Braddon Group

In case you haven’t heard, blockchain technology has the potential to change the auditing profession. A new whitepaper co-authored by the American Institute of CPAs details what opportunities could emerge for auditors.

Not sure what blockchain is? Don’t worry, you’re not alone. It’s a digital, distributed ledger that contains every transaction since its creation. Once transactions are entered, they can’t be changed or deleted. Every user on a blockchain has an identical version of the ledger, and all copies are updated automatically when a new transaction occurs. Each entry refers back to the previous entry across all versions, creating a “chain” of information.

What does this mean for auditors? In an earlier blog, we talked about how the work auditors do every day may change. The AICPA’s new whitepaper goes further. It explains how blockchain technology could both evolve audit and assurance practices and create totally new opportunities. Specifically, the paper identifies 4 new jobs that we might see in a blockchain ecosystem:

1. Auditor of smart contracts

One intriguing capability of blockchain technology lies in smart contracts. This capability allows for a computer program to digitally transfer assets between parties once pre-specified conditions are met. However, users of such smart contracts will still want assurance that the contracts are implemented with the correct business logic. This is where the CPA comes in. Additionally, CPAs could verify the interface between smart contracts and external data sources.

2. Services auditor of consortium blockchains

As the technology becomes more mainstream, businesses will likely develop blockchain platforms that other organizations can use for their own purposes. Before subscribing to one of these platforms, though, organizations will want independent assurance as to the stability and robustness of the blockchain’s architecture. Thus, the blockchain business may choose to engage a CPA to provide assurance as to the effectiveness of controls over a private blockchain.

3. Blockchain administrator

For private blockchains, organizations may want an independent party – such as a CPA – to perform the functions of a central access-granting administrator. CPAs could validate the enforcement and monitoring of a blockchain’s protocols. If one of the blockchain’s users were to perform these functions, that individual might have an undue advantage over the blockchain’s other participants. Having an independent auditor serve in this role creates greater trust for the blockchain’s users.

4. Arbitrator

While blockchain technology can execute contracts, people still determine those contracts’ terms. This means there is room for error. In a world with blockchain, CPAs may be able to serve as an arbitrator in those cases when the spirit of a smart contract departs from a legal document, contractual agreement or letter.

As the CPA’s role evolves in the blockchain ecosystem, standards and education have to evolve as well. These new opportunities raise questions that the profession must consider, such as:

• What types of skill sets does the profession need to remain relevant?
• When providing assurance across a blockchain, who is the client?
• How would a CPA assurance provider assess engagement risk for an autonomous system?
• How would independence rules apply to users of a blockchain?

As the technology gains wider acceptance and new applications become apparent, the AICPA’s Assurance Services Executive Committee, working with other AICPA committees, will be at the forefront identifying answers.

To learn more now, check out the webcast Blockchain Technology – Impact on the Accounting and Finance Profession, airing March 26.

Lindsay N. Patterson, CAE, Senior Manager, Communications and Public Relations, Association of International Certified Professional Accountants 

Blockchain courtesy of Shutterstock.

     

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• 3 myths about tax extensions

 

Sometimes filing a tax extension can be a benefit to your clients, but only if they are clear on what an extension means —and what it doesn’t mean.

If you’re a tax CPA, you’ve probably come across a client who chose not to file an extension because they misunderstood how it would affect them. On the other hand, maybe a client was happy to go on extension but for the wrong reasons.  

Below are three myths that your clients may have about extensions that you can proactively dispel.

Myth #1:  If I go on extension, I can wait until the return is filed to pay. 

Your client may not realize that although they have extra time to file, they don’t have extra time to pay. These clients are confident they don’t owe anything, so they do not want to make a tax payment with the extension. They are sometimes in for an unpleasant surprise after a Schedule K-1 arrives that summer, showing income that they did not expect. Now they owe penalties on top of the tax payment. Ouch.  

In some cases, this common misconception is mixed in with payment anxiety. Some taxpayers find themselves in a position where it’s difficult to pay a tax bill all at once. They may not always mention this, so it’s important to stress that payment cannot be delayed but installments are an option.   

Gerard Schreiber, CPA, recommends that CPAs should send a letter to clients who will need to file for an extension that spells out the client’s responsibility to pay estimated taxes to avoid penalties. He requires his clients to sign the letter before filing the extension to eliminate issues that may arise later such as complaints about late payment penalties. 

Myth #2:  Going on extension is expensive.

