Failure and Capitalism

Last week I updated you on the AICPA 125th anniversary and Council meeting that took place in Washington DC.  One of the benefits of meeting in Washington is that you have the opportunity to hear from a variety of regulators and politicians.  Senator Ron Johnson from Wisconsin addressed most of Council during the traditional PAC breakfast.  He made the statement that “Capitalism doesn’t work if you don’t allow failure.”

The problem we are dealing with as a society is that, with apologies to NASA, in some areas failure is not an option.  9/11 taught us that a single failure can cost thousands of lives. In a world with biologic and nuclear weapons, a single failure can be catastrophic.  But just like we have the difference between internal control over financial reporting and internal control over operations, there is a difference between the impact of failure over security and the failure of a business.

Internal control over financial reporting is all about minimizing risk.  Internal control over operations is different.  In business, the whole point of operations is about taking risk to make money.  The point of internal control is to make sure that the risks taken are known and within acceptable tolerances.   So, like financial reporting, risks over security only have one direction – minimization.  But like operations, for risks in our capitalistic economy, failure must indeed be an option – but with the appropriate controls in place to make sure those failures are kept within appropriate tolerances.

The danger we face today is that we will take the failure is not an option attitude to our economy.  We have major problems to deal with in order to permit orderly failures, but the answer would seem to me to continue to allow capitalism to do what it does best – allow failures.  If the risk of a business is too great to allow failure (to big to fail) then I submit the solution is not more regulation to prevent failure, but instead enforcement of existing or heaven forbid, creation of new rules to split businesses that are too big to fail.

This sounds more radical than what Frank-Dodd proposed, but in the defense of capitalism, I have come to the conclusion that being radical is what is needed.  And being radical means bringing back to capitalism its most basic control – the risk of failure.

AICPA 125th Anniversary

The AICPA celebrated its 125th anniversary during its Council meeting in Washington DC May 16 – 18.  Usually council meetings have a number of business issues to deal with and while we did take care of important business issues such as approving the budget (be on the lookout for those dues statements), this meeting was more celebration than business.  Typically celebrations focus on the past and while we did spend some time highlighting where we have been, most of the time was spent looking at where we are going – as auditors, tax preparers, management accountants and everything else we as CPAs do and will do in the future.

 The future of auditing, like the whole professional, is critically linked to our ability to attract bright people with the right character in order to continue to provide continuing and new assurance and audit services.  But one of the issues hitting auditors hard today is keeping people involved in and excited about a career in audit.  I, like many of my B&I colleagues, came into the profession as an auditor, but decided to take my career in the profession to a different path.  Keeping people involved and excited about this core service of our profession is critical to the future of the CPA profession.  Audits are the root of the profession and without a strong root system, all the branches we have built off that will come down when the tree topples over.

 We heard from George Colony, CEO of Forrester research.  He presented a fascinating look on what is going on in the world where business and technology continue to blend.  Mr. Colony talked about four thunderstorms occurring in the intersection between the technology world and the business world today.  Those storms are

1.  Death of the Web
2. Post Social World
3. The Changing Customer
4. Mobile Engagement

 The final topic from the Council meeting I want to cover here is the panel discussion on the future of financial reporting.  The most interesting point was a stat from the chairman of the IIRC.  In 1975, financial reports indicated 83% of the value of an enterprise. In 2009 that value indication was down to 23%.  Clearly there is a disconnect between what investors need to know and what we produce.  For those of us in the public company world this should be a call to action to move to something more relevant.  One possibility is the integrated report.  The idea is to combine critical financial and non-financial information in a single integrated presentation that will provide users of the report what they need to make investment decisions.  The IIRC is in the middle of a pilot program with 75 companies worldwide to see how this would really work and then intends to use the results of the pilot to develop guidance on what should be in and how to produce an integrated report. If you want to know more about the IIRC effort, check out their website at www.theiirc.org

 There was so much more covered in the council meeting, but I can’t do it all justice in this blog.  Check out all of the articles from the Journal of Accountancy at www.journalofaccountancy.com to get a complete review of the happenings at the May 2012 Council meeting.

