AZ CPA July/August 2013

AZ

CPA JULY AUGUST 2013

The Arizona Society of Certified Public Accountants

What is your Practice worth?

Comfort Letters • Subpoena Q & A • Unleashing Innovation www.ascpa.com

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Strength in numberS. The strength of a business can be measured in many ways … financial statements, balance sheets and assets. But you won’t see a line for integrity or a footnote that provides insight into the passion of the individuals who are making a difference, day in and day out. Now with the integration of well-respected firms —Abalos & Associates, and Miller, Allen & Co. — we’re adding to our numbers. Because the strength of REDW will always be in our people, and in the founding principles that have guided our business for six decades.

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You can add to the strength of REDW – visit redw.com/careers

Phoenix Office 5353 N 16th St. Suite 200 Phoenix, AZ 85016 602.730.3600 | redw.com

JULY/AUGUST 2013 y AZ CPA

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AZ

CPA

JULY/AUGUST 2013

Volume 29 Number 6

Comfort Letters: Just Say No

15

Find out the best way to respond to lending institutions and client requests for comfort letters.

by Benjamin Podraza, CPA

Subpoena Questions and Answers

18

Understand the nature of subpoenas and how CPAs can minimize their professional liablity exposures when responding to them.

by Nadia Bell and Natalie Vu

Features Leadership Day 2013

9

Featuring pictures from Leadership Day in June.

What is Your Practice Worth in 2013

Unleashing Innovation

20

Organizations who are able to foster creativity, reap numerous rewards in terms of growth and profitabiltiy.

11

Baby boomers selling practices may shift the “seller’s” market in the next few years.

by Gary Adamson

What’s at Stake? The CPA Profession on Federal Fiscal Responsibility

14

A new AICPA video raises awareness of seriousness of nation’s budget deficit.

Columns & Departments 6

Chair’s Message by Karen Abraham, CPA

9

Focus on Members

22 Classifieds 23

In the Black ... Adventures in Accounting

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

4 AZ CPA y JULY/AUGUST 2013

AZ

CPA

The Arizona Society of Certified Public Accountants

President & CEO

Cindie Hubiak

Editor

Patricia Gannon

Copy & Advertising Deadline The first of the month one month prior to publication date.

Board of Directors Chair Chair-Elect Secretary/Treasurer Directors

Karen Abraham Anita Baker Rob Dubberly Diane Groover Sandra Hieb Debra Johnson Jimmy Lovelace Adam Miller Molly Montgomery CW Payne George Raysik Andy Spillum Leslie Stackpole Jared W. Van Arsdale Craig Van Slyke

AXIOM

Immediate Past Chair Armando Roman AICPA Council Members Jim Buhr Rick Goldenson Chapter Presidents Southern Chapter Northern Chapter Southwest Chapter North-Central Chapter

Flo Zenblu Jennifer Nordstrom Jayne Wright Richard Joliet

AZ CPA is published by the Arizona Society 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 advertisements within this publication.

Opinions expressed by correspondents and 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 Fax (602) 252-1511

www.ascpa.com

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Chair’s Message

by Karen Abraham, CPA

What is Happening in the Accounting World?

“The only thing constant in life is change.”

– Francois de la Rochefoucauld

That quote is certainly applicable to our accounting pronouncements. I recently looked on the Financial Accounting Standards Board (FASB) website and learned that 140 standards were issued between 2005 – 2012. That’s an incredible amount and averages out to 17.5 standards per year! In addition, there are currently nine exposure documents out for public comment. Change does seem to be the dominant factor – at least in our accounting world!

Happy Anniversary FASB The FASB celebrated its 40 anniversary this spring. At a recent conference, FASB Chairman Leslie Seidman commented that the FASB only issues standards if the expected improvements in the quality of the reporting are likely to justify the costs of preparing and using the information.

Chairman Seidman noted that “when market participants perceive an improvement in the quality and credibility of the information they are receiving, the efficiency of the market improves, and investors are better able to price stocks and other capital investments.”

He stated that more experienced staff has been hired to do outreach and research. The FASB has also improved on answering implementation questh

tions and resolving issues before the pronouncement is effective.

A Global Merging of Standards What about the International Accounting Standards Board (IASB) and the international convergence of standards? There are times that I liken this to the U.S. attempting to adopt the metric system. All of us were taught to use the metric system in grade school.

Canada adopted the metric system in the mid-70s only to see the U.S. abandon our implementation efforts in the 1980s.

