AZ CPA June 2013

AZ

CPA JUNE 2013

The Arizona Society of Certified Public Accountants

Financial Planning Fiduciary Roles

Reverse Mortgages Examining the Financial Advisor/CPA Relationship

Tips for Renewing Your CPA License www.ascpa.com

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JUNE 2013 y AZ CPA

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AZ

CPA JUNE 2013

Volume 29 Number 5

Reverse Mortgages: A Financial Planning Tool

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Reverse Home Equity Conversion Mortgages are a unique product designed to help older homeowners live a more financially secure life in the comfort of their home.

by Bill Parker, CPA

Features

Renewing Your CPA License?

Financial Planning Theme Issue 2013 Annual Meeting and Awards Luncheon

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Failed applications are on the rise due to poor CPE reporting by applicants. Find out how you can avoid becoming a statistic.

by Laura Belval, CPA, and John Cotton, CPA

Featuring pictures from the Annual Meeting in May.

CGMA at Work: Employer Voices Fiduciary or No Fiduciary; That is the Question

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In light of new rules and the increased scrutiny by the Dept. of Labor, fiduciary roles are examined.

by John J. Chichester, Jr. CFP, CPA, PFS

Creating a Dream Team — Examining the Financial Advisor-CPA Relationship

Raising the profile and value of management accountants in the eyes of their current, and future, employers.

by Barry Payne

Columns & Departments 13

Creating a mutually beneficial enviroment for advisors and CPAs.

by Brian Hartstein, MSFS, CLU, ChFC

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Chair’s Message by Karen Abraham, CPA

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Focus on Members

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

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In the Black ... Adventures in Accounting

www.ascpa.com

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AZ

CPA

AXIOM

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

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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

ESTATE PLANNING • TAX CONTROVERSIES • QDRO’S

YOUR TRUSTED ADVOCATE IN ALL IRS DISPUTES

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.

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Chair’s Message

by Karen Abraham, CPA

Creating Proactive Financial Planners The completion of my tax return is still burning in my memory as I write this article. My husband and I are convinced that we should just put our money in the mattress to simplify matters. But seriously, that is not an excuse to avoid financial planning. I am assuming that most of the readers of this newsletter are proactive financial planners. I hope we are not like the plumbers whose own homes have leaky pipes!

From budgeting to financing your child’s education, to saving for retirement or for a down payment on a home, to being better prepared to handle emergency situations – financial planning is imperative. No doubt some of us are better at this than others.

We Must Educate Our Children I’ve tried to make my children, now young adults, save and plan wisely. For the most part, I think they will do fine.

My daughter certainly knows that it is better to spend someone else’s money than her own. Some people may suspect that she is a bit spoiled, but she does know the value of a dollar and what it takes to earn the kind of money she would like to spend. For Christmas, I gave her ASCPA member Sharon Lechter’s book, Save Wisely, Spend Happily.

I’m confident this resource will ultimately have a positive influence on her.

One of my favorite sections of the book is the discussion about wants and needs. In today’s society, it is easy to overspend on things that we really don’t need. As a result of recently cleaning out her closet, my daughter now admits she has too many clothes. This makes her

Did you know?

There are an estimated 1.3 million Certified Public Accountants in the United States and about 5,000 of them have the Personal Financial Specialists (PFS) credential.

6 AZ CPA y JUNE 2013

focus on what she really needs. She is now considering a job offer out-of-state after graduating. So the realization she might need to pack and move all her belongings is making her think. I read an article that said most people only wear 20 percent of what is in their closet. It is evident that with many of us, our wants and needs are out of synch.

The ASCPA is Helping I am very encouraged by the Society’s involvement in school programs to help young people understand finances. The program, ThriveTime for Teens, helps high-school students learn to manage their time and money and focuses on the importance of charity and positive decision making. Society staff and volunteers talk about super cool CPA jobs.

They also give out literature to assist the entire family in becoming more financially literate. The ThriveTime Challenge was created by Sharon Lechter.

In addition, the ASCPA has teamed with Big Brothers Big Sisters to teach young people about the importance of financial literacy. Volunteers participate in the annual “Game of Life” event using the Milton Bradley board game with CPAs acting as bankers and coaches.

Choices must be made regarding going to college, buying auto insurance, when to buy a home and other real-life decisions.

Besides young people understanding the importance of financial planning, there are also many adults who could use assistance. Baby boomers either entering or already in retirement, may

be facing expenses that they were not anticipating. This could be the need to assist parents and children, inflationary pressures, tax changes, entitlement program changes or even potential health issues. AARP estimates that 40 percent of baby boomers now plan to work until they die. Employment Benefit Research Institute estimates that 46 percent of Americans have less than $10,000 saved for retirement. Again, planning through the generations is essential.

CPAs Can Help With the Difficult Choices Today’s labyrinth of investment options really makes it imperative to seek professional advice. Investments are not just stocks and bonds anymore.