One of the main advantages you can stress to a client who needs to go on extension is that the return will likely be more accurate because it reflects up-to-date information and is not finalized in a rush. This means an amended return (prepared at extra cost) will not be necessary. The client may also save money by allowing time to see if more deductions can be claimed.  Additionally, self-employed clients benefit from an extension because they will have more time to fund a SEP IRA, solo 401(k) or SIMPLE IRA retirement plan.

Because they believe an extension may be expensive, clients may resist the idea and plead for more time, offering to get the needed information to you soon. One of the best ways to address this issue is to use an engagement letter for the client to provide tax information. The deadline should also be accompanied by a clear statement that if all information is not received by that date, the client may need to go on extension and will face late payment and interest penalties for amounts not paid by the filing date.    

Myth #3:  Filing a return after the April deadline makes me more susceptible to an audit. 

Lawrence Carlton, a CPA who runs a practice in Massachusetts, has occasionally fielded this question.  “It really is a myth,” says Carlton, who also serves on the AICPA’s IRS Advocacy Relations Committee. “Your chances of an audit are not related to the timing” of the filing.

Instead, it is a rating scale that determines the audit. The IRS assigns returns a Discriminant Inventory Function (DIF). The IRS is understandably tight-lipped about the details of DIF, but the bottom line is that the score reflects potential red flags that are on the agency’s radar, such as a high level of charitable contributions compared to reported income.

This year adds a new angle to tax extensions with the passing of the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018. There are provisions in each law that affect 2017 returns, which creates confusion as to what certain taxpayers should do as well as uncertainty about how some states will conform to the changes. The IRS is working on implementing this major tax legislation, which should alleviate some of the confusion and allow for more successful tax planning and strategic moves.

Still need a few more talking points when discussing extensions with your clients? Download these FAQs for clients from the AICPA Tax Practitioner’s Toolkit and share with your clients to shed some light on the topic.

And once you’ve addressed your clients’ concerns, take a few minutes to refresh yourself on some of the rules and procedures listed below for return preparation, including those related to extensions.

• SSTS No. 4, Use of Estimates is useful for working with estimated amounts of income and deductions.
• SSTSs 1, Tax Return Positions and No. 2, Answers to Questions on Returns provide more insight into due diligence in the preparation of returns.
• Circular 230 Sections 10.22, Diligence as to accuracy, and 10.36, Procedures to ensure compliance, mandate considerations to be followed in the preparation of federal returns, including extensions by practitioners.

Best of luck as you head into the final stretch of busy season.

April Walker, CPA, CGMA, Lead Manager, Tax Practice & Ethics, Association of International Certified Professional Accountants

 Tax extensions courtesy of Shutterstock.

     

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Suddenly, in the middle of a client meeting or complicated tax return, you want — no, need — chocolate, or maybe French fries and fried chicken. There’s no doubt food cravings grow under stress. But they can also hit when we feel good or for seemingly no reason at all.

These guilty pleasures can be a great morale booster during busy season. Yet too much indulgence can lead to unhealthy weight, high blood pressure, type 2 diabetes and a host of other health problems! Cravings can’t be eliminated entirely but knowing your triggers and developing strategies for feeding them in healthier ways can help.

Here are some ideas:

1. You just made it through a big deadline and the returns are filed or the report is issued — yay! What would you like? An ice cream sundae, chocolate chip cookies, apple pie? Expecting treats as a reward for accomplishment lives deep inside the human brain. After finishing an engagement or gaining a new client, you probably deserve some time off, but you settle for a candy bar, bag of chips and soda from the vending machine. Food rewards don’t have to be unhealthy even though they often are. Instead of vending machine snacks, make your prize into an exercise break with a brisk walk to a nearby coffee shop, diner or deli. Or reward in moderation — if you must have something sweet, use portion-controlled snacks to keep it reasonable.
2. Flat tire? In-laws coming to visit? Unhappy client? Experts say certain foods — usually those high in carbohydrates, fat and sugar — help us feel better in the short term. Unfortunately, they often leave you feeling worse later — either from a post-sugar crash in your blood glucose, guilt or an unfavorable reading on the scale. When you’re having a bad day, try other stress-reduction techniques, such as deep breathing or exercises you can do at your desk.
3. Celebrations are a big part of our culture both in and outside the office. Birthdays, holidays, the end of busy season, performance goals met, wedding showers, baby showers and so on. No celebration is complete without food, and you may find yourself making exceptions to your healthy diet “in support of the person or event.” Instead, lend your support by bringing a healthy dish to share or volunteer to help plan a celebration with healthy food options. Salads, fresh fruits and vegetables, and low-calorie beverages such as fruit-infused water are all good substitutions. Don’t have time to contribute? Eat a healthy meal or snack ahead of time to help keep your cravings under control.
4. Imbalances in our body chemistry, particularly the hormone leptin and neurotransmitters serotonin and endorphins, can also cause food cravings. Exercise helps fend off chemically induced food (and nicotine) cravings because physical activity releases endorphins.
5. Your food cravings may be the result of the simplest reason of all — you haven’t eaten! Make having a nutritious breakfast, lunch (preferably away from your desk) and dinner a priority no matter how busy you are. When your plans fall apart — and they will — keep a backup stash of healthy snacks, such as granola bars, fruit, nuts and healthy microwave meals.

