AZ CPA January 2017 by ASCPA

AZ CPA January 2017

Negotiating Skills â&#x20AC;˘ Excel at Networking New Law Clarifies Use of Independent Contractors The Arizona Society of Certified Public Accountants y www.ascpa.com

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Are you utilizing Arizonaâ&#x20AC;&#x2122;s newest tax credit? The dollar-for-dollar foster care tax credit allows you to reduce your taxes while helping Arizonaâ&#x20AC;&#x2122;s foster children. To take advantage of this credit, please visit creditsforkids.org.

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Wealth Management for High Income High Net Worth Business Owners/ Professionals, Retirees and Pre-retirees, Corporate Executives. • Comprehensive Planning • Investments / Strategies • 401(k) Analysis Armando G. Roman CPA/PFS MBA Wealth Manager

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of Certified Public Accountants (ASCPA) to provide information, news and trends in the profession of accounting. It is distributed 10 times a year as a regular service to members of the Society. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA.

Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 www.ascpa.com

Volume 33 Number 1

AZ CPA

January 2017

Features Five Ways to Excel at Networking 11

Learn five steps to help you look, sound and feel more confident in social and professional relationships. by Samantha White

Enhance Your Negotiating Skills 13

Most CPAs have little or no training in negotiating skills. Find out what it takes to become a better negotiator.

by Gilbert B. Blumenthal, CPA

Columns & Departments

Chairâ&#x20AC;&#x2122;s Message by W. Gregory Nelson, CPA

Member News

A Dash of SALT by James G. Busby, Jr., CPA

Quick Quiz

Classifieds 22

Computing Really Secure? 19 IsPt.Cloud 2 - Third Party Relationships

Outsourcing may have advantages, but you should not forget the increase in risks associated with third-party relationships. by Michael D. Peters

Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, Arizona 85034-2021 www.ascpa.com

JANUARY 2017 AZ CPA

ASCPA Chair’s Message

Ethics and Courage In 1996, Aaron Beam was enjoying great success as a CPA and the CFO for one of the country’s largest, most successful companies – HealthSouth. His life in Alabama was filled with all the trappings of success: prestige, power, great wealth, possessions and a loving family. He talked of a bright future with four homes scattered throughout the United States and a collection of French neckties worth the equivalent of a staff accountant’s annual salary.

by W. Gregory Nelson, CPA As the old saying goes: “it takes us a lifetime to build our reputation, but only five minutes to ruin it!”

AZ CPA JANUARY 2017

Then, in 1996, he agreed to bend the rules just a bit. Not much — just a small adjustment to ensure that earnings expectations were met for the quarter. It could be made up next quarter, he reasoned. It wasn’t. And so began a fraud stretching over seven years that was finally uncovered in 2003. It had grown from a small adjustment to the point where the company’s taxes exceeded its legitimate earnings. Beam ultimately lost everything and investors lost $2.8 billion. The frauds we are most likely to hear about are the really big ones: Enron, HealthSouth, WorldCom and Bernie Madoff. But the ethical lapses that give rise to these frauds happen every day, everywhere. They happen in our own backyard, and given the “right” circumstances, the potential to be a facilitator or culprit in wrongdoing exists in each of us. A forest fire can be started with a small match, and our action, or inaction, in seemingly inconsequential matters can start a forest of problems. As CPAs we have lots of rules to follow, and you know the abbreviations: GAAP, GAAS, IRS, etc. If we are creative, perhaps we can occasionally spot a few tempting shortcuts around the rules. There is a good reason for the Arizona Board of Accountancy’s ethics training requirement for all active CPAs. Although four hours of ethics training may not make anyone more ethical, perhaps it makes us think more deeply about why ethics matter. If Beam had demonstrated the courage to say “no” to just a small “fudging” of the numbers, we might not be reading about the HealthSouth scandal. Following Beam’s retirement in 1997, three successive CFOs participated in perpetuating the fraud. That borders on the unbelievable. Were these CFOs corrupted by the HealthSouth culture? Did HealthSouth only hire already corrupted financial executives? Why didn’t they likewise demonstrate the courage to stop the fraud? As CPAs, we are held to high standards of ethical behavior for the public benefit. Rightly so. According to a Gallup/USA Today poll, CPAs are ranked first among the most trusted business professionals. Financial frauds in which CPAs are involved are rare, but they do happen. They take the shine off our profession and are certainly personally detrimental to the perpetrator when uncovered. Even though most of us probably don’t face serious ethical dilemmas on a daily basis, we must be diligent about the small things to avoid the potential for larger problems. As the old saying goes: “it takes us a lifetime to build our reputation, but only five minutes to ruin it!” n

Member News Armando G. Roman, CPA/PFS, MBA, has been appointed chairman of the Investment Management Committee of The Roman Catholic Diocese of Phoenix. Jon Munson, CPA/PFS, lead advisor with Montlake Financial Services, LLC, appeared on the Fox Business Network show “After The Bell” to discuss rising health care costs. Kate E. Banker, CPA, was elected treasurer for GET Phoenix Young Professionals for 2017.