The Norwalk Agreement Memorandum of Understanding was signed in October 2002 between the FASB and the IASB, committing to the convergence of U.S. GAAP and International

Good News... Did you know?

The current U.S. unemployment rate is 7.5%. For accountants, the unemployment rate is only 3.5% and the projected growth in accounting jobs by 2020 is 16%.

6 AZ CPA y JULY/AUGUST 2013

Financial Reporting Standards. Since then, we have been bracing ourselves to adopt these new standards. There has been notable progress: • Revenue Recognition in 2013 • Re-exposure of lease accounting in April 2013 • Plans for financial instruments being completed in piecemeal in early 2014 These are far-reaching and will affect nearly every business, but full convergence is still a very long way away.

ASCPA Annual Meeting and Awards Luncheon 2013 Our annual meeting of ASCPA members was held May 14 and was a fantastic event. Greg Anton, CPA, CGMA and Immediate Past Chairman of the AICPA was the guest speaker. Greg discussed many of the changes we are seeing in our industry, including the IASB, the FASB’s Private Company Council, legislative and tax issues. However my favorite portion of his presentation was on CPAs’ Public Service. Greg talked about educating consumers on the federal government’s finances.

To help, the AICPA, with Greg as the spokesperson, produced a video called “What’s at Stake?” which reviews the

• The long-term implications of the government’s health can be reviewed and understood in the financials, and they are much more insightful than the annual budget that is reviewed and debated by congress and the president.

• Social insurance and the deficit are larger than the household net worth of all Americans.

You can view “What’s at Stake?” at www.aicpa.org.There you can also find PowerPoint presentations, talking

In Our Capitol I attended the AICPA conference in Washington D.C. and visited with our legislative representatives. We gave our representatives educational materials, including the “What’s At Stake?” video.

It was all a very interesting process, but I’ll save that discussion for my next AZ CPA column.

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© 2012 Robert Half. An Equal Opportunity Employer. 0912-9012

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Download your 2013 Salary Guide today at RobertHalf.com/SalaryCenter or call 1.800.803.8367.

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To attract the financial talent you want,

get the salary data you need.

points and background information for starting a dialogue in your communities. (See page 14 for more information.)

at www.ascpa.com

Compliance

federal government’s latest financial report. He speaks with the co-chairs of the Congressional CPA and Accountants Caucus about the profession’s role in promoting the importance of fiscal responsibility. This video is part of an ongoing initiative of the AICPA, which calls on members of the CPA profession to inform their colleagues, clients and communities about the need to put the federal government on more solid financial footing.

Highlights include: • The need for CPAs to help protect the public interest. To assist with this, education of the American people is critical. This can be done in a non-partisan and objective way.

• Discussion of the federal government’s financial statements, both in terms of the income statement and the balance sheet – but also liabilities for social programs (Social Security and Medicare) that are not part of the financial statements and are only shown in footnotes.

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Focus on Members Mark Eberle, CPA, partner at Henry & Horne, LLP received the honor of having the Rising Star award from the Scottsdale Area Chamber of Commerce renamed the Mark F. Eberle Rising Star Award as part of their annual Business Volunteer Awards. The Rising Star Award recognizes an individual for his or her volunteer spirit and leadership. The award was named the Mark F. Eberle Rising Star Award as a tribute to Eberle’s contributions to the Chamber and Scottsdale community.

in Scottsdale in the Gainey Ranch Financial Center at 7373 E. Doubletree Ranch Road, Suite 170.

AXIOM Financial Advisory Group, LLC announced expansion into new larger offices. New offices are located

Heinfeld, Meech & Co., P.C. announced the following promotions: Eugene Park, CPA, to audit manager,

Ron Butler, CPA, managing partner at Ernst & Young, LLP, was listed as a Most Admired Leader by the Phoenix Business Journal.

Darlene Hagan, CPA, of Hunter Hagan & Co., Ltd., was elected to the board of the Central Arizona Estate Planning Council.

Kaleigh Hotchkiss, CPA, and Michael Paul Rohr, CPA, to senior associate, and Anthony St. George and Justin D. Robertson, CPA, to staff associate II. Tracy Taylor, CPA, of Moutainside Fitness was selected by Wells Fargo as its 2012 CFO of the Year.