Ultimately, one of the best ways to control unhealthy cravings and keep unwanted health effects at bay during busy season is to permanently improve business processes to help reduce stress. Small firm practitioners can check out the AICPA small firm resources site featuring a variety of valuable tools designed to help practices run smoothly. Also check out the Tax Practitioner’s Toolkit and Private Companies Practice Section for resources to help grow your firm strategically and improve efficiencies.

Lisa Simpson, Associate Director, Firm Services, Association of International Certified Professional Accountants

Ice cream courtesy of Shutterstock.

     

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If you took the CPA exam any time before 2004, images of an arena or hotel ballroom and No. 2 pencils and scratch paper still hold a prominent place in your memories. For those of you who took the exam after the American Institute of CPA’s launch of computer-based testing in April 2004, it was a much different experience. This important move helped the AICPA become a model for high-stakes testing, known for our ability to manage, deliver and score exams faster and more efficiently for candidates. 

Since computerizing the exam, we’ve remained focused on our ability to provide the best possible test experience. Some recent projects include the exam’s move to a web-based application for better test delivery, as well as a new item type (Document Review Simulation) that offers a more realistic simulation experience. 

On April 1, we’ll take another step forward with the launch of new exam software. Candidates will gain improved exam functionality with a format that closely resembles their professional work environment and tools. These are the types of changes allows the candidate to focus on what’s most important– showing that they have the relevant knowledge and skills to pass the exam. Here are three ways the new software will enhance the CPA exam experience:

Incorporates candidate feedback Over the last several years, we have taken strides to enhance the user experience and usability of the exam to better meet the needs of our candidates. We asked ourselves: what is most important to a CPA candidate who takes the exam? The best way to find out was to engage candidates directly through “test drives” of early software versions.

During the process, we gained valuable feedback that guided our development. As candidates tried the software’s various design versions, we heard comments such as “this is just like my workspace,” and the design “makes it much easier to navigate a slew of documents.” This feedback was instrumental in our development of the software solution we have today – one that better simulates a candidate’s real workspace in a test environment.

Simulates candidates’ everyday workspace

Think of how you work each day. More than likely, you probably use large monitors to easily view multiple documents, screens and applications. You quickly copy and paste information, highlight important details, and use Microsoft Excel^®, one of the most common tools of the trade.

Keeping that in mind, we designed the new software to give candidates:

• a modern and intuitive user interface on a Prometric 23-inch HD monitor
• dedicated on-screen workspace to review exam exhibits and documents
• use of a highlight tool to remember important text
• seamless cut-copy-paste functionality
• Microsoft Excel^® as a tool to complete items (Excel proficiency not tested)

While the software was primarily designed to benefit candidates, it will also allow our team of exam developers to easily make future exam enhancements. We all know the profession continues to rapidly evolve with new technologies and practice areas coming into play. This software ensures the exam remains ready to adapt to future testing needs.

Improved exam preparation

We’re just a couple of weeks away from the software launch – the next phase of the exam’s evolution. It’s been quite a journey from paper-and-pencil testing to computerization to the new exam format candidates will soon use.

Many of you may know exam candidates and want to support their studying and help them thoroughly prepare for the exam. Take a moment to pass along a tip to the candidates you know. Direct them to the sample tests and tutorials on the AICPA website and tell them to take the software for a trial run so they know what to expect on test day.

It’s always best to be ready and avoid surprises. Good luck to your candidates as they experience the next generation of CPA exam software technology.