ASCPA Leadership Attend 2016 AICPA/CPA-SEA Leadership Conference (left to right) AICPA Vice Chair Eric Hansen, ASCPA President and CEO Cindie Hubiak, ASCPA 2017/18 Chair Molly Montgomery and AICPA President Barry Melancon.

CliftonLarsonAllen promoted the following individuals: Stephen J.M. Schiltz, CPA, assurance principal, Credit Union; Lisa Adams, CPA, tax principal, Commercial; Chad Callahan, CPA, assurance manager, Public Sector; and Skylar Freeman, tax associate.

If you have a specialized interest, you can build on the value you offer clients by adding an AICPA advisory service credential: Personal Financial Specialist (PFS ), Accredited in Business Valuation (ABV ), Certified in Financial Forensics (CFF ) or Certified Information Technology Professional (CITP ). These credentials were developed for the profession by the profession. They set you apart, make a statement and get you noticed. And, they can seriously boost your career. ®

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JANUARY 2017 AZ CPA

Explore your opportunities at aicpa.org/aicpacredentials.

WHERE CAN AN AICPA C REDENTIAL TAKE YOUR CAREER NEXT?

Governmental Accounting Conference February 3, 2017 Arizona Biltmore Resort This conference is designed for CPAs, auditors and accountants in federal, state, local and tribal governments to provide insights and understanding about new developments in governmental accounting and auditing. Topics include: • • • • • • • • • •

Fraud Risk Management & COSO: Past, Present & Future GASB Update – The Blue Covers Healthcare Impact on Government and Consumers Arizona’s Economy and Universities: Where We Are Now and What is Ahead GASB Update – Current Projects Using Emotional Intelligence to Enhance Leadership Qualities Updates and the Changing Environment within the Municipal Bond Market Learn more at GAO’s Fraud Risk Management www.ascpa.com/ Framework conferences An Action Plan for Information Security Uniform Guidance: Two Perspectives

AZ CPA JANUARY 2017

Dennis, Schmich & Co., Ltd. recently combined with Wallace, Plese + Dreher. All four partners, Murray Peter Mindlin, CPA, J.D., L.L.M., Hilarie H. Pierce, CPA, Steven F. Buel, CPA, and Nikki M. Kuretich, CPA, joined Wallace, Plese + Dreher. Corey Arvizu, CPA, managing partner of Heinfeld, Meech & Co., P.C., was recently appointed to the AICPA State and Local Government Expert Panel. Henry+Horne was listed as one of the top corporate volunteer programs in Phoenix by the Phoenix Business Journal. Henry+Horne came in at number 22 with 732 hours (100 more hours than the previous year). The firm is one of only three companies with less than 200 employees to make the list. BeachFleischman in Tucson made Accounting Today’s Top Workplaces in Accounting 2016 list in the mid-sized firm category.

A Dash of SALT

Two Arizona Income Tax Credits Designed to Attract Big Business This month’s state and local tax (SALT) column addresses two Arizona income tax credits meant to attract or expand big business operations and summarizes some of the recent changes to these credits. In recent years, Arizona enacted two new individual and corporate income tax credits in hopes of attracting high quality employment opportunities for its citizens in manufacturing and research and development positions, as well as to attract more headquarter and “international operations center” facilities. The first credit is worth up to $150 million per taxpayer over five years, while the other credit is worth as much as $25 million per taxpayer over five years.

by James G. Busby, Jr., CPA

Credit for Qualified Facilities Effective January 1, 2013, Arizona established new, individual and corporate income tax credits for expanding or locating qualified manufacturing, research, or headquarters facilities in Arizona. These credits are to be claimed over five consecutive years in equal installments. If any portion of these credits cannot be used to offset income taxes, it is refundable. According to the legislative purpose clause, these credits are intended “to encourage business investment that will produce high quality employment opportunities for citizens of this state and enhance the position of this state as a center for corporate headquarters, commercial research and manufacturing.” Among other things, to qualify for these credits, taxpayers must invest in a new qualifying facility or expand an existing qualified facility in the state, and produce new full-time employment positions at the facility. Effective August 6, 2016, taxpayers only have to pay at least 65 percent of the cost of all net new full-time employees’ health insurance costs instead of 85 percent of such costs. For qualified facilities located in counties outside Maricopa and Pima counties, the requirement that at least 51 percent of the net new fulltime employment positions at the facility pay a wage that equals or exceeds 125 percent of the median annual wage for production occupations in this state was reduced to 100 percent of that amount. Other than the requirement that taxpayers who qualify for one of these credits by relocating an existing facility in the state must make an additional capital investment of at least $250,000, there is no minimum investment required to claim these credits. Rather, the credits are for 10 percent of the lessor of the total qualifying investment in the facility or $200,000 for each qualifying net new fulltime employment position created at the facility. Taxpayers who want to claim these credits must apply to the Arizona Commerce Authority, and they may not claim one of these credits and the credit for expanding or locating qualifying renewable energy operations in the state (not to be confused with the credit described below for companies’ investments in renewable energy facilities that produce electricity for use in their own manufacturing operations or for use in their own international operations centers).