The Four Day Marathon

Four days, 34 meetings.  That was my week so far as I write this Blog on Thursday night.  To put is delicately, I’m beat.  This kind of schedule is extremely unusual for most people in Business and Industry although I am sure there are more than enough controllers, officers and C-suite CPAs that would say that kind of schedule happens more than once during a year. 

My marathon week was brought on by a convergence of several factors.  First, at the beginning of the week, month-end close for April was still finishing up and that created a few regular and issue induced meetings.  The second cause was a rare occurrence.  My employer, AT&T closed on the sale of a Billion Dollar piece of the business, our yellow page and related local search internet operations.  That event alone caused more than a third of the meetings to deal with various aspects of the deal.  The third major factor was the ongoing schedule recovery from missing a day and half the week before while I was out sick.

Going through so many meetings, the hardest thing to do is to stay focused on the topic of each meeting.  It’s easy to let your mind drift to the next meeting topic or to the dozens of emails buzzing on your BlackBerry, but that defeats the whole purpose of the meeting in the first place.  The meeting is scheduled because someone either needs to pass information on to you, they need you to pass information on to them or they need your council, advice or approval for something they want to do. 

Passing information on to someone else is the easiest meeting to stay focused in because generally you are the active leader of the meeting. There is also a danger though of moving too fast through the information because you are looking to save a few minutes at the end of the meeting to clear out some of the emails building up, make a phone call or simply take a nature break.   It’s important to not only talk but listen with your ears and your eyes to make sure that your message is being received and more importantly understood. 

The other two types of meetings can be made even more difficult to stay focused if they involve conference calls.  It is all too easy to become distracted by the email chime or the papers sitting on your desk.  No one will notice if you take a peek for just a second, but anyone who has worked for a while can tell you that is when they invariably say something really important or ask you a question and you are caught asking them to repeat themselves.  One trick I use is to have a wireless headset and get up and pace around the office.  This gives my body something to do while my mind is focused on the topic at hand.  Walking to the other side of the desk is a great way to avoid clicking the mouse to look at an email.  You can even do a few low impact exercises, although you might want to make sure the mute button is on so people don’t suddenly wonder why you are breathing heavy.

I survived my marathon and can say I only lost focus in two or three meetings.  I just hope I didn’t agree to anything I will come to regret in those few meetings.

Tis the Season (for CPE)

As a CPA, you can always tell the end of tax season even if you don’t complete one tax return and your calendar is missing.  You can tell because your mailbox – both the postal version and the electronic version – starts getting filled up with CPE catalogs.  Of course you do probably need to look outside to see if the leaves are green or red to be sure exactly what time of year it is because one tax season end is April and the other is October and the CPE catalogs come in droves after both deadlines.

The question for you is which time of year do you actually look at the CPE catalogs?  Is it in the spring when you can plan your CPE approach for the year or is it late in the year when you are just looking for hours to comply with your state licensure requirements? My recommendation is to take advantage of all of the catalogs you are receiving now to put together a proactive CPE plan that will actually increase your skills during the coming year.

The first step to putting together a CPE plan is to look at your needs.  Are there areas you need to improve on in the coming year?  You might look back at those annual reviews you quickly filed away in the rush to get all of that year-end work done for some ideas.  Ideas can also come from looking at your work goals and plans for the coming year.  Did you get new duties in the last few months that will require new knowledge or skills?  Is there a new standard that directly impacts your company or job? Is there a promotion or new set of duties you will be striving to obtain in the coming year?  All of these provide fertile ground for growing ideas of CPE that will enhance your career rather than simply meeting the state mandated minimum.

The second step is then to search for those CPE opportunities that meet the needs you laid out above.  I know too many of you have limited or no help from your employer in paying for quality CPE.  That creates is own set of dilemmas, but even those can be overcome with a well thought-out plan.  First off, by planning ahead you can maximize the use of low or no cost CPE opportunities that come along.  My home Chapter here in Texas has an annual free CPE day. (OK, you have to pay for lunch, but who is going to quibble over a few bucks when you get 8 hours of CPE.)  With a CPE plan in place, I can choose the sessions that best fit my needs for the coming year while at the same time keeping my cost to a minimum.