In Memoriam Douglas McCulley

Leadership Day 2013 The ASCPA Board of Directors, Section and Chapter chairs met to discuss matters of importance to the Society, hear from Rep. Forese who was instrumental in passing SB 2260 and network with each other at the annual ASCPA Leadership Day.

JULY/AUGUST 2013 y AZ CPA

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Heinfeld, Meech & Co., P.C. recently completed their annual community service day on May 24. Here are teams from their volunteer day at food banks in Tucson and Flagstaff.

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Behind the Scenes ... at the Federal Reserve

ASCPA Members got a special tour of the San Francisco Federal Reserve Bank’s Phoenix cash facility. This group was among the first to see the new $100 slated for release in October 2013.

What is Your Practice Worth in 2013?

by Gary Adamson

Tax Season 2013 is over and the M&A frenzy will pick back up again where it left off. So, what is your practice worth? What can you expect whether you are a buyer or seller? One thing is for sure – Baby Boomers are selling at a rate that the profession has never seen before. It is still a sellers market, for now. But the demographics and the thousands of practices that will soon be for sale suggest that may change over the next few years.

We are often asked by our clients about the market and what firms are selling for. Everyone wants to know “what’s the multiple?” Let’s start with a little bit of background and definition. First of all, there are basically two types of deals in the CPA firm M&A world. One is a “merger” transaction where generally, partners of the smaller firm join the larger firm with the key characteristic being that those partners plan to continue with the larger firm on more

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than a short term basis. Normally no cash changes hands. Rather the incoming partners are brought into the firm’s existing deferred compensation /partner buyout plan.

The second is really a purchase where the partners or sole proprietor of the smaller firm are selling the practice and are not continuing on a long term basis with the larger firm. These tend to be the smaller deals. Often, a single transaction will combine a merger approach for some incoming partners and the buyout of others.

This article is focused on the purchase transaction. At the smallest end of the spectrum are the cash deals. In spite of lots of talk, we just don’t see them.

In fact, they are almost non-existent in the firms that we work with. The generally accepted deal structure for most purchases in the profession today is a multiple of revenue approach paid out over a period of time, with no interest.

The first question we get from our clients is usually “what multiple of revenue are practices selling for?” We normally answer that question with another question: As the buyer, would you take this deal: a $500,000 tax practice, good rate per hour, located in your back yard, zero or a small down payment, good transition of clients by the retiring sole practitioner, and the price is 15 percent of collections over 10 years? There usually is a short pause and the answer is “yes, absolutely.” So far I don’t think we have heard a no.

In the preceding example, as the buyer you just said yes to paying a multiple of 1.5 times revenue for the practice!

What?? Why would you do that? The point is it’s not just about the multiple; it’s about the overall deal structure and terms. The multiple is only one piece of the puzzle.

Although we won’t touch on everything, the important components that go together to make up and influence the structure are: • Size of practice • Profitability of the practice • Location • Down payment • Term (number of years) of the

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payments • Length of time before the purchase price is fixed • Extent and quality of client transition • And finally, the multiple of revenue being paid.

The relative size of a practice being acquired will have an impact on the pricing of a deal. Generally, the larger the target, the fewer potential buyers there will be and the price is lower.

Likewise, the pricing is impacted by the location of the target. If you are in a major metro area, there are more potential suitors and you can command a higher price.

Be careful on analyzing the profitability of the practice. Most of us want to focus on the financials of the target and yes, we do want to review and understand them. But as the buyer, the more important questions should be the margins and profitability in our firm. What is it going to look like in our shop? Cost structures are different and how we staff it may be different.

The down payment, length of payment term and when the price is fixed or locked down all work together to influence the multiple. As you can probably imagine, as the down payment goes up the buyer has more risk and the multiple may go down. A down payment of more than 20 percent is fairly unusual in this post recession market and we often see any down payment treated as an advance on the first year or two of payments. The length of the payment term is normally in the range of four to six years, and the multiple will be higher as the term increases.

The lock down of the price deserves some explanation. In our $500,000 tax practice example, there is no lockdown and the seller would have received 15 percent of collections or $75,000 for ten years, assuming that the revenue stayed at the $500,000 level. Of course, it won’t stay at that same amount. Hopefully the acquiring firm is going to grow it, but most sellers are worried that it will shrink. To protect against that shrinkage, sellers want a lock down or fixing of the price after some period of

time. We normally see that in the one to three year range. So, if in our example we included a two year lock down, the value would be fixed at the end of two years based on the revenue of the practice at that time. The remaining payments would be adjusted accordingly.