James G. Busby, Jr., CPA, is a state and local tax attorney at The Cavanagh Law Firm. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue. If you have any questions, please contact the author. He can be reached at (602) 322-4146 or JBusby@CavanaghLaw.com.

JANUARY 2017 AZ CPA

The amount of these credits, plus the amount of individual and corporate income tax credits for expanding or locating qualifying renewable energy operations in the state (again, not to be confused with the credit described below), may not exceed $30 million per taxpayer, or $70 million in aggregate, in any calendar year.

Credit for Renewable Energy Facilities for Self-Consumption The other credits went into effect on July 24, 2014. They are non-refundable individual and corporate income tax credits that may be carried forward for up to five years. Manufacturers and lessors that lease qualifying facilities to manufacturers qualify for these credits. The manufacturer or lessor must invest at least $300 million in new renewable energy facilities that produce electricity using renewable energy resources primarily for self-consumption in the manufacturer’s own manufacturing processes.

AZ CPA JANUARY 2017

In 2015, these credits were extended to include companies that operate “international operations centers” and lessors that lease qualifying facilities to international operations centers. To qualify as an international operations center, one generally must invest at least $100 million in new capital assets per year for 10 consecutive years for a total capital investment of at least $1.25 billion within 10 years. Then, to qualify for one of these credits as an international operations center, a company must invest at least $100 million in one or more new renewable energy facilities in the state that produce electricity using renewable energy resources and use at least a portion of the electricity for selfconsumption in the companies’ own international operations center. Effective January 1, 2015, the amount of these credits was increased from $1 million per facility to $5 million per facility annually for five years — with a cap of $5 million per taxpayer per year and an overall cap of $25 million for taxpayers

and their affiliates who use the electricity in an international operations center. International operations centers must be certified by the Arizona Commerce Authority, and all taxpayers who seek these credits must apply to the Department for precertification and then for final certification after their renewable energy facility becomes operational. The Department may not authorize more than $10 million of these credits per calendar year on a first-come, first-serve basis, and taxpayers may not claim both this credit and the credit for expanding or locating qualifying renewable energy operations in the state. Taxpayers who fail to make the required investment, who fail to receive final certification from the Department, or whose certification as an international operations center gets revoked by the Arizona Commerce Authority may not claim any further credits, and generally must reimburse the state for the amount of credit previously received. n

Ways to Excel at Networking by Samantha White In her new book, The 100-Year Life, co-author Lynda Gratton explains that increasing life expectancies mean we will all work longer and pursue multi-stage careers in several fields. Moving from stage to stage, and between sectors, will require us to reinvent ourselves and acquire new skills as the world of work and our interests and priorities change. The knowledge, skills and contacts which will enable us to make these various transitions are to be found in our network. The more diversified our network is, the better.

JANUARY 2017 AZ CPA

Networking is simply about exchanging information with others and finding commonality to develop social and professional relationships, says Sally Hindmarch, founder of UK-based training provider Partners With You. “We are all networking all of the time, even while waiting in line for lunch,” she said. It is also important to remember that relationship-building is a long-term process; there’s no pressure on you to sell something or achieve a particular outcome on the first meeting. Your network can support you in all sorts of ways, Hindmarch explained. “For people to recommend you or introduce you to one of their contacts, or give you recommendations for staff, etc., they need to trust you. For trust to exist, they need to like you, and for them to like you, they need to get to know you – that is the point of small talk at networking events. You have to give something of yourself.” Hindmarch highlights five steps anyone can take to excel at networking. The techniques can help you look, sound, and feel more confident, leading others to perceive you as more competent.

your spoken message to be perceived as sincere, it has to be matched by the physical image you convey through your stance and eye contact.

Adopt a confident posture. The way we stand can either invite others to strike up a conversation or put them off. Slouching, for instance, gives the impression that you are apologizing for your presence. Instead, stand with your feet, shoulders and hips in alignment so your weight is evenly distributed. Imagine that there is an invisible thread running up through your body that comes out of your crown. If someone were to pull that string taut, you would stand a couple of inches taller. Then, imagine you are wearing a bolero (or matador’s) jacket and someone has pulled the back of it downwards, pulling your shoulders back and opening your chest. This stance looks open and receptive, and helps you feel more comfortable, making it more likely that other attendees will be receptive and open with you. For

Wear something distinctive. Another bit of preparation you can do to help you move the conversation past “hello” is to wear a distinctive tie, a piece of jewelry, or a badge of a charity you support. It can be anything that will draw the eye, prompt someone to remark on it, and get a conversation started. The important thing is to have a story about it (who gave it to you, why you bought it, why you support that cause) that can reveal something about you and your interests, and help develop a rapport.

AZ CPA JANUARY 2017

Ask open questions. Have some questions up your sleeve to get a conversation started. These might include: Where did you travel from? What do you do? What did you think of the speaker? Asking lots of questions helps you shine the spotlight on other people, so that they feel important. Practice asking open questions beginning with what, where, who, when, why and how. Prepare your own answers so you can contribute to the flow of the conversation, because it can be hard to do on the fly when you are nervous. Likewise, avoid giving a one-word answer. If someone asks where you’re from, for example, tell him or her an anecdote or a piece of trivia about your town, which gives the other person something to talk about.