Niall Hennessy – Sr. Product Manager, Technology, Association of International Certified Professional Accountants

 

     

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Congress, the media, watchdog agencies and funders — almost everyone wants to know how nonprofits are using their scarce resources. They look at functional expenses to make that determination, so it’s important to present the most useful and transparent information possible.

To that end, FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, requires not-for-profit entities to disclose their expenses by both functional and natural classification in one location. This ASU gives you good reason and opportunity to review your current classifications to determine if any changes need to be made as you prepare for implementation. ASU 2016-14 is effective for fiscal years beginning after Dec. 15, 2017.

How often does your nonprofit review its functional expense classifications? For most, it’s been a while. The following will walk nonprofit professionals through that process.

1. Start by looking at the functional classifications you currently use. Are they the ones that best tell your story? How many functions do you have? If there are too many, valuable information may get lost in the detail. If there are too few, financial statement users may not understand how you’re using resources. It’s a fine balance. Although not required by ASU 2016-14, not-for-profits may wish to consider whether a brief narrative describing the types of expenses included in the various functions — if not obvious from their titles — would be helpful to financial statement users.

2. Ensure expenses in your system are being coded to the correct functional category. Sometimes an account is set up in the system and assigned to a functional category. Over time, the nature of activities charged to that account change, but the functional expense category is never revised. If this scenario rings a bell, a thorough scrub of your current classifications may be warranted. Break it down into manageable pieces and work systematically.

3. Consider how you want to present the analysis in your financial statements. Under current GAAP, Voluntary Health and Welfare Organizations are required to present a separate statement of functional expenses. ASU 2016-14 eliminates that requirement but still requires the analysis to be presented somewhere within the financial statements. If your not-for-profit is currently preparing a statement of functional expenses, consider whether you wish to continue doing so. If you don’t currently present such a statement, consider whether you’d like to add one or whether including the analysis in the notes makes more sense. For very simple organizations, a description on the face of the statement of activities might be sufficient.

4. Choose whether to show expenses by function or nature on the face of the statement of activities. Today, most not-for-profit entities show functional expenses on the face of the statements. Under current GAAP, there’s no requirement for those entities to show expenses by natural classification. Since both functional and natural classifications will be required under ASU 2016-14, now is a good time to consider whether changing the way expenses are presented on the statement of activities would be beneficial to your financial statement users. For example, many nonprofit board members are more familiar with for-profit entities that report expenses by natural classification and don’t really understand the functional expense categories. If that’s the case for your entity, you might want to consider presenting natural classifications on the face of the statements.

Functional expenses generate frequent questions among not-for-profit professionals. For additional information on functional expense allocation and reporting, among many other aspects of not-for-profit accounting and financial reporting, visit the AICPA Not-for-Profit Section’s Audit and Accounting FAQs. Stay tuned for the next part in this series, when we’ll discuss functional expense reporting from an auditor’s perspective.

Karen Craig, CPA, is a consultant providing technical accounting, reporting, finance, and analytical expertise to not-for-profits with a focus on higher education. She volunteers on the AICPA Not-for-Profit Advisory Council and is an ex-officio member of the AICPA Not-for-Profit Industry Expert Panel. Karen also is a technical advisor to the Accounting Principles Council of the National Association or College and University Business Officers (NACUBO).

Expense reporting courtesy of Shutterstock.

     

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You know that feeling you get when you’ve helped a client in a concrete way? Perhaps you saved them money on their taxes, identified waste or even fraud. Maybe you designed a plan to take their children through higher education, helped them save for retirement or protect themselves from loss. Possibly you advised a small business startup, or helped a larger company report on their cybersecurity controls.

What if you could take that feeling — and your service — to the next level?

When you’re a CPA, you have a solid understanding of the many issues that power government: taxes, their assessment and collection and the rules that govern them; small business challenges and needs; financial literacy and responsibility; and myriad details of budgeting, responsible record keeping and the impacts of financial decisions.

CPAs’ expertise gives them a distinct advantage over other candidates, making them uniquely qualified to serve as thought leaders in government. As the country ponders the effects of the first major tax overhaul in more than 30 years, now more than ever, there’s a need for tax and fiscal expertise in our public servants. Who better to serve the community and protect the public interest than CPAs?