The length and quality of the transition to be provided by the exiting partners or sole practitioner is critical to the retention of clients and the value of the practice.

The interplay of the transition and the lock down of the pricing is key.

So, what about the multiple? We see a lot of transactions in the one to 1.25 range, with the higher end of the scale in the metro areas. That would assume terms in the “somewhat normal range” such as a down payment of not more than 20 percent, a five-year payout, a two-year lock down, good transition, etc.

A few more details to be aware of include: • Furniture and equipment are normally included (the buyer receives them).

• Work in process and accounts receivable are normally not included.

• As the buyer, always share the upside prior to the lock down with the seller.

• Make sure that your transition plan includes two cycles.

For a little bit more information, in a recent article available on our website, we shared what sole practitioners are thinking regarding multiples and terms in the sale of their practices. Our source was the 2012 Succession Survey conducted by the Succession Institute in cooperation with PCPS. AZ CPA Gary Adamson is a CPA and the president of Adamson Advisory, specializing in practice management consulting for CPA firms. He can be reached at (765) 488-0691 or gadamson@adamsonadvisory.com. For more about Adamson Advisory, visit www.adamsonadvisory.com.

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What’s at Stake? The CPA Profession on Federal Fiscal Responsibility New Video Raises Awareness of Seriousness of the Nation’s Budget Deficit The fiscal cliff, the debt ceiling and sequestration have brought greater attention to our nation’s budget policy. The American Institute of CPAs (AICPA) strongly believes that there is a longer-term threat posed by the nation’s budget deficit.

In December 2012, the AICPA conducted an online survey of its members and found that the majority believe that cutting the federal budget deficit should be the government’s top economic priority. They also expressed concern that individuals and families will be affected most severely if policy makers are unable to reduce the federal debt.

“CPAs have a powerful, credible voice in this matter, and can make a major difference in helping policymakers, as well as the public, understand just what is at stake,” believes Gregory Anton, CPA, CGMA, former AICPA Chairman of the Board of Directors and the founder of the Institute’s “What’s at Stake” initiative. To help others understand the significance of the issue, AICPA released What’s at Stake? The CPA Profession on Federal Fiscal Responsibility, an update of the May 2012 video What’s at Stake? A CPA’s Insights into the Federal Government’s Finances.

In this video, Anton explains to viewers why the federal financial statements provide a different perspective compared to the annual budget. He also reviews the 2012 Financial Report of the U.S. Government and offers guidance for policy makers and the public on how the U.S. government’s financial statements can be used for greater understanding of the nation’s fiscal health.

The CPA profession can play an important role in promoting the importance of fiscal responsibility. The video includes interviews with the co-chairs of the Congressional CPA and Accountants Caucus, Representatives Brad Sherman (D-CA) and Mike Conaway (R-TX), who discuss the value of the CPA in shaping this fiscal policy discussion and creating change. To get started, watch the video now and share it with clients, colleagues and your community. Resources to support CPAs in these outreach efforts can be found AZ CPA on aicpa.org/whatsatstake.

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Comfort Letters: Just Say No

by Benjamin Podraza, CPA

Many lenders and loan brokers offering no-documentation and low-documentation loans have developed a bad habit of asking CPAs to issue comfort letters for selfemployed borrowers. These requests come in many forms. A lender may ask for a simple written confirmation of a client’s self-employed status or verification of self-employment income. More aggressive requests ask the CPA to confirm the sustainability of a client’s profitability or to indicate that withdrawing money from a business to fund a down payment will not adversely impact the borrower’s business.

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Guidance related to such requests is provided in Interpretation No. 2, “Responding to Requests for Reports on Matters Relating to Solvency,” of AT section 101, Attest Engagements (AICPA, Professional Standards, AT sec. 9101 par. .23-.33). Paragraph .25 of Interpretation No. 2 defines matters related to solvency as whether an entity (a) is not insolvent at the time the debt is incurred or would not be rendered insolvent thereby, (b) does not have unreasonably small capital, or (c) has the ability to pay its debts as they mature. Paragraph .27 of Interpretation 2 indicates that because of the varying legal interpretation of solvency, the practitioner does not have suitable criteria to evaluate the assertion. CPAs are therefore precluded from giving any form of assurance on matters related to solvency or any financial presentation relating to solvency.