Know when and how to extract yourself from a conversation. If your goal in attending the event is to meet lots of new people, it’s important to know how to move on politely. If a conversation is going really well, but getting a bit too detailed for such an occasion,

Hindmarch suggests saying something such as: “This is really interesting. Could I possibly call you and have a proper conversation about it?” If the person is giving useful advice, you might want to make an appointment to explore the subject in more depth. Once you have exchanged contact information, it is much easier to say, “Thank you for this. I’ll be in touch. I’m going to move on now.” If you are simply looking to make a polite exit, try: “I have enjoyed our conversation, but I promised to meet X here. Would you excuse me?” Alternatively, remind the other person that you both went to the event to mingle, saying, “I’m sure you want to meet as many people as possible, too.” Follow up. Following up with your new contact is a crucial step that many people fail to take. The first meeting is just the start of a relationship. If you took someone’s card, send him or her a note to say, “Hope our paths cross again.” If you said you would call someone or promised to send a report, article or recommendation, make sure you do it. If you don’t deliver what you promised, your contact will infer things about you and your ability to deliver in your profession, Hindmarch says. Following up provides an opportunity to build trust and rapport. Ask yourself, “Is there something I can do to help this person?” such as send him or her your company’s white paper about a topic the person is working on. Consummate networkers give the first referral and always thank others when they provide one. n Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor. This article first appeared in CGMA Magazine. For more articles, sign up for the weekly email update from CGMA Magazine at http://bit.ly/UZ07NC.

Enhance Your Negotiating Skills by Gilbert Barry Blumenthal, CPA The need to negotiate is a fact of modern-day life. How often we engage in negotiations depends greatly on our individual personalities. Some hate negotiating and do it only when necessary; others live for it. As CPAs, we are often asked to participate in negotiations and, just as our professional roles vary, the situations requiring our participation as negotiators are even more diverse. Every negotiation is important. It could be for your client, your company or just you. Whatever the circumstances, it is expected that you will secure a successful outcome. After all, CPAs are smart (true) and their training will help them calculate the best negotiated outcome (not necessarily true). The reality is that most CPAs have little or no training or background in negotiating skills. So what does it take to become a better negotiator?

JANUARY 2017 AZ CPA

Could This Be Your Mentor or Mentee? Join the ASCPA mentor/mentee match program and engage with some great professionals who have already signed up. Here is a look at some of the titles/experience of mentors who are currently available. We have a variety of mentors who work in public accounting, corporate finance and other specialty areas. • • • • •

President/CEO Partner Finance Manager Business Valuation Expert Firm Owner

• Former CFO for a Nonprofit • CFP • Forensic Accountant • Global Audit Senior

There are also several amazing mentees looking for mentors. Here are some of the reasons they would like a mentor: • I am pursuing a controller position with a privately held firm and would like development suggestions and ideas on how to market myself. • I am looking for an advisor. I started my career in public accounting where promotions happen often and expectations are high. I struggle with finding balance and comfort in my position. • I am working as an EA and accountant at a CPA firm — also am in my second year of B.S. in Accounting so I can sit for the CPA exam. I need someone to help with questions about tough tax subjects and encouraging me in my schooling. • Resources and help with complex or other questions. Ability to bounce ideas off experienced and well-seasoned professionals in nonprofit and government audit and accounting. • I would like to have a mentor who can help me to grow my management skills for how I interact with staff. In addition, I want to grow in my organization and want to build the skills that senior management is looking for, as well as build up my confidence in what I have to offer. • Knowledge of how to advance my practice and maintain a good work/life balance. Join the Mentor Match program today to find your mentor and/or mentee. Go to http://connect.ascpa.com and click on “Engage in Mentoring” in the navigation bar. Select “About Mentoring” from the dropdown menu to follow the steps to becoming a mentor or mentee.

AZ CPA JANUARY 2017

Most disputes that involve CPAs in the negotiations are financial disputes. Focus on your strengths and less on your discomfort as a negotiator. Make a commitment to treat the negotiation as you would any other task you perform as a professional. This would include both training and preparing for every negotiation. No “winging it” here! Visualize “negotiator” as part of your job description because you end up doing it anyway. Accept the notion that not everyone is a good negotiator. However, with practice you can improve your skills. People talk about achieving “winwin” outcomes when in reality they actually strive to just win, and better yet crush the opposition. Understanding the other party’s interests and point of view is important. Get some training. We are often recruited to handle the negotiation du jour because we are respected, have lots of skills in financial disciplines, and are usually articulate and convincing when we speak. These are great attributes, but they do not replace training. Practice. If CPAs were to routinely engage in negotiations, there would be a strong incentive to improve performance.