Investment vehicles like REITS, commodities, futures, private equity and the like, make investing difficult for most. In addition, insurance is a maze for many. Health, life, disability, longterm care and other types of insurance are confusing and difficult to navigate.

Many of the Society’s members have the knowledge and ability to assist their clients with these difficult choices.

Your Chance to Help Want to get involved with financial literacy or other volunteer opportunities?

Join our ASCPA Connect Volunteer Opportunities group or visit www.ascpa. com on the Member Activities/Volunteers page to see all the opportunities available AZ CPA and to sign up today.

Focus on Members The Tucson firm of Hammel, Beal & Lauer, P.C. recently merged with DeVries CPAs of Arizona, P.C. The firm will be named HBL CPAs, P.C. Joe Epps and David Cantor (founder of Forensic Accounting Consulting) announced that Cantor is joining Epps Forensic Consulting as the managing director of Family Law Services. Cantor will oversee all family law accounting cases.

Heinfeld, Meech & Co., P.C. promoted Michael A. Hoerig, CPA, to partner.

Sechler CPA PC Honored as “Best for the World” Sechler CPA PC has been chosen “Best for the World” for creating the most positive social and environmental impact. Sechler CPA PC is one of 67 companies worldwide recognized for this award by the nonprofit B Lab. B Lab releases the annual B Corp Best for the World List to honor the Certified B Corporations that earn an overall score in the top 10 percent based on a company’s impact on its workers, community and the environment.

“I’m absolutely thrilled with this recognition,” said Carolyn Sechler, CPA, founder and CEO. “This is validation that we are walking our talk. We are firmly committed to being a company that is socially conscious and backs that up in every way we can – buying local, living green, and supporting our clients.”

ThriveTime Challenge 2013 The Arizona Society of CPAs is proud to once again be a partner of the ThriveTime Challenge, a statewide initiative that utilizes the awardwinning board game, ThriveTime for Teens, to help high school students learn to manage their money and time, the importance of charity and the power they hold in determining the direction of their lives through positive decision making. ASCPA member volunteers serve as coaches at multiple events around the state. The Challenge culminated April 20 with winners from schools across the state competing in a multiround competition that crowned a winner and two runners-up who received scholarship money for college and the thrill of being the ultimate to thrive. Sharon Lechter and Cindie Hubiak welcomed the students and the following members volunteered at this year’s Thrive Time Challenge: Elizabeth Goff George Grombacher Molly Montgomery Carol Mulloy Rachel Piergallini Debbie Stenman

Patty Adamthwaite Elizabeth Barber Yesenia Barraza Dane Baxter Cynthia Course Joanne Elsen

Register online at www.ascpa.com JUNE 2013 y AZ CPA

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Helping businesses flourish

Blue Cross Blue Shield of Arizona is proud to acknowledge the Arizona Society of CPAs for supporting businesses of all sizes and helping create a climate where business and

89600-13

individuals thrive.

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Auditor General’s Office with Doug Norton

Life Members Doug Norton and Ira Feldman

2013 ASCPA Annual Meeting and Awards Luncheon More than 275 members and guests attended the 2013 ASCPA Annual Meeting and Awards Luncheon on May 14. The program featured guest speaker Greg Anton, past chair of the American Institute of CPAs, and honored Doug Norton and Ira Feldman as Life Members, and also recognized the Excellence in Teaching Award Recipient Leslie Eldenburg, Ph.D. Thanks to our sponsors: Gold—ADP; Silver—CAMICO/Stuckey

Leslie Eldenburg, Excellence in Teaching Award Recepient

Insurance, SCF Arizona and ZUBA Solutions.

Past Chair and Life Member Meeting

Thanks to ADP, our Gold Sponsor, who has been a sponsor of the Annual Meeting for six consecutive years.

JUNE 2013 y AZ CPA

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Fiduciary or No Fiduciary; That is the Question

by John J. Chichester, Jr. CFP®, CPA, PFS In this day of increasing regulation from the Department of Labor (DoL), questions regarding what it means to be a fiduciary, and the controversy surrounding how a financial planner gets compensated, it’s no wonder that business owners are confused when it comes time to choosing an investment professional to help them navigate these mine fields.

With the advent of ERISA Regulation 408(b)(2) as of July 16, 2011 (adopted July 1, 2012), the days of an investment professional adding value to a qualified retirement plan by simply choosing “good” mutual funds are over. If a business owner elects to open up a 401(k) plan in his business, then he has effectively become a sponsor to that plan as it relates to this rule. Plan sponsors need (and are clamoring for) professionals who know these new rules and are ready and able to assist in adhering to them. These new rules have not changed the fiduciary responsibility that a plan sponsor has had with respect to a qualified retirement plan, but what it has done is further highlight them in a way that plan sponsors feel as if they have. A plan sponsor has always had a high degree of fiduciary liability with respect to sponsoring a qualified retirement plan, but ERISA 408(b) (2) has brought this issue to the forefront of plan sponsors’ minds.