In obtaining a comfort letter, lenders and brokers effectively shift the burden of assessing a borrower’s creditworthiness to an unwitting CPA. If the borrower later defaults on the loan, the lender may sue the CPA alleging that it relied on negligent misrepresentations contained in the letter. The definitive guidance provided by Interpretation No. 2 would not afford the CPA with much of a defense. Essentially the CPA has co-signed the client’s loan via their professional liability insurance policy, assuming their policy does not specifically forbid it, which many now do.

Despite efforts by the AICPA to reach out to the lending community to explain what services CPAs can and cannot provide, lenders continue to press the CPA community for comfort letters.

When these requests are submitted, it creates an uncomfortable tension between the practitioner and the client.

The client, who does not understand the implication of issuing such a statement, feels the CPA is being unreasonable and uncooperative at one of their most vulnerable moments. The client is fearful to return to their lender absent the requested documentation and has concerns about how they will explain why their CPA would not provide the letter.

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In obtaining a comfort letter, lenders and brokers effectively shift the burden of assessing a borrower’s creditworthiness to an unwitting CPA.

There are several ways a CPA can respond to these requests. It is important to help the client understand the applicable professional standards, but simply quoting scripture and sending the client to face the lender alone will probably not solidify the relationship.

The CPA should also engage directly with the lender to (1) help them understand why the request cannot be fulfilled, and (2) to find out if there is alternative documentation that may satisfy the need. In many cases, the lender may accept a client’s articles of incorporation, a current state/ business license, a letter from a professional organization verifying their current selfemployment, a letter from a business that employs their services verifying the type of service and the dates that they were used, or a bond or workers’ compensation insurance policy verifying that they own the business.

The CPA should further advise the client and the lender of the professional services that are available and may be useful for purposes of making a financing decision. The CPA may audit, review or compile financial statements.

A CPA can examine, review or compile pro forma financial information. CPAs are permitted to examine or compile prospective financial information.

CPAs can also perform agreed-upon procedures, provided the resulting report does not provide any assurance on matters related to solvency.

In the many cases where mortgages will be resold to Freddie Mac, lenders may assert that a self-employed borrower will not qualify for a mortgage unless the CPA provides the comfort letter. The CPA may challenge the lender by referencing the fact neither Fannie Mae nor Freddie Mac contain such guidance in their seller guides for residential mortgages.

Historically, Freddie Mac’s Single Family Seller/Servicer Guide (the Guide) provided that in order to assess whether the withdrawal of funds would adversely affect the ability of the business to continue operations, the secondary market sellers could obtain a comfort letter from the accountant stating that, “The Borrower has access to the funds and the withdrawal of the funds for the down payment and closing costs will not have a detrimental effect on the business.” Such guidance regarding comfort letters has never been found in Fannie Mae’s guide.

In 2012, Freddie Mac revised the Guide by deleting the practice of obtaining a comfort letter. Instead the Guide now indicates that the lender should verify the borrower’s business and personal assets and perform a cash flow analysis, both of which must now be contained in their mortgage file. The revision to the Guide places the burden of evaluating the borrower’s solvency solely on the lender or broker.

In an effort to avoid alienating their

client, the CPA may provide a letter confirming that the CPA prepared the applicable income tax return(s). Disclaimers indicating that the tax return was not audited or verified are appropriate. The CPA should also make specific reference to the fact that in preparing the tax return, the CPA does not perform any assessment of creditworthiness and that the lender is solely responsible for such determination.

If after offering these practical solutions the lender continues to press the client for the comfort letter, the CPA should consider that the client’s underlying desire is to have flexibility in obtaining credit in the marketplace.

As an important center of influence in their clients’ lives, the CPA is wellpositioned to help the client find a AZ CPA different lender.

Benjamin Podraza, CPA, is the principal at Podraza CPA, PLLC in Scottsdale. He provides tax and accounting services for individuals and small businesses. He can be reached at ben@ podrazacpa.com or (480) 998-3945.

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Subpoena Questions and Answers

by Nadia Bell and Natalie Vu Facing a subpoena can be a daunting situation. CPA firms are often uncertain about whether or how to comply with a subpoena while complying with a number of rules and regulations that are intended to protect client confidentiality. The following Q&A focuses on understanding the nature of subpoenas and how CPA firms can minimize their professional liability exposures when responding to them.

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What is a subpoena?

A subpoena is usually a formal request for documents and/or appearance, typically requested by an attorney in the course of litigation, or by a government agency in the course of a criminal or civil investigation.