Where to Start? Like anything else, improving your negotiating skills starts with the basics. Sometimes the most daunting task is to know where to start your preparation. Typically, you know a lot more about your situation than you do about the other party’s. If we look at the threads that are common to most negotiations, you can see that solid preparation and knowing yourself are among the keys to success. Some common threads to a good negotiation: • Prepare thoroughly • Know your strengths and weaknesses • Know what you’re after • Be a good listener • Stay focused on the issues • Know your options

• • •

Be willing to be creative Stay calm If necessary, be prepared to walk away

Know Yourself We’ve all been to meetings where the group is ultimately divided into four quadrants, each representing a different personality type. Like many of you, I don’t fit neatly into one area, as each of us is unique. A self-assessment may help you understand just what type of negotiator you are. These instruments do not project success, or not, as a negotiator. But what they will do is increase your awareness of the personality characteristics that you bring to negotiation. Knowledge of these characteristics cannot change your essential personality. It will, however, help you deal with bad habits that can be overcome. If you plan to do much negotiation, or if you want to learn more about yourself, you should consider looking at the Thomas-Kilmann Conflict Mode Instrument, which is available online. What makes a good negotiator? Some negotiators are simply gifted individuals who have the knack for sizing up situations, developing alternatives, being persuasive, asking great questions, being patient, all while making you feel good about yourself – as they rob you blind. These people are few and far between. Instead most negotiaters typically work hard to develop those skills.

Interests and Positions Interests define the problem. The basic problem in a negotiation doesn’t lie in conflicting positions, but in the conflict between each party’s needs, desires, concerns and fears. In negotiations, most parties are usually unwilling to reveal what they want. The negotiation process teases out these interests as positions soften to the point of extinction. Bottom line – interests are what you really want. Positions are a starting point. They represent a safe place where one can hide their concerns or lack

of information. They rarely reveal what either party ultimately wants to accomplish. Most negotiations start with both parties aiming high. That is the conventional wisdom, but is that what they really expect? Of course not. It doesn’t hurt to ask for more as long as you keep your eye on your ultimate goal. The art of negotiating is the process that allows one to move progressively from position to position until you start dealing with interests. So, while you may ask for the moon, you should always have an end game in mind. To do that, you must: Know your underlying interests. The more clearly you understand what you want, and what you don’t want, the better the outcome. If you cannot reach an agreement, have you thought through the alternatives? Fuzzy thinking at this point creates problems. Not only are you uncertain, but also the other side can get frustrated with your uncertainty.

Know your alternatives. One of those alternatives may end up being a final offer. Have you researched that alternative as a possible outcome, or are you waiting until it is put into play? If that is the case, you may find that it doesn’t address your interests to the extent you wished. Far too often negotiations break down because they become personal. The human aspect of negotiation can be helpful or disastrous. You can only control one party in the negotiation and that is yourself. If you want to be a successful negotiator, there is a path that you can follow to improve your outcomes. It’s not particularly difficult, but it takes practice. There’s no time like the present to begin. n Gilbert Barry Blumenthal, CPA, is a member of the ASCPA. You can learn more about negotiation skills by taking his class. (See Box below). He can be reached at phxmedi8r@aol.com

Developing and Enhancing Your Negotiating Skills Feb. 27 & April 26 — 12:30 to 4 p.m. Speaker: Gilbert Barry Blumenthal, CPA Recommended CPE Credit: 4 hours Personal Development Everyone negotiates in their daily life - from choosing a restaurant to agreeing on salary and benefits. CPAs and practitioners who are formally trained in negotiating will generally do better than those who are not. Everyone can benefit from learning the basic tools to improve their outcomes in negotiation. Learn how to use your own negotiation style in your professional and personal life. This course will help teach you how to stand up to sophisticated negotiators, practice active listening skills, and ensure you ask the right kinds of questions. •

Develop basic strategies and techniques that you can apply when situations arise requiring negotiation

•

Address the underlying nature of conflict, the elements of the negotiation process and, as a result, become better equipped to participate in the negotiation process

•

Become familiar with sophisticated, yet practical skills for winning negotiations while preserving relationships.

CGMA–final_for_CFO.pdf

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ARE YOUR FINANCE PROFESSIONALS SKILLED ENOUGH TO FULFILL YOUR STRATEGIC BUSINESS GOALS? Whether you integrate a qualified CGMA designation holder into your team, or empower your people through the program, you’re adding the experience to excel, to be ready, to be the difference.

From informed to influential. The CGMA difference. ®

AZ CPA JANUARY 2017

Visit CGMA.org/Program to know more.

New Arizona Law Attempts to Clarify Use of Independent Contractors While not a cure-all for employee misclassification, a newly enacted state law offers significant benefits for companies and workers alike. by Natalie Virden and J. Phillip Glasscock On August 6, a new Arizona law designed to clarify the blurry line between employees and independent contractors went into effect. The new law (A.R.S. § 23-1601) allows companies and independent contractors to memorialize the terms of their agreement by signing a “Declaration of Independent Business Status.”

