining reductions to unfold between 2010 and 2015. Sen. McCain has also proposed expensing all three-year and five-year business equipment; concurrently, his plan calls for denying interest deductions on such equipment. In addition, Sen. McCain has proposed a permanent research and development credit that would equate to 10 percent of the wages a company pays to employees engaged in research and development.
Sen. Obama’s vision for the structure of the corporate tax system was unclear as of press time. However, in June 2008, Sen. Obama indicated in an interview with the Wall Street Journal that he would consider a reduction in corporate tax rates that was contemporaneous with a reduction in unspecified corporate tax breaks. Regardless of any clear stance on the direction of corporate tax policy, Sen. Obama has detailed a few tax benefits for corporate taxpayers. He has indicated that he would make the research and development credit permanent. In addition, he has proposed making the renewable energy production credit permanent.
Estate Taxes
There are a few years left on a previous ambitious estate tax reduction plan. During 2008, the estate tax exemption is up to $2 million, with a maximum tax rate of 45 percent. The estate tax exemption will rise to $3.5 million in 2009, with the same maximum tax rate of 45 percent, and 2010 will usher in a year where the estate tax doesn’t exist. These provisions will sunset at the end of 2010, and the estate tax will return in full force in 2011 with a greatly reduced threshold to the amount of $1 million.
The topic of the estate tax represents something rare in a presidential campaign - agreement between the candidates. Their agreement, however, is relatively narrow in scope as both candidates only agree that the elimination of the estate tax should not be permanent as the current administration advocates. From there, their respective thoughts on the estate tax take divergent paths. Sen. McCain advocates an estate tax that would have an up-to-$10 million exemption, and a maximum tax rate of 15 percent. Sen. Obama supports an estate tax with an up-to-$3.5 million exemption, and a maximum tax rate of 45 percent.
Most of the information in this story, as well as other positions, is available on each candidate’s Web site. For a more complete view of the candidate’s tax policies, the Tax Policy Center of the Urban Institute and Brookings Institution has released a document entitled "A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans."
This is an excellent summary of the proposed tax policies of the two candidates, and sets forth the purported cost of their respective tax plans. The document will be continuously updated between now and the election, and can be found at www.taxpolicycenter.org.
While no one can predict what the tax landscape will look like in a few short months or over the course of the next four years, it is helpful to have an understanding of the direction in which things could head. With an understanding of each candidate’s tax plans, you can begin to develop plans for your clients now so that, no matter who wins the election, you and your clients will have the ability to act calmly as necessary instead of being forced to react with urgency.
Geoffrey D. Bushko, CPA, JD, is a graduate of Temple University’s James E. Beasley School of Law, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at gdbushko@aol.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Robert Vitale, CPA
Economic worries have been present for several months now: weak consumer spending, the credit crisis, rising energy prices, and mounting job losses. According to the U.S. Department of Labor Bureau of Labor Statistics May 2008 report, total nonfarm payrolls declined by 324,000 during the first five months of the year. Broken down further, the professional and business services sector lost 124,000 jobs, and of those positions, 16,200 have been accounting-related. Whether you’re a CPA in industry or in public practice, your companies are adapting to the new environment and changing their businesses to weather the storm. And those strategic alterations may include the loss of your job.
Job loss is never easy to deal with, even if you knew it was coming. The unfortunate experience of losing one’s job is one of the most emotional times you will ever face in your life. Money worries, for example, become predominant: How will the bills get paid? How long can I sustain without an income?
I’ve had firsthand experience in dealing with the range of emotions and financial challenges when I found myself in transition. I hope sharing my experiences will benefit and console readers who may find themselves in similar, unfortunate circumstances.
Job Loss Emotions
Job loss can be devastating emotionally, which is often amplified if it comes abruptly and unexpectedly. You may become embarrassed or down on yourself. To effectively manage your emotions, know that some of them are characteristic of any major loss in your life. While we all handle things differently and at our own pace, the feelings and emotions I went through included shock, denial, anger, depression, and finally acceptance. These feelings, leading up to acceptance, can come in any order and last for varying amounts of time.
Talking about this traumatic event is crucial for moving toward that final stage of acceptance. First and foremost, inform your family as soon as practical about the job loss. You will need their support to get through the challenges that lie ahead. Use your family as a resource. Someone may have encountered a similar experience in the past and have good advice to share.
A major trap that many in transition fall into is immediately jumping back into the market to find a new job. An unorganized and emotionally charged job search can set you back months. You may find yourself venting to potential employers and job search professionals, which, almost certainly, will turn them off. It’s better to take some time to get your emotions in check before beginning your job search.
Be mindful that those you might be venting about may need to give you a reference or may even be the next person to help you with your search. If you manage your emotions effectively, you will remove one potential roadblock to getting a new position.
Programs That Soften the Blow
There are several programs available to those who find themselves unemployed that may offer some peace of mind.