While running for and serving in an elected office can be extremely fulfilling, it also comes with some challenges. Before you take the plunge, it’s important to step back and consider what’s involved in running. Some things to think about:

• It’s important to have specific issues and ideas to run on. Distinguish yourself from the competition and develop strong positions on key issues. Run on ideas and positions you’re passionate about.
• Running for office can be physically, financially and emotionally exhausting. How will your family feel about this new obligation in your life? Will you be able to balance work, family, hobbies, running an effective campaign and, if successful, serve in office?
• Will you be able to maintain your business while running? Will you be able to keep up with your CPE? Holding a political office can be demanding at any level and can present a substantial impact to your work schedule.
• Will your family support the decision? If you win a position in government, it can mean less time for family obligations and could draw them into the spotlight as well. Be certain they are comfortable with your desire to run and win.

As it turns out, CPAs are perfect candidates for political office and it may not be too late to run in 2018. Forty-four (44) states are still accepting candidate applications, but state deadlines are approaching with 17 of those deadlines in March. Congressional filing deadlines for many states continue through July.

Once you’ve decided to run, your top priority will be hiring a campaign manager and treasurer. Every state, county and municipality have different laws pertaining to getting on a ballot, getting petition signatures and reporting campaign income and expenditures. You’ll need a competent manager and treasurer to understand the state’s election, compliance and campaign finance laws thoroughly. They’ll help make sure you meet all the requirements and deadlines.

It might also be a good idea to consult with a CPA colleague who has campaign finance experience and can help you meet campaign finance requirements. Be sure to research and familiarize yourself with all campaign laws and deadlines, which can be found on your state legislature’s website, department of election’s website, and NCSL’s Election Administration website.

Running for office can be a fulfilling endeavor and can put you in a position to make real change in your community. Regardless of political affiliation, the need for experienced CPAs in government is at an all-time high. As filing deadlines near, now is the time to consider jumping into races and making a difference in the country. For more guidance, check out the resources on AICPA’s How to Run a Successful Political Campaign – Electing CPAs to Office website and download the brochure, “Starting an Election Campaign: A Primer for CPAs.”

Jeff Shaffer, Specialist – State Regulation and Legislation, Association of International Certified Professional Accountants

Election courtesy of Shutterstock

     

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Second in a series on the Financial Accounting Standards Board’s (FASB’s) Current Expected Credit Loss standard

After years of debate over the role fair value accounting may have played during the subprime mortgage crisis, accountants seek to apply FASB’s current expected credit loss (CECL) standard as a “force for good” in their depository institutions.

If this is your mission for a bank, thrift or credit union, you probably feel like Luke Skywalker. Ultimately you want to be Yoda — thoughtfully presenting the keys to unlocking a force for good that can strengthen your institution against the dark side of internal disarray and competitive challenges.

As with any mission, success starts with understanding your situation and the power of resources at your fingertips. If you’re still struggling to read and digest the standard, “Do. Or do not. There is no try.”

Dive into data

It’s extremely important to understand what type of data you have right now and what you don’t have just yet. Data analysis will distinctly make or break your level of success. I can’t stress this enough: The more data you’ve collected or can gather now, the better. Strong data will provide more flexibility and reliability upon implementation in the future. Work closely with your core system provider to retrospectively and prospectively collect as much information as possible. In short, if you haven’t started — start now.

Assemble a Jedi council

In setting your organization on the right path, it’s important to have a CECL Steering Committee. Be sure to include all appropriate decision makers. As a best practice, your committee should consist of members from across the organization — think financial reporting, risk management, tax, internal audit.

Overhauling the incurred-loss model can be a daunting task. Once your committee is established, your next step is to come up with detailed goals and plans to appropriately execute your mission. I urge you and the committee to chart a detailed course to success.   

Chart your course

Start by determining your public business entity status. This will directly affect your launch date. If you’re one of the lucky ones who has three or even four years to implement CECL, don’t put off the planning process — the stakes are too high. As with the rest of your mission plan, it never hurts to double check your assumptions with an Obi-Wan Kenobi, who could be your auditor or an outside expert.

Assess your troops

Be realistic about the resources you have available internally and what you might need. For example, if your staff are already at risk of a processor overload, be aware of that limitation and reflect it realistically in your plan by considering additional training, hiring or both. Remember a realistic and well-thought-out plan will ensure that the force remains with you.

Consider outside help

Peer institutions, trade associations, outside service providers, even bounty hunters — numerous resources are at your disposal. IFRS 9, the international credit loss standard, went into effect Jan. 1, 2018. Although IFRS 9 varies from the FASB standard in notable ways, there are many similarities. Those who have implemented IFRS 9 may be especially helpful to you. If you plan to use an outside service provider, be sure to include them as early as possible in your overall plan and timeline.