Of course sometimes you still have to pay to get the CPE you really need to improve your skills.  By planning ahead you can find the right sessions in or close to your city minimizing the travel costs which all too often can be as much or more than the course or conference itself.  In addition you can look for a course with the right expert on the subject or a presenter that you know will make it worth your time and money rather than taking a leap of faith.

Really, CPE should be no different then everything else we CPAs do.  We plan and organize the monthly, quarterly and annual reporting process for our companies, we put together plans for new system or process implements and we even we put together personal financial plans for our clients and ourselves.  Isn’t your career worthy of some of that planning effort as well?  Planning your CPE approach for the year is one simple step you can take toward being more proactive in planning your career.  I hope you will take advantage of all of the CPE catalogs you are receiving now that tax season is over to spend a little time doing that planning.

Picking an Accounting Program

My nephew, who is a Junior in High School and currently intends to major in Acconting, called me the other day to talk about what college he should go to.   He asked questions about how determine how a college is viewed by employers and does going to a certain college make a difference in your career.  He also asked about getting a bachelors degree with 150 hours or getting a bachelors and masters degree in obtaining the 150 hours required to sit for the CPA exam.

The first question was tough because there are so many good accounting programs out there.  I could tell him to look at the ratings that come out every year, but his question was really more than that.  He asked about the impact on your career.  I told him that after about five years, the college listed on your resume mattered less than your actual work experience in advancing your career, but that is the “long-term view” and as the saying goes in the long-term we’re all dead any way. 

The advice I finally decided on was to tell him to ask what accounting firms and businesses regularly recruited from the College or University and do they come on Campus or not to recruit.  For example, if his desire is to go to work for one of the big four accounting firms then he should pick a college that the big four regularly recruit from.  If his desire is to go straight into industry then he might need to be looking at a different set of institutions.  Of course, most High School Seniors don’t have a clue what they want to do in the profession after they finish school, so I suggested he look for a College or University that was recruited by a variety of businesses and firms.

Of course, that is based on all other things being equal and that he feels comfortable at the college he chooses.   Colleges and Universities have different cultures and personalities and no matter how high it is ranked, if that culture is not a good fit, he shouldn’t go there.  That’s why I pointed out that after a few years, the school on the resume’ starts to lose its importance when compared to the work experience.  And in our profession, where there are so many different career paths, it is easy to start your career in one place and end somewhere completely different if that is where your heart takes you.

His other question was about getting just a Bachelors degree or getting both a Bachelors as well as a Masters.  I told him that almost every state now requires 150 hours (5 years) to become a CPA.  While there are a significant number of people who go the route of getting the hours but only have the bachelors degree, I suggested that if you were going to go to the trouble of doing the 150 semester hours of work, wouldn’t it make sense to have something more to show for it than just the right to sit for the CPA exam. (Full disclosure – I stuck around and got a Master of Accountancy degree back in the ‘80’s when it wasn’t generally required to become a CPA in most states.) I know some people will have different opinions in this area, but I believe the extra degree, unlike which college I attended, continues to make an impression on those that read my resume’, and continues to open up additional opportunities for me as a result.

So what do you think?  Did I give my nephew good advice?  Or should I call him back and tell him something different.

AICPA April 2012 Board Meeting

It hit me as I was preparing for this Board meeting that this was my next to last meeting in New York with the Board.  My three year term is nearly up.  It has been a great three years, and I am looking forward to the last meeting in August and my final act of making the audit committee presentation at the October AICPA Council meeting.  Of course this just marks the end on one stage of my involvement with the profession.  I will continue to serve on the AICPA council for two more years as I was nominated to complete the remaining two years of an unexpired term as a member at large.  I will also continue to serve through the end of 2014 as the AICPA representative on the IFAC Professional Accountants in Business committee as well as the TSCPA Business and Industry Issues committee.  Even though my term on the Board is nearing an end, there are plenty of issues that the Board will have to deal with this year and beyond.  Some of them are highlighted in the remainder of this blog.