Benefits While the new statute does not require independent contractors and contracting parties to execute such a declaration, there are benefits to doing so. First, the declaration creates a “rebuttable presumption” that the relationship is, in fact, an independent contractor relationship. (However, failing to have an independent contractor sign such a declaration does not create any presumptions against the contracting party.) Also, the declaration has the potential to help companies avoid the financial consequences of misclassifying an employee as an independent contractor. Misclassification can result in business and personal liability for unpaid wages, tax penalties, shortfalls in unemployment insurance and violations of worker’s compensation laws.

JANUARY 2017 AZ CPA

The Declaration In signing the declaration, the independent contractor acknowledges that he or she: • is not an employee of the “contracting party”; • is responsible for all taxes; and • has no right to unemployment benefits or any other rights arising from an employment relationship. In order for the declaration to be effective, the contracting party must treat the independent contractor in a manner consistent with his or her stated status and not as an employee. The statute also provides 10 factors to be considered in determining whether a person is an employee or an independent contractor. The independent contractor must verify that at least six of the factors apply to his or her relationship with the contracting party. The list includes the following: • The contracting party does not restrict the independent contractor’s ability to perform services for or through other parties, and the independent contractor is authorized to accept work from and perform work for other businesses and individuals. • The contracting party does not dictate the performance, methods or processes that the independent contractor uses to perform services. • The contracting party has the right to impose quality standards or a deadline for completion of services performed, or both, but the independent contractor is authorized to determine the days worked and the time periods of work. • The contractor is responsible for providing and maintaining all tools and equipment required to perform the services performed.

Limitations The declaration provided in the new statute is not a cure-all, and it poses three important limitations.

AZ CPA JANUARY 2017

First, while its use provides Arizona employing units with some security when they utilize independent contractors, it will not impact federal employment laws, such as the Fair Labor Standards Act and the Civil Rights Act of 1964 (Title VII). Thus, this new rule will have no impact on federal claims or investigations by federal agencies. In these cases, such guidelines as the IRS “20-factor test” will still apply. Second, the new law specifically excludes much of the construction industry — arguably one of the economic sectors that struggles the most with employee misclassification. Subsection C of the new law allows contractors and subs to utilize the declaration only when “contracting with an independent contractor to perform services that do not require a license pursuant to A.R.S. Title 32, Chapter 10” — in other words, workers that do not perform construction work (e.g., clerical and administrative staff). Third, regarding the “rebuttable presumption” discussed above, “rebuttable” means that the presumption can be challenged. Do not be surprised to see challenges to the presumption by the Arizona Department of Economic Security for unemployment claims, Arizona Department of Revenue for state income tax withholding claims, Arizona Industrial Commission for workers compensation claims, and the employee for minimum wage, overtime, discrimination, wrongful termination and other claims. While the new statute has changed the rules of the game to favor employers by creating the presumption, it still allows any party to play by alleging that an independent contractor is actually a misclassified employee. n Natalie Virden is an employment attorney at Aiken Schenk in Phoenix. She can be reached at (602) 248-8203. J. Phillip Glasscock, CPA, is an ASCPA member and a business attorney at Smith Paknejad PLC. He can be reached at jpg@ phxlawfirm.com.

Third-Party Relationships

competency within your organization, there are of course proactive cyber security companies out there who will be able to assist you. Outsourcing may have certain business advantages, but we should not forget the exponential increase in risks associated with third-party business relationships.

by Michael D. Peters

Data Ownership

Is Cloud Computing Really Secure? - Pt. 2* A vital part of vetting any third-party provider relationship is risk assessment. This is an aspect of a business relationship that organizations on average failed to perform more than 60 percent of the time. The company’s executive leadership within your organization may be interested in outsourcing or displacing risk to a third-party provider; however, the ultimate responsibility for the privacy, security, confidentiality, integrity and availability of your data and business continuity ultimately falls with the home team. A bona fide vendor risk assessment should be streamlined enough to not be an unreasonable burden to the prospective vendor, yet provide your organization with a reasonable comfort level that the fundamentals of cyber security be present. There are several best practice standards available to model your vendor risk assessments on such as the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-30 and the International Organization for Standardization (ISO) 27001. You will want to collect and consider from the perspective vendor any third-party assessment reports and certifications they may possess that would go a long way to assuaging concerns you may have during the vendor risk assessment process. Depending on the business relationship and the data at risk, you should look for reports concentrating on SOC 1, SOC 2, SOC 3, FedRAMP, PCI DSS and ISO 27001. There are of course other attestations and compliance reports, so consider those on a case-by-case basis. Keep in mind the potential quality difference that may exist between a selfcertified report versus an independent attestation report or certification. If reviewing these reports or conducting risk assessments is not a strong core * Part one of this article ran in the October issue.

It’s natural to assume that data ownership would not be in question given the fact that … it’s our data! There are several aspects to relying on a thirdparty provider to become the custodian of your organization’s information. Depending on the nature of the thirdparty business relationship, the lines between those points of ownership may be blurry. You should try to establish clear territorial boundaries within your ser vice contracts to avoid any unnecessary surprises or risks. Keep in mind that even obscure operational aspects such as data storage media replacement may pose a risk of data leakage to your organization if that media is mishandled by the third-party provider.