What should I do when I receive a subpoena?

Consider the information you have in your client file and the recent communications you may have had with the client or any parties involved, and then contact your professional liability risk adviser or attorney before responding to the subpoena. In evaluating the appropriate course of action for you to take, your adviser may consider the following questions.

What is the underlying litigation about? Do you have direct or other knowledge about what the issues are in the litigation?

What is the subpoena asking you to do? Is it requesting that you provide testimony, documents, or both? Does the subpoena excuse you from testifying if you provide the documents in advance?

Are you in possession of the information listed? Review the subpoena and consider whether your firm is in possession of the information.

Does the subpoena provide a deadline for complying? If the deadline is quickly approaching, or if the subpoenaing party did not provide sufficient time to comply, have you received any communications to suggest the opposing party will grant an extension of time?

What communications have you had with your client? Have you had any contact with your client, the attorneys on the case, or the governmental agency?

Does that contact suggest whether you are a target or merely a person in possession of information? Is the client taking specific measures to formally object to the subpoena?

Why am I receiving this subpoena?

Typically, an attorney or other party will issue a subpoena because he or she

Sometimes a subpoena may indicate you are a target in the underlying case by seeking information that could implicate you as possibly liable for the matter being investigated or litigated. believes you are in possession of information that will establish facts that are relevant to the underlying case. However, sometimes a subpoena may indicate you are a target in the underlying case by seeking information that could implicate you as possibly liable for the matter being investigated or litigated.

Am I required to comply with a subpoena? Is this subpoena a court order?

If you have received a subpoena that is signed by a judge, you must comply.

However, most subpoenas are preprinted forms that attorneys or other parties fill out to request information.

In these cases, accountants are bound by a number of rules and regulations that are intended to protect clients, including Internal Revenue Code section 7216. Under certain circumstances, these rules and regulations prohibit the accountant from complying with the subpoena, unless the accountant has undertaken specific measures to protect client confidentiality.

Again, contact your risk adviser regarding all subpoenas to evaluate the underlying litigation and the obligation to comply.

Should I report this subpoena to my professional liability agent or carrier?

Yes, regardless of how much or how little information you may have pertaining to the client or former client, it is always important to promptly report the matter.

Should I notify my client if I either receive or comply with a subpoena?

Notification is generally suggested unless the cover letter or subpoena specifically requests that you do not

disclose the subpoena to your client or any third parties.

Am I required to comply with a request for documents without a subpoena?

In civil matters, absent a subpoena, first obtain written consent from the client to produce any documents to the requesting party. However, situations may vary, so it is still best to first consult with your risk adviser prior to providing any documents at all.

In criminal matters, request issuance of a subpoena prior to producing any documents or disclosing any confidential client information. Providing documents to a governmental agency (e.g., the IRS), absent a subpoena, could still potentially take place “as a one-time courtesy,” depending on the nature of the request.

Can I bill my client for the compliance of this subpoena?

Fees are generally suggested to be obtained from the requesting party that issued the subpoena. Reimbursement of fees is often governed by the applicable courts within your specific jurisdiction (state/county) with respect to per page copy costs, hourly fees, or reimbursement for mileage for deposition/testimony.

If, however, there is language in your existing engagement letter between your firm and your client with respect to your firm’s involvement in any investigation, litigation or document requests on the clients’ behalf, you may then be able to bill your client directly, based upon the agreed upon rates within the AZ CPA engagement letter.

Nadia Bell, MAOM, and Natalie Vu, J.D., are claims specialists with CAMICO (www.camico.com).

JULY/AUGUST 2013 y AZ CPA

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New Resource for Management Accountants

Unleashing Innovation

You Can be the Catalyst for Long-Term Success In the late 1950s, the average tenure of a company in the S&P 500® was 61 years. Today it is down to only 18 years. In just the last decade, approximately half of the companies in the Index have been replaced by newcomers such as Google and Facebook. Organizations that are able to foster the creativity needed for innovation, and finance and efficiently implement it across the organization, reap numerous rewards in terms of growth, profitability and marketplace distinction.

In the midst of this uncertain marketplace, a new role for management accountants—manager of innovation—has not only emerged but has also grown in demand. What uniquely positions management accountants as catalysts for the innovation needed for long-term success? Their ability to evaluate the risks associated with specific opportunities, and their multi-faceted role across the organization when helping to transform creative ideas into commercially successful innovations.

