A BLUE-RIBBON PANEL

Toward the end of 2009 the Financial Accounting Foundation (FAF) in cooperation with the AICPA and the National Association of State Boards of Accountancy formed a blue-ribbon panel to address how accounting standards in the United States can best meet the needs of users of private company financial statements. The formation of this panel represents the latest in a series of developments related to the “big GAAP/little GAAP” debate. (See my blog of May 14th.)

There are over 22 million private companies in the U.S. but there are only about 17,000 publicly traded companies so it would appear that addressing the accounting and financial reporting needs of this very large group should certainly be a priority of the FAF. Rick Anderson, chairman and CEO of Moss Adams LLP and a member of the FAF Board of Trustees, was appointed chairman of the panel. The panel is expected to provide recommendations on the future of accounting standard-setting for private companies, including whether there is a need for separate, stand-alone accounting standards for those companies.

The panel evaluated five possible approaches. They rejected two of the five approaches and then expanded their evaluation of the remaining three. The panel rejected the current approach to setting generally accepted accounting principles related to private companies. They do not believe that the current method is meeting user needs in a cost-effective manner. They also rejected adoption of the current International Financial Reporting Standards for Small and Medium sized Entities, IFRS for SMEs.

The three remaining models that the panel is evaluating are as follows:

1. U.S. GAAP with exclusions and enhancements for private companies.
2. Basic U.S. GAAP with public company add-ons, and
3. Separate, stand-alone standards for private companies based on current U.S. GAAP.

The panel is also exploring whether to recommend a board separate from the FASB to oversee private company standards. Barry Melancon, CEO of the AICPA, and one of the panel members, believes that they should.

Before making its final recommendations the panel sought input from the public about how accounting standards can best meet the needs of users of private company financial statements. The comment period just ended on September 15, 2010. The panel is expected to make its final recommendations by the end of the year.

The issue of big GAAP vs. little GAAP has been debated for decades. So, the likelihood that the recommendations of the panel will be adopted in the near term is probably very small. However this is an issue that I believe needs to be addressed. What do you think?

Plain Speaking and Tax Law

NOTE: This blog was written by Abe Carnow.

As you know, President Obama on September 27 signed the Small Business tax law, H.R. 5297. Right on the heels of his signature, the following news item appeared on BNA Daily Tax Real Time, on September 28, in the afternoon.

Senate Passes Amended Version of ‘Plain Writing’ Bill Affecting IRS Rules

The Senate passed legislation by unanimous consent late on September 27th that would require government agencies such as the Internal Revenue Service to draft all public documents in “plain writing.” The Plain Writing Act of 2010 (H.R. 946) would require IRS to provide tax forms in plain writing and would require federal agencies to draft documents explaining how to comply with federal guidelines in plain writing. House lawmakers passed the bill by a vote of 386-33 on March 17th and will need to vote again to send the amended bill to the president. The text of the bill is:

In the Senate of the United States, September 27, 2010.

Resolved, That the bill from the House of Representatives (H.R. 946) entitled ‘‘An Act to enhance citizen access to Government information and services by establishing that Government documents issued to the public must be written clearly, and for other purposes.’’, do pass with the following:

AMENDMENTS:

1. On page 2, line 17, strike relevant to and insert necessary for

3. On page 3, strike lines 5 through 9 and insert the following:

PLAIN WRITING—The term ‘‘plain writing’’ means writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience.

This idea is a fine one. But, I have a suggestion for Congress.

How about writing the tax law using plain writing, meaning writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience? What do you think?

ARE YOU ETHICAL?

It seems to me that every time I watch a television news program or pick up a newspaper the top story is about fraud, embezzlement or unethical behavior. I think that Henson Cargill really captured the essence of much of today’s ethics in a song titled “Skip a Rope.” The song goes, “Cheat on your taxes, don’t be a fool. Now what was that they said about a golden rule? Never mind the rules just play to win…” Cheating on your taxes, like the song says, is what everyone else does so why shouldn’t you? Whether it is pro sports or business, today’s philosophy is play to win even if you have to break the rules.

Tax fraud by unenrolled tax preparers has become so common place that the IRS is proposing a mandatory competency examination for anyone who prepares a tax return for a fee (CPAs, Attorneys and Enrolled Agents are exempted). The Unenrolled Tax Preparers initiative will also require each person to complete two hours of ethics training once they have passed the competency exam. Will that make them more ethical? I doubt it.

The Texas State Board of Public Accountancy requires me to take a four-hour ethics course every other year. My employer requires me to periodically read and sign a Code of Business Conduct and Ethics. Will those two activities make me more ethical, probably not? The reason is that I developed most of my understanding of right or wrong when I was growing up, as does everyone. But they do serve as good reminders of those moral and ethical values that I learned as a child.