Third Party Access and Implications I’ve already mentioned that the risks for data leakage are present in any cloud environment but exponentially more in shared environments. Data leakage risks are typically within the software as a service (SaaS) realm, but not limited to it. This rabbit hole runs deeper than you

JANUARY 2017 AZ CPA

may realize. If you have not considered the implication that your potential third-party service provider may be using third-party provider resources themselves, you’d be overlooking an aspect of the vendor relationship that comes with its own challenges.

Sustaining the Relationship — Cyber Insurance Exclusions If you think that the business general liability or even purpose built cyber insurance policies will cover you in the event of a cyber security breach, it’s highly likely you are mistaken. In fact, it is in your carrier’s best business interest to deny your claim. Chances are the exemptions in your policy exclude coverage for access to or disclosure of confidential or personal information which accounts for the majority of claims. Cyber criminals are in it for profit, which means they are going after confidential or personal information. Insurance claims are being denied when breaches occur as the result of

Behind the Scenes

St. Mary’s Food Bank Alliance Jan.19 — 9:30-11:30 a.m. Go Behind the Scenes at St. Mary’s Food Bank Alliance, the world’s first food bank. ASCPA member and staff accountant Lou Servin will be joined by the Director of Finance Marcos Gaucin as they discuss the food bank financials, including the statements of activities and financial position. Hear about the unique challenges and opportunities faced by the organization. You will have the opportunity to tour two of their facilities in the west valley. Two hours of CPE Credit.

www.ascpa.com/stmarys 20

AZ CPA JANUARY 2017

hackers exploiting commonly known security vulnerabilities, which amounts to negligence on the insured. When on average 96 percent of all breaches are avoidable, the only thing that stands between being breached and having your cyber insurance claim denied is the effective implementation of controls and countermeasures from taking a proactive cyber security approach.

Vendor Risk Assessments Just as you vetted while considering engaging a third-party provider for your cloud computing requirements, once contracted, you should on at least an annual basis be performing vendor risk assessments just as you did during the vendor vetting phase. In cases where the vendor is the custodian of data that would be considered restricted and require breach reporting in the event of an exposure, the frequency of these risk assessments should be increased.

only a certificate is presented, making it impossible for customers to read the audit report and make an informed decision about their vendor. The SSAE 16 SOC 1, SOC 2, SOC 3, PCI RoC, and FedRAMP assessments are by far the more meaningful reports simply because they are conducted annually and they are performed by independent third-party assessment organizations that are authorized to perform the assessments.

The Big Breakup

SOC, PCI, FedRAMP, ISO 27001 Certifications

All things eventually come to an end and your third-party service provider relationship is not an exception. Regardless of how that vendor relationship ends, your primary concern should be about the protection of your intellectual property and your sensitive or restricted data. If you have been diligent along the way, now is not the time to become complacent. I’ve covered quite a bit of common high-level points that should not be overlooked when considering or sustaining a cloud computing business relationship. Keep in mind that this review is not intended to be a comprehensive list because every business is a little different and service providers are unique as well. You are not alone if you think that this is a bit overwhelming. The best path is to get assistance from a reputable and experienced proactive cyber security company to help you identify and manage the risks along the business lifecycle. When the average cost of a breach per company is $5.9 million, and the cost of expert assistance is less than the salary of a single employee dedicated to cyber security, it should be an easy choice to avoid trouble rather than invite it. n

The SSAE 16 SOC 1, SOC 2, SOC 3, PCI RoC, PCI SAQ and FedRAMP assessments are conducted annually. You should request a copy of the reports from your service provider annually when they first become available and look for any troubling results. The exception here is the ISO 27001. The ISO 27001 is valid for a three-year period of time and

Michael Peters is the serial entrepreneur and innovator behind the IT Audit Machine, Policy Machine, Cybervisor, Your Personal CXO, the Security Trifecta, and the globallypopular Holistic Operational Readiness Security Evaluation (HORSE) Project. He is currently the CEO of Continuum GRC — michael.peters@lazarusalliance.com.

Site Visits An important part of a risk assessment is what’s called the site visit, which is nothing more than physically inspecting the service provider’s operations that includes the data processing facet. Depending on what type of data is being processed, this may not be important enough to add to your vendor risk assessments. If your service provider is the custodian of your data and an exposure would require a customer notification, you should be conducting an annual site visit, along with more frequent vendor risk assessments to verify your service provider is holding up their end of the cyber security bargain.

AZ CPA Quick Quiz You’ve Read It, Now Get Credit Take this quiz online or submit this hard copy on AZ CPA content. Receive a score of 70% or more and earn one hour of CPE credit in specialized knowledge. It’s that easy! Fees Members: $25 Nonmembers: $40 Online Access Login to www.ascpa.com and go to CPE/OnDemand CPE Quick Quiz to access links to all active quizzes. Purchase quiz and the quiz link and password will be emailed to you. Your results will be sent immediately after completing, and certificates are emailed within two business days. Hard Copy Please select one answer for each question. Fill out registration/payment information below and mail or fax to the Society office. Quiz results and certificates will be emailed to the address provided on the registration form. *This quiz will be available until January, 2018. Please note that users have three attempts to pass the quiz with at least a 70% score.