Mandatory Auditor Rotation – a big topic of discussion was the PCAOB and EU proposals around mandatory auditor rotation for public companies.  We had a specific agenda item covering the results of the recent PCAOB roundtables on the subject, but it was also discussed within several other agenda items including the report from the CEO, the report from the Center for Audit Quality (CAQ), and the report on what is happening in Washington.  The PCAOB proposals were seriously questioned by members of Congress (both Democrats and Republicans) at recent congressional hearings.  The focus of the questions was on what issue is mandatory rotation trying to solve and are there better, less invasive ways to solve those issues.  The PCAOB has made it clear they will be discussing this for a while before they even consider proposing any actual rule changes, so we all need to keep up with this issue as it continues to develop.

Cyber Security – If you weren’t aware, the AICPA was the subject of a spoofing attack recently.  Over 90 Millions emails were sent out under a spoofed AICPA address stating that the AICPA was canceling your license.  Putting aside the fact that the ACIPA has no authority to cancel your CPA license, the incident had many impacts.  Clicking on the link in the email resulted in an attempt to install malware on your computer that would potentially send key financial information to the people who launched the spoof.  In addition, millions of the emails had bad addresses, so the AICPA email system was temporarily brought down by getting hit with millions non-delivery email responses in less than 15 minutes.  Keep in mind, this email didn’t come from AICPA systems – they simply sent out emails from other systems that made it look like they came from the AICPA.  The costs of dealing with this attack were significant, but not nearly as much as they would have been had the AICPA systems been actually breached.  And this goes beyond just the immediate costs as shown by these statistics.

• 25% of businesses have had a merger, acquisition or new product roll-out stopped or delayed by a Cyber breach per a McAfee/SIAC study
• 20% of victims who have had data compromised cut ties with the institutions that compromised their privacy.

Like all businesses, the AICPA takes security and privacy very seriously and we have extensive controls and procedures to protect your personal information, but as always the controls start with you.  If you get an email that looks or sounds strange, don’t be afraid to question it.  Did it really come from the purported sender?  Is this legitimate?   Always ask those questions, no matter who the email is from and don’t be afraid to call the sender to make sure it is real.

Total Tax Insights – the last thing I want to do is mention a tool that will soon be introduced by the AICPA in conjunction with its 125^th anniversary in May.  This tool will enable people to determine their total tax burden from all taxes (income, property, sales, gasoline, telephone, electricity, alcohol, cigarette, etc.) they pay down to the county level – all 3,035 of them.  It will be a great way for people to understand the full tax burden incurred by different people at different income and wealth levels across the country.  Be on the look-out for the launch of this fantastic tool.

The AICPA Spring Council meeting and 125^th anniversary will take place in mid-May and I will update you on what happened at that meeting and other items impacting our great profession in the coming weeks.

What Happens If

It seemed like the whole country was following the arguments before the Supreme Court on the Constitutionality of the Individual Mandate in the PPACA – better know as the Health Care Act (or as some like to call it Obamacare).  I do not recall this much interest in judicial proceedings since the OJ Simpson Trial.  We are now waiting to see the Court’s decision, but we will have to wait until the end of June to find out.   Essentially, there are four possible outcomes.

1. The mandate is constitutional and everything stays just the way it is
2. The mandate is not constitutional, but it is the only part struck from the law
3. The mandate is not constitutional and other integral parts are struck along with it
4. The mandate is not constitutional and so integrated with the rest of the law that the whole law must be struck down

As an accountant I have been told more than once I have no business trying to play the part of lawyer, so I won’t venture any opinions on which outcome is likely, but as accountants we are responsible for helping our businesses make plans.  In this case, those plans include thinking about the “what ifs” if the law is struck down. With 2,700 pages of law and thousands of pages of passed and proposed regulations, the “what if” list is quite long. 