Don’t forget…

As you create your ultimate plan, it’s important to include specific key dates for each item along the way. Some key items to consider when creating your mission timeline:

• Complete a data gap analysis and overall examination
• Create external meeting dates to ensure communication with regulators, auditors and investors
• Schedule CECL Steering Committee dates throughout the process timeline
• Determine the role (if any) of outside service providers

Communicate

Before, during and after the mission, ensure you are communicating and setting expectations internally and externally with board members, management, regulators and your external auditors. The more you communicate, the better folks will understand expectations and the better off you’ll be.

Once you’ve established your mission timeline, it’s time to review key management data and consider your options.

The next step is to educate your leaders (board and management) about upcoming plans. The new credit losses page on aicpa.org features helpful resources including a PowerPoint template that you can share with your board and/or management.

Stay tuned for our next article in this series: Credit losses: Return of management’s judgment. Until then, “May the force be with you.” 

Jason Brodmerkel, CPA, Senior Technical Manager – Accounting Standards, Association of International Certified Professional Accountants

Yoda courtesy of Yuri Turkov/Shutterstock.

     

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It’s the middle of busy season, and you’ve just realized you could use a little more help. Maybe you underestimated your firm’s capacity, or a staff member unexpectedly needed to leave. When it’s all hands on deck to manage client needs, mid-season hiring is a curveball no firm wants to face. Here are a few ways to prevent such departures and prepare for the unexpected.

An ounce of prevention

Of course, one of the best ways to handle mid-season hiring is to prevent departures. 

While people will leave, and not always at the best time, a firm should try to create a fun office culture so employees won’t want to go anywhere else. This means creating a family-like atmosphere in hopes that staff members are less likely to leave “family” in the middle of a busy time. To make the firm more inviting, consider:

• creating a “work from anywhere, anytime” policy for staff members, while fostering teamwork during in-office hours
• providing healthy snacks each day and lunch on Saturdays for those who are working in the office
• offering extras such as massages, ice cream treats, and car details
• trying not to take yourself too seriously (while taking the work seriously)

Small firms may struggle with developing retention incentives if there are budget concerns, and a low staff count can restrict some of these tactics. Other options might include compensatory time or a leave bank to make up for all the extra hours. If interested in these incentives, firms must consult a labor law attorney to discuss applicable laws in their state.  

Preparation is key

A little preparation can help ease the pain of a CPA’s departure mid-season. Life events, such as a staff member going on maternity leave, can be prepared for in advance. This preparation can also help if a staff member leaves unexpectedly.

Ensure everyone, including management, is cross-trained, particularly for vital administrative tasks such as billing. Consider holding a 15-20-minute presentation on office procedures in case people need to pick up the slack.

Another part of preparation is building a strong team environment. When your staff has a team mindset, it’s easy to rally the troops. Consider creating a social committee that organizes social functions beyond basic happy hours so your staff members can bond over paint and wine sessions, family BBQs, escape rooms and other fun activities.

Regroup fast

No amount of worrying or hand-wringing is going to solve the problem of a lost employee. Call the team together and realign responsibilities of staff members who can get all the returns done. Regroup. Then have conversations with clients who may understand the situation and be more open to extending.

In the case of someone who didn’t leave but is unable to come to the office (e.g., suffered an injury), be flexible. A work-at-home arrangement could help keep a staff member on board while maintaining the workflow. Consider developing that kind of arrangement for employees who move out of the area as well.

Be selective with replacements

You may feel it’s critical to get someone on board right away, but resist the urge to take the first person available. You could end up with bigger and more costly problems in the end.

Anyone brought onboard will be handling firm finances and/or interacting with clients, so they must have impeccable integrity. In addition to technical skills, they’ll need to be willing to learn new software, firm processes and workflow, and be able to adapt to change. It’s also important to remember that anyone brought on board should align with company values.

Small firms should be extra vigilant when hiring mid-season. Consider hiring via word-of-mouth and through your networks rather than sourcing from agencies. Identify if this role will continue after busy season. If not, be sure to hire someone willing to be flexible. But keep in mind, if you’re hiring for a long-term position, whoever you hire must fit in with the firm’s culture. Small firms often employ staff who wear many hats and replacing a tax person can be more difficult compared to larger firms.

Be vigilant on retention

Although your retention rates may be stellar, it’s important not to get complacent.