I was recently involved in an investigation to determine if someone had cheated on a course final examination. Upon review, it appeared that, in fact, they had cheated on the exam. You guessed it. The topic of the course was professional ethics.

In business, employees tend to adopt the ethics of management. This is referred to as the “tone at the top” in the audit literature. Unethical behavior by management tends to filter down to the employees of the organization. Employees will assume that if it is okay for management to be unethical, then it is okay for them to act in the same way.

Are we more unethical today than our forefathers were 50 years ago? I am not sure. Maybe unethical behavior is just more visible today than in the past. So why does it seem that ethical behavior has deteriorated to the point where it is almost common place? I am not sure, but if you aren’t practicing ethical behavior each and every day you need to try to correct the problem and do better in the future. What do you think–are you ethical?

SHIP AHOY

Have you ever wondered what is involved in accounting for the operations of a cruise ship? Well I hadn’t either until I recently took a cruise around the Hawaiian Islands. You should have seen the look on the Cruise Director’s face when I ask to speak to the ships chief accountant. He said that was the most unusual request he had ever received. He was use to requests for tours of the bridge, the engine room or to speak to the captain, but never to speak to the ships accountant.

There are usually two accounting departments on a cruise ship; one that handles passenger accounting and the other that handles the general accounting duties for the ship and its employees.

I only got a very general overview of the ships accounting department, which for the most part was not the more interesting of the two departments. Some of the challenges they face include a work force from various states and foreign countries. This particular cruise ship had approximately 950 employees. Payroll is twice a month and employees room and board is provided by the ship. Employees work five months on, two months off, and then another five month rotation. One of the employees said it was really a great job since all of your expenses are paid and you are working almost every day for the five months so you never have time to spend your pay check. Sounds like a great job for a single person.

I was given access to the Assistant Financial Accountant who was in charge of passenger accounting for the ship. His name was Sergey. Sergey was a delightful young man from Russia who gave me the cook’s tour of the duties and responsibilities of his department. Passenger accounting had eight employees, including Sergey, that handle the accounting for some three thousand passengers. Sergey and his employees speak a total of eight different foreign languages in order to accommodate the international mix of passengers. The passenger accounting employees handle all passenger related accounting transactions from boarding to final disembarkation. Before boarding the ship you are required to establish an on board account and either provide a credit card or a cash deposit to cover any charges you might have while on board the ship. You are then issued a cardkey which give you access to your state room and also serve as a credit card for any purchases you make while on the ship. All purchases must be made using your cardkey. Cash is not accepted on board the ship. Sounds like a very good internal control.

Sergey’s group handles passenger registration including issuing your cardkey. His group is also responsible for checking every cardkey charge of every passenger to be sure that the charge amount is correct and that the passenger has not been over or under charged. Then at midnight each night all of the day’s credit card charges are uploaded. Any charges that are rejected for any reason have to be resolved by Sergey’s group. For charges that are rejected by the credit card company you will have to either provide a new credit card or a cash deposit before you may make any further purchases onboard. For deficient cash deposit accounts, an additional cash deposit or valid credit card will be required.

The ship is also required to collect state sales tax when in US waters. For example there is a Hawaiian sales tax and an Oahu Island sales tax that has to be collected when in Hawaiian waters within three miles of the island of Oahu. However, the ship is not required to collect state sales tax when it is in international waters. The moment the ship sails into International waters the bridge notifies the accounting department and sales tax collection is stopped. The passenger accounting department immediately turns off the calculation of sales taxes by the ships cash registers. When the ship crosses back into US waters the sales tax function is again activated.

At the end of the cruise the accounting department is responsible for settling up with each passenger. For passengers who have set up a credit card to cover their on board expenses they simply need to verify that all of the charges are correct. For passengers that have put up a cash deposit they will need to collect the balance of their deposit. Also, where a passenger has made a deposit in US dollars but is returning to a foreign country they try to refund the balance in the currency of the country to which the passenger is returning after the cruise. All balances must be refunded no matter how small the amount. Sergey said that once he had to track down a passenger that was owed a total of one cent. Oh yes, they won’t allow you to leave the ship at disembarkation until you have settled your account. Aloha.

The ULTIMATE 1099?

Robert Preston, playing the lead in The Music Man, sings, “You've got trouble, my friends!” and accountants do have trouble, and not just in River City.

Beginning January 01, 2012, 1099s must be issued for virtually all payments made by a trade or business aggregating $600 or more to any single vendor. Here is Code Section 6041(a) and 6041(h). Reading the statute is important.