One of the first decisions businesses and insurers will have to make is how to deal with the benefit changes they already made to comply with the law.  Does the business still want to insure dependents of employees up to the age of 26 as was required by the law?  What about reinstituting lifetime coverage maximums?  What changes should be made to preventive care and checkup benefits now that they aren’t required to be without a co-payment?

Another significant impact close to the heart of many CPAs is the elimination of the requirement to include the dollar amount of medical benefits on an employee’s W-2.  Most businesses are well underway with their plans to determine the amount and develop ways to include it on the W-2 since it is currently required to be included on the 2012 W-2s to be issued in early 2013. Another change would be around Flexible Spending Accounts or FSAs.  Under the law the maximum contribution to an FSA would drop to $2,500 in 2013.  Businesses will need to be prepared to modify their annual enrollment process quickly to keep up with the changes. 

As I said, the list is long and I could spend the next ten blogs going over the possible impacts, but I think you get the idea that the Supreme Court decision is of more than a passing interest to CPAs in Business.  The decision will impact budgets, planning and a number of processes, so like the rest of the country we will be waiting, but unlike the rest of the country, we are already starting to think “what if…”

March 2012 Regional Meeting of Council

The AICPA held its four regional meetings of Council over the last couple of weeks.  Regional meetings of Council are smaller assemblies that only members of Council attend (no guests or members of the press attend). This, along with the smaller meeting size, allows for greater and more frank discussion among members of Council.  The AICPA took advantage of this opportunity to have in-depth discussions on its strategic plan down to actual implementation initiatives.

If you are like many of us buried in work these days, you might have missed the impact the JOBS Act will have on our profession.  Dodd-Frank exempted public companies with a market cap below $75M from the section 404(b)  (obviously logic evaded congress as it is precisely these small companies that are most susceptible to fraud and the most in need of controls). Congress continued to defy logic by exempting new public companies for their first 5 years of being public from 404b if their market cap is under $750M  and their revenues are under $1B.  If that wasn’t bad enough, congress also decided to get into the accounting standard setting process. Under the act, new public companies that qualify for exemption from section 404(b) will be exempt from implementing any new accounting standards if the standard includes a delay in implementation for private companies.  Most new standards today include a delay for private companies, so this in effect delays all new substantive accounting standard changes for new public companies for the same period of time.  This is congress’s first successful attempt to set accounting standards since the exchange acts of 1933 and 1934 which gave the SEC standard setting authority (which the SEC then passed to the private sector for the most part). This is a dangerous precedent and we need to be on alert for additional attempts by congress to legislate accounting standards.  As vocal as I have been about the FASB, I still see the FASB as a far superior alternative to congress setting accounting standards. 

And a word for those opposed to differential standards for private companies. Where are your voices against this set of differential standards? Congress just set up a scheme for two different sets of standards for two different classes of public companies.  This makes even less sense given the users of new public company financial statements have the exact same needs as the users of existing public company financial standards. 

The exemption also applies to auditing standards.  There is a 5 year exemption from new auditing standards for companies meeting the 404(b) exemption threshold.  This may prove to be the most contentious exemption between a new public company and it’s auditor.  Auditing standards are essentially minimum requirements for an auditor to meet when performing an audit.  An auditor can (and should) go beyond the minimum requirements depending on the audit.  My guess is the auditor will often follow all current standards regardless of the exemption, but that sets up the contention.  I can see the discussions now between the business and the auditor with the business asking why certain procedures that are costing time and money are being performed when they are not required by the older auditing standards.  Even better, can you imagine the auditing standard on the auditor’s report being changed, but the business requesting the old report format be used because they don’t want disclosures required by the new report to be included.

There were a lot more topics covered in the meeting, but in keeping with the theme that the regional meetings are more private, I won’t go into them in detail in this blog.  I will, however, continue to keep you informed of the issues through this blog as they become public over the coming months during the April AICPA Board meeting and the May AICPA Council meeting open to the public.