Small firms should look for ways to make themselves more competitive in the job market. Consider increasing paid time off and developing flexible scheduling for employees. Stay on top of your employee’s work/life balance to avoid burnout.  

Here are a few more ways to improve your retention rates:

For some references, check the PCPS Flexibility Toolkit, which has some ways to implement flexibility in the firm.

When employees do leave, make sure you understand why. Ask departing staff members what you could have done differently to keep them on board. 

Create a formal exit interview process (like this one offered to PCPS Section members) that pays close attention to what people say about your firm. This will help you understand what areas of your firm need to improve. You may learn valuable information that can be leveraged to improve not only your firm’s culture but also the well-being of staff members.

By preparing ahead, hiring a new staff member during busy season can be an opportunity to grow your firm’s family and keep you focused on the most important part of your business – your clients.

Raleigh Cutrer, CPA, ABV, is a partner with Matthews, Cutrer & Lindsay, P.A.., a mid-sized firm in Mississippi. He oversees the firm’s tax planning and preparation practice, as well as the firm’s business valuation services. Raleigh has over 35 years of experience in numerous areas of taxation, including estates and trust planning and is a member of the AICPA’s Tax Practice Management Committee.

Terri Hogoboom, CPA, is a shareholder with Cothran & Johnson Accountancy Corp., a small firm in Walnut Creek, California. Terri began working at the firm in 1979 and became a director in 1997. She earned a Masters in Taxation at Golden Gate University and specializes in trust, estate, and gift taxes.

Help wanted courtesy of Shutterstock.

     

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Tax reform affects more than just taxes. It has lasting implication for all CPAs and introduces some uncertainty for financial forensics and business valuation. Depending on who your clients are, you may feel this more than other CPAs.

If you concentrate in estate and gift tax valuation, now is a good time to start looking outside those business models by leveraging the opportunities that have come up since the new law was signed.

In a recent interview, Don DeGrazia, CPA, ABV, CFF, partner with Gold Gerstein Group LLC, explained the P.L. 115-97, known as the Tax Cuts and Jobs Act, makes the federal estate tax temporarily go away for many tax payers. While state estate or inheritance taxes are still in effect, they don’t provide nearly the same volume of business.

This poses a lot of questions for forensic and valuation professionals – questions that could translate into a very busy, but opportune year.

“It’s big stuff. It’s complicated. And you have to get it right,” said DeGrazia.

Much of the attention from tax reform falls on income tax. But, CPAs also should consider the potentially significant effects this legislation has on other services such as valuing closely-held businesses and family law.

DeGrazia highlighted four key components that require this scrutiny.

1. Cash flow changes

This is the biggie. Provisions in the bill will affect businesses’ cash flow in both directions. For example, §179 and bonus depreciation rules changed to allow businesses to write off 100% of depreciable assets (e.g. a roof) in one year if the asset is bought and placed in service between Sept. 17, 2017, and Dec. 31, 2022 (the percentage then declines through 2025). Businesses will see reduced tax expenditures, which increases cash flow and thus, the value of the business. Great news if the owner is considering selling.

If the company is a pass-through and qualifies for the 20% qualified business income deduction, aka QBID (more on that below), the owners’ tax expenditures dip there, too.

But, it’s not that simple.

If the same company that installed a new roof, let’s say it’s a C corporation named Stan & Sue Inc., also wants to offset income by carrying over last year’s losses, it can’t offset as much as it could under previous law. Net operating loss (NOL) carryforwards are limited to 80% of adjusted taxable income (as defined in the new law) rather than 100%.

So now, Stan and Sue’s tax liability goes back up and their cash flow could change accordingly.

2. Limit on interest deduction

Tax reform caps the deduction for net interest at 30% of adjusted taxable income, with an exemption for smaller businesses. Stan and Sue have leaned toward capitalizing through debt and now change to using more equity, increasing their cost of capital but possibly lowering their “specific company risk” for valuation.

Also, as we have seen in the news, some businesses will use their enhanced cash flow for capital expenditures and employee bonuses.

3. Reasonable compensation

This issue has been a thorn in everyone’s side for years as the IRS and businesses debate what should be considered reasonable. S corporations typically want to keep their compensation lower to minimize payroll tax liability, but QBID has “flipped everything on its head,” DeGrazia noted. Now, S corps may want to boost W-2 compensation to be eligible for this 20% deduction, which is subject to numerous rules. (This Tax Geek article is a great resource to understand more about QBID.)  