COBRA is a federal law that allows you to continue getting health insurance under your former employer’s plan for a period of up to 18 months. This will help in the short term, knowing you will have access to your existing health insurance for you and your family. The challenge is that you most likely will be required to pay the full cost. COBRA insurance coverage can be much more expensive than when your employer was contributing to your health care plan. You will only have 60 days to make a decision on whether to accept COBRA. If you miss this window, your employer is not obligated to offer its health care coverage.
Unemployment compensation is meant to provide temporary income support to people who become unemployed through no fault of their own. Pennsylvania allows for up to 26 weeks of unemployment compensation benefits. Unemployment compensation won’t make up for all of your lost wages, but it can help when you have no income coming in and are searching for a new job. File for unemployment compensation benefits as soon as possible, as it usually takes four weeks for the first payment to arrive. I found the process to be very easy. Unemployment compensation applications can be filed online at the Pennsylvania Department of Labor and Industry Web site.
Personal Finances
If your spouse is still working, make every effort to try to live on one income. One of the biggest mistakes you can make is not cutting expenses fast enough because you think it won’t take you long to find the next position. Desperate times call for desperate measures, so make sure you slash expenses.
Take a full inventory of your family’s financial health. Compile a listing of assets, including checking accounts, savings, stock investments, and anything else that’s liquid enough to use as supplemental income. Do the same for liabilities, including mortgage, credit cards, auto payments, and other monthly obligations.
Make a list of any supplemental income you have coming in, such as any severance you were granted, vacation pay, and unemployment compensation. Then review check registers, bank statements, and credit card statements to compile a list of all monthly expenses, and then divide them into essential and nonessential categories. One of the first things I did when I lost my job was to stop spending the money I had. I was surprised at how much money I was wasting on things I didn’t need, including a satellite radio subscription, daily coffee purchases, magazine subscriptions, and even the extras you pay for on your cell phone service. Adding up just a few of the nonessential expenses, I found I had saved hundreds of dollars a month.
Once you build a personal budget, the most critical thing is to live by it. If you find you were short in balancing it, then cut more expenses and think about alternative sources of cash flow to help out. This may include obtaining a penalty-free hardship loan from your retirement accounts.
Other Tips and Considerations
Getting your personal finances in order will allow for a clearer focus as you conduct a job search. Below are several additional considerations:
-- Change - If changes in your profession have been implemented, embrace them and move forward. Don’t get caught looking back in a changing environment or profession.
-- Savings - Ensure that you have an effective savings plan that allows you to maintain a reserve of at least six months of essential expenses. If you are a financial executive, you will need up to 12 months of expenses, as it may take longer to find a position.
-- Debt - Keep credit card balances low. If you currently have high balances, work on paying them down right away. Always maintain a good credit rating, because it’s as good of an asset as any when you become unemployed.
-- Networking - Devote time weekly to networking. Chances are the professional network you build will help you get back on your feet quicker than anything else you do in a job search.
Losing a job isn’t fun. In fact, it takes a great deal of effort to manage your emotions and prioritize personal finances. If you have the opportunity, take a brief break and recharge the batteries. This will allow you to be better prepared for the next opportunity. As you weather the storm, take charge of your career. Look for opportunities that you might not have considered otherwise. Remember, a time of extreme adversity may also be a time of opportunity on which to capitalize. Finally, be optimistic at all times and keep an open mind toward paths you may have never considered before.
Robert Vitale, CPA, is founding partner of Horizon Business Consulting in Allentown. He can be reached at Bob@HorizonBizConsulting.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission
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Fall 2008
By Paul R. Brazina, CPA
Healthcare Fraud: Auditing and Detection Guide, by Rebecca S. Busch, RN, CFE (John Wiley & Sons Inc., 2008), 286 pages, $65.00.
Auditors want to assume most people are honest, but they know they must exercise professional skepticism when embarking on an attestation engagement. With this skepticism comes an awareness that fraud is always possible. Fraud examiners, by contrast, learn to think like criminals and specifically look for the methods people use to misrepresent facts. In Healthcare Fraud: Auditing and Detection Guide, Rebecca Busch uses her extensive background in health care administration to expose the many ways that health care fraud can be perpetrated, detected, and ultimately prevented.
For readers who are not familiar with the health care industry, Busch explains specialized health care terminology, putting each term into its proper context. For example, in the third chapter, the author describes protected health information (PHI) in terms of the Health Insurance Portability and Accountability Act of 1996; relates it to the health care continuum players; and then discusses the implications of PHI in the audit process.
The book’s 286 pages are divided into 18 chapters, and the presentation is concise and to the point. The first eight chapters introduce the key functions in the health care system, describe the flow of transactions and information among the players, and then explain systems for data management. Opportunities for fraud abound, the author maintains, given the sensitivity of medical information and the complexity of the payment systems. While it is important for auditors to have knowledge and experience in traditional business cycles, the risks and exposures for health care fraud are unique. In health care, the audit trail includes the patient, the provider, th | |
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