January 2017 Issue of AZ CPA* 1. In the Chair’s message about Ethics, where does a Gallup/USA Today poll say CPAs are ranked among the most trusted business professionals? m First m Second m Third 2. To qualify for the Credit for Qualified Facilities, taxpayers can do all of the following except: m Invest in a new qualifying facility m Expand an existing qualified facility in the state m Produce new part-time employment positions 3. How much money can the Arizona Commerce Authority authorize for renewable energy facilities for selfconsumption per calendar year? m $5 million m $10 million m $15 million 4. One of the five steps Hindmarch highlights to excel at networking is to wear something distinctive. m True m False

5. Many people fail to take this crucial step when it comes to networking: m Adopt a nervous posture m Follow up m Monopolize a conversation 6. Which is not an optimum tactic to being a good negotiator: m Be a good listener m Know your options m Be aggressive

7. The art of negotiating can break down because you: m Have common interests m Make it personal m Know your alternatives 8. In order for the Declaration of Independent Business Status to be effective, the contracting party must: m Treat the contractor as an employee m Provide unemployment benefits m Treat the contractor in a manner consistent with his or her stated status 9. The new contractor declaration law specifically excludes much of which industry? m Construction m Hospitality m Not for Profit 10. An important part of a third-party vendor risk assessment is: m Conducting site visits m Ignoring reports m Establishing vague boundaries

Quick Quiz Registration Name: ____________________________________________________ Email:_____________________________________________________ Telephone: _________________________________________________

Payment

m Member: $25 m Nonmember $40 Checks: Please make payable to: The Arizona Society of CPAs Credit Card:

m Visa m MasterCard m American Express

Credit Card #: _______________________________________________ Expiration Date: _____________________________________________ Name on Card. _____________________________________________ Mail to: ASCPA, 4801 E. Washington St. Suite 225-B, Phoenix, AZ 85034-2021; fax to (602) 324-6043; scan and send to ASCPACPE@ascpa.com.

JANUARY 2017 AZ CPA

Classifieds The Arizona Society of CPAs

ROAD TO THE CPA

A collegiate program to promote the benefits of the CPA profession

COLLEGE STUDENTS Over 1,500 Arizona college student have attended and benefited from the Road to the CPA's efforts and activities

UNIVERSITIES

10 Each year, the ASCPA visits at least 10 local universities and colleges to speak with students about becoming a CPA

More than 350 young professional CPAs expressed interest in being a panelist speaker at Road to the CPA events in 2016 alone.

SCHOLARSHIPS

YOUNG PROFESSIONAL CPAS

TUCSON CPA TAX PRACTICE seeks succession plan with new partner – A two partner firm of over $1 million seeks a tax partner or manager to buy out partners over time. Beneficial if interested person has an existing practice to merge in. Over 30 years, the practice is highly profitable with a strong concentration in business and individual tax preparation and consulting. Firm would also consider merger with equal or larger firm. Firm has a 90-day lease cancellation notice. Please contact CPAfirm3@gmail.com.

Employment Sigrist, Cheek, Potter & Huyser, PLLC — Mid-size Scottsdale firm looking for career-minded professional with great client skills and 5-10 years of experience. You will be surrounded by a supportive team and work environment, with competitive compensation and benefits. Send resume to howellcheek@ azcpas,com. TAX PREPARER/ACCOUNTANT — Schutte & Hilgendorf, PLLC is a leading CPA firm in Prescott, AZ, serving Northern Arizona with tax, audit and accounting services. We are seeking a dedicated professional to add to our fun team for tax season initially. Candidate should have tax prep experience for individuals and businesses (using Lacerte a plus), and be ready to expand their public accounting career throughout the year in accounting and auditing. Min. Rqrmts: Bachelors Degree Accounting or related; CPA or candidate. FT (seasonal and flexible schedules negotiable) — www.prescottaccountants.com.

Office Space

$21,000 The Arizona CPA Foundation for Education & Innovation gave $21,000 in college scholarships in 2016

DO YOUR PART TO GROW THE CPA PROFESSION

Visit www.ascpa.com/foundation to make a donation.

Business Opportunities/ Practices for Sale

AZ CPA JANUARY 2017

Share in costs with Tucson CPA group for a receptionist, conference rooms, a comprehensive library, copier/fax/scanner and other office services and facilities. Become part of CPAs who each own their own practices, but unite together in discussion ad interpretations of tax and accounting issues through personal interaction or meetings. Options available to either lease your own office space from the group or pay a standard monthly fee to have use of the conference rooms, receptionist, mail service, copier/fax/ scanner and other services. Located in the prestigious plaza palomino. Please contact David Lotz or Randy Livingston for details (520) 321-1334. Website: www. cpatucson.com.

For information about classified ads, visit www.ascpa.com and go to marketplace.

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JANUARY 2017 AZ CPA

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