For fun, take all these factors and move the scenario to 2023, when the 2025 sunset date of the law is getting closer and no one knows if it will be renewed. What does that do to the terminal value in a discounted cash flow analysis?  The uncertainty adds a higher element of risk to any model and potentially lowers the firm’s value. So, yes, it’s complicated. Stan and Sue are confused, too.

4. Alimony deduction

Stepping outside the business world, CPAs also need to prepare individual clients for a significant turn in tax law. For divorce agreements signed after Dec. 31, 2018, taxpayers can no longer deduct alimony payments. “This is a sea change,” said DeGrazia. The eliminated deduction effectively increases the cost of alimony and, therefore, is likely to make it more difficult to reach agreements as the paying spouse will want to pay less. Tax reform also allows the spouse receiving the payment to exclude it from taxable income. DeGrazia recommended that CPAs encourage clients to settle their cases and enter into agreements this year if possible.

If these changes leave you with some questions, you’re not alone. The AICPA received more than 4,000 inquiries from attendees in one of its webcasts last month on tax reform. The good news is that you can conquer some of the uncertainty by hearing what DeGrazia and our forensic and valuation experts know on Mar. 6.

Also, the AICPA Tax Reform Resource Center is an excellent resource to help you stay on top of tax reform. It offers comprehensive coverage on all things tax reform. Visit often as the page is updated frequently with guidance, resources, news and videos.

Barbara Andrews, Director – Forensic Services, Association of International Certified Professional Accountants

Tax reform courtesy of Shutterstock

     

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Most CPA Exam candidates can rest assured knowing the time and energy they’ve spent leading up to exam day has prepared them for what to expect. Reviewed content and structure, section by section in the Blueprints? Check. Practiced with the sample tests to learn the exam’s functionality? Check. Confirmed test windows, how scoring works and made that test day appointment? Check. Understood the importance of language in the exam and what goes into the wording of each question? Che…wait. What?

Understanding what goes into the development of exam questions may provide extra insight for test day when you sit for the exam, which surely adds to your confidence. Read on to explore some of the behind-the-scenes considerations from creation to approval, fairness in the wording, as well as knowing with certainty that each multiple-choice question has only one right answer.

Think of it like an assembly line

The process of developing, reviewing and ultimately approving an exam question is rigorous. A question could go through as many as 20 reviews with 20-30 different people before it appears on your exam. This process makes the question, and the test, as fair as possible. Fairness in this sense means that each question gives you the opportunity to demonstrate the knowledge, skills and abilities that entry-level CPAs are expected to have. Fairness also means that emotion-laden words and concepts are removed from the questions so that you will hone in on the intended CPA-related content.  

Leave emotion out of it

According to Lead Manager of Test Development, Jeff West, “We want to ensure that candidates are able to focus solely on the content of the question and not be distracted by anything other than the content.” He adds, “For example, an item might test the important concept of disaster recovery, but we refrain from providing any unnecessary and upsetting details about the disaster itself.”  

What you see is what you get

Have you ever wondered if there could be more than one right answer on an exam question? According to Tim Habick,  test development manager, “Questions are designed to have one and only one correct answer. All incorrect answer choices are designed to be clearly incorrect, and the correct answer choice is designed to be clearly correct. If you understand the content, you should be able to distinguish the correct choice from the incorrect choices. Do not introduce unrealistic possibilities into question scenarios. There is no reason to make assumptions about facts not in evidence in the question. All relevant facts are already established in the construction of each question’s scenario, so don’t overthink with “What if” digressions.” All of the choices in a multiple-choice question are designed to be plausible. Given the facts in the question, the correct answer is “always correct”. Some of the other choices may only be correct either some of the time or only if you assume other facts to be true.

Tim combines his background in linguistics and logic to ensure every word in every sentence of each test question is completely clear on first reading. In fact, each word in each question is there to perform a particular function.  So, when you read a sentence, rest assured it means exactly what the words indicate, in the overall context of the other words and sentences in the question.

Now that you’ve had a glimpse into the behind-the-scenes preparation of a CPA Exam question, hopefully you feel a little more comfortable and acquainted with the material you’re being tested on. Remember, if you’re stumped on a multiple-choice question, pick answer choice “C.” You’ll be right 25% of the time.

Lauren Walter, Exam Communications Manager, Association of International Certified Professional Accountants

Behind the scenes courtesy of Shutterstock

     

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