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To obtain further insights into how management accountants drive innovation, the American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA) developed a program to explore how successful organizations encourage innovation without compromising risk management. They were also interested in learning more about how management accountants can promote a culture of creativity while providing for sustainable success, reliable data analysis and strategic decision making.

As part of the program, the AICPA and CIMA held roundtable meetings and conferences in the Americas, Asia and Europe where financial leaders from The Coca-Cola Company, Royal Dutch Shell, BT Group and a wide range of other organizations from around the world shared their experiences and opinions. The result is a Chartered Global Management Accountant (CGMA) report titled Managing Innovation: Harnessing the Power of Finance.

The report combines top insights from roundtable and conference participants with AICPA and CIMA research findings, and explains how management accountants are playing a vital role in ensuring that the most innovative ideas are funded and properly executed. It also features real-life examples and anecdotes from a diverse range of senior financial executives and acclaimed thought leaders about how the finance function, working with innovation strategies, can have a positive, measurable, bottom-line impact on the organization. The report concludes with a detailed checklist that management accountants can apply to their own organization’s innovation plans.

Four Steps to Unleashing Innovation Building a culture that comfortably balances creative thought and flexibility as well as it does discipline and control can be a challenge for even the best-managed organizations. The

following are four areas where management accountants can help strike this balance and put an organization on the path to an innovation-powered future.

Create a New Mindset. Support from the top is necessary for the success of the most important initiatives, and shaping an innovation-centric mindset is no exception. More than half of respondents to a recent McKinsey & Company survey cited C-suite support as a driver of innovation success. With demonstrated backing from the leadership team, innovation can more successfully flow within the organization—and spread among supporters and advocates at all levels.

Focus on Flexibility. When evaluating and measuring innovation, financial metrics need to be more flexible than the traditional metrics applied to business operations. Financial processes and metrics should align with different innovation lifecycle stages—more relaxed criteria that gradually tightens as ideas approach implementation—with ideas challenged and refined as necessary at each stage. There also needs to be an understanding that there will likely be detours, and in some cases failures, in the pursuit of innovation.

Although minimizing risk plays an indispensable role in an organization’s daily activities, it can present a challenge when applied to innovation, which includes risk as an inherent part of its process.

organizations recognize that the risk function helps ensure that they have balanced strategies and actions needed for growth, which repositions risk as a value driver. Organizations are then better able to make business decisions that allow innovation to flourish.

Innovation is not easy to unleash and support. It can be disruptive to operations and uncertain in its outcomes, and requires new thinking and a strong appetite for risk. However, it has become a lifeforce for today’s or-

ganizations. Management accountants can guide organizations through the many stages of the innovation process and help them avoid the risks that can undermine long-term success, including what is perhaps the greatest risk of all—the failure to innovate.

Additional Information CGMA designation holders can download a copy of Managing Innovation: Harnessing the Power of Finance at CGMA.org.

AZ CPA

Pave a Path to Profits. The longterm rewards of innovation require that projects conceivably generate some degree of profit—innovation is not an end in itself. With expert advice on costs, financing and resource allocation, among other areas, a more successful progression from idea to implementation can occur. What follows is finance being valued as a contributor to, and not a constraint on, innovation.

Take a Balanced View of Risk.

Although minimizing risk plays an indispensable role in an organization’s daily activities, it can present a challenge when applied to innovation, which includes risk as an inherent part of its process. However, innovative

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Employment Opportunities GOVERNMENTAL/NPO SPECIALISTS — Heinfeld, Meech & Co., P.C., recognized leaders in governmental and non-profit accounting and auditing, seeks ambitious and motivated individuals for all levels of consulting and auditing positions in our Phoenix and Tucson offices. Nationally and locally recognized for our firm culture, we are committed to providing a superior work environment and career opportunities for our staff. Competitive salaries and benefits offered. BS in Accounting required. CPA, CPA candidates and CFEs preferred. Senior and managerial positions require extensive experience in governments/nonprofits. Travel required. E-mail resume and salary requirements to recruit@heinfeldmeech. com.

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In the Black ... Adventures in Accounting

Concept: Heidi Frei Illust.: Jack Gannon

Sunny skies ahead...

The weatherman may not be sued for a bad forecast, but a CPA can be.

Make sure you know how to protect yourself and maintain a good relationship with your clients by reading the article “Comfort Letters: Just say No� on page 15 or contacting your professional liability carrier.

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