6041(a) Payments of $600 or more.
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1) , 6044(a)(1) , 6047(e) , 6049(a) , or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2) , 6044(a)(2) , or 6045 ), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.

6041 (h) Application to corporations.
Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection , for purposes of this section the term "person" includes any corporation that is not an organization exempt from tax under section 501(a).

In the fall seminars, Gear Up will discuss this significant change and how to cope with it. But, wait, there's more in the proposal chain. The President's Economic Recovery Advisory Board, Paul A. Volcker, Chairman, on page 60, Small Business Bank Account Reporting, proposes a simplified tax accounting system for small businesses that permits cash accounting. But the cost of that proposal is that “a small business would be required to use a designated bank account for all business receipts and expenditures that is segregated from any personal bank account. The bank would be required to report the receipts and expenditures within the designated account annually.”

Call it the lifetime 1099.

Robert Preston worried about bringing in a billiards parlor. Ah, those halcyon days of yore!

Judge Not and Persistence

As a tax guy, I work many controversy cases. Before I take on a case, I need to evaluate the case and determine if I feel there is a possible resolution that I can work with the IRS to effect.

Recently, I was approached by a CPA who wanted help on a penalty abatement for a non profit who was delinquent with their 990 filing. This is a 990 organization with larger gross receipts and the delinquency covered a span of years. Some penalties can be abated if reasonable cause is demonstrated. In fact, in the Gear Up Class, IRS Audits, Appeals, and Collections: Successful Strategies, Rick and I teach about penalty abatement. I have historically had good success but not 100% success (who has?). I evaluated the 990 case and I felt there was an argument for reasonable cause but I was not overly optimistic about getting the penalty abated. I typically take on cases that I feel very positive about and not only do I practice positive affirmation of the good results, but I usually have quite a fighting spirit going in. In this case, I was not overly optimistic and, while I fashioned a very well argued letter, covering the issue, facts, rule of law, argument, and conclusion, I still did not expect exceptional results.

And herein lays the surprise. Close to $83,000 of penalty abatement was accomplished. And this was an appeal of a previously rejected penalty abatement.

There are two lessons to be learned. The first, and most obvious lesson, is: If at first you don't succeed, try, try again. Learn about the appeals process. Do not be afraid to take the case up to the next level. Use your tax knowledge to make a strong case, as the facts warrant. Sometimes you make an initial fantastic presentation, but it doesn't move the IRS. Make the same presentation to someone different in the IRS, and the results could be sensational. Now, when you make the second presentation, you have the advantage of having gone through a dress rehearsal, which means the second presentation is improved. Also, you prepare further for the appeals hearing. So, it is not solely a case of persistence, but persistence, along with applied skills is a winning combination.

And, the second lesson is, you never know what the results will be. The enjoyment of resolving controversy cases with the IRS is that you never really know how the case is going to end. Even though we assess the case, we never know the ending. With this case, I was not overly optimistic. I do believe the abatement is warranted and I do believe the protest was soundly structured, and I did hope for, but did not expect the best. And the best came our way.

With the IRS you just never know. Do your best. Persist. Be of good cheer. Persist. And, oh yes, persist.

HOW DO YOU LEARN?

How do I learn? That is a question we should ask ourselves because knowing how we learn will enable us to select training methods that provide us with the best possible learning outcome. People learn in different ways. No one has a better learning style than anyone else. Remember, the way you learn is perfect for you. I am just thankful that what I don’t know I can learn.

It has been said that what we learn, after we know it all, is all that really counts. Researchers tell us that there are as many as seven different learning styles; but most just narrow it down to three basic types of learning:

Listening - someone tells you how to do something.

Seeing - you watch someone perform the task.

Doing - you perform the task yourself.

Most people combine one or more of these learning styles to suit their personal preferences. I have found that I learn best when I can both see and hear the instructor as he or she demonstrates a concept. I do OK with just listening, but just watching something demonstrated or reading about how to do it has never really worked for me.

It is important to know which method of learning is best for you because as a CPA, accountant or tax professional what we sell is our knowledge. The number of accounting and tax rules, regulations, policies and procedures are growing at a rapid pace; therefore, it is imperative that we make learning a continuous life-time activity if we intend to stay abreast of these ever- changing rules and standards. If you are looking for a training provider that can meet all of your training needs and provide outstanding quality courses in all of the different learning styles, then look no further than the Tax & Accounting Business of Thomson Reuters. Check them out and see for yourself at:

https://checkpointlearning.thomsonreuters.com/ .

Knowledge has certainly increased within this generation almost beyond imagination. In fact according to some research studies, “the total of all human knowledge is now doubling every eight years." I think that continuous learning is, and will continue to be the key to success no matter your profession. What do you think?