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In essence, the rule states that plan sponsors are now required to understand and benchmark all of the fees that are associated with the various service providers that are attached to the plan (e.g., pension administrator, recordkeeper, financial advisor, investment manager, etc.). Since July of last year, most service providers have done an excellent job in helping the plan sponsor comply with this regulation as far as understanding what the fees are; however, most plan sponsors have had little to no guidance as to how they need to go about benchmarking these fees.

In fact, the DoL is considering passing a second version of ERISA 408(b)(2) essentially forcing compliance with the benchmarking aspect of this rule.

Because of all of this confusion, most plan sponsors do not know where to turn to get guidance on this.This is where a financial planner could really step in and not only assist the plan sponsor with understanding these regulations but also act as the quarterback to help coordinate the work of the other service providers on the plan. With more than 300,000 financial advisors out there and only two to three percent that really specialize in servicing 401(k) plans, there is a huge potential for new business from the advisor’s perspective. In addition, this is a great opportunity for plan sponsors to re-evaluate whether or not their current financial advisor is capable in assisting them in adhering to these new rules.

So, how does a plan sponsor evaluate their current advisor’s readiness to assist

in adhering to these new regulations?

Simple. They ask. If the current advisor has not already had this conversation with her current clients, it would probably be safe to say that she is either not truly aware of the ramifications of these new rules, or she does not feel that this is her responsibility. The ultimate responsibility for adhering to this rule is that of the plan sponsor. With that said, though, most plan sponsors will look to their financial advisor for guidance on this and any other aspects associated with the administration of their 401(k) plan. Because of this, I predict that there will be a great shift in advisors as plan sponsors become more cognizant of these rules and the liabilities associated with them. This has already been the case in the larger plan market (e.g., greater than 1,000 employees). Most of these plans have an investment committee that is charged with making many of the decisions surrounding the administration of a 401(k) plan.

Because of this, they are acutely aware of their liability, and thus, have begun to undertake a more rigorous screening process when it comes to choosing an investment advisor to the plan.

What are the types of criteria that plan sponsors should be looking at when choosing an investment advisor to the plan? One of the most critical is whether or not that professional is naming himself as a fiduciary to the plans that he serves. Many times, financial advisors are acting as a fiduciary and they are not even aware of this fact. If they help select the funds made available to plan participants, then they are technically acting in a fiduciary capacity to that plan. In other words, they have the same liability as a fiduciary, but they simply have not been named as a co-fiduciary to the plan. Therefore, if an advisor is already accepting this liability (either knowingly or not), it would make sense for a plan sponsor to only deal with those advisors that are willing to name themselves as fiduciaries to the plans that they serve. A financial advisor can serve in either a 3(21) or a 3(38) fiduciary capacity. The needs and desires of the plan sponsor typically dictate the

specific arrangement, as determined by how much risk the plan sponsor wants to assume.

Under Section 3(21), if an advisor exercises any authority or control over the management of the plan or the management or disposition of its assets; if he renders investment advice for a fee (or has any authority or responsibility to do so); or if he has any discretionary responsibility in the administration of the plan, then he would be operating as a fiduciary. This will limit the fiduciary responsibility of the plan sponsor, but it will never eliminate it. The plan sponsor still has the ultimate responsibility to carry out its fiduciary duties. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plan’s investment menus. If this is the case, then a 3(21) fiduciary arrangement might be most beneficial for this situation.

Under Section 3(38), an “investment manager” is deemed to be a fiduciary due to his responsibility to manage the plan’s assets. ERISA states that a plan sponsor can delegate the responsibility of selecting, monitoring, and replacing investments to a 3(38) investment manager. This is the highest form of

fiduciary that can be sought by a plan sponsor. Again, the liability here is essentially avoided in that the investment manager has agreed to take on the responsibility of all investment decisions.

For those plan sponsors that want to shift the fiduciary responsibilities to a third party due to their lack of expertise and fear of exposure to liability, then a 3(38) fiduciary arrangement would probably fit best in this situation.

Both 3(21) and 3(38) advisors accept fiduciary responsibility and have a duty to serve in the interest of the plan participants under the “prudent man” standard of care. Under these rules, a fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity” would act. This rule is derived from the common law of trusts. This is an objective standard based upon how a person with experience and knowledge of a certain area would act in a given situation. If a fiduciary lacks the expertise for a certain area, then the fiduciary must obtain expert help.

Below is a chart outlining some of the duties that an advisor might perform as either a 3(21) or 3(38) fiduciary.

Duties of 3(21) and 3(38) Fiduciaries 3 (21) 3(38) State in writing co-fiduciary State in writing co-fiduciary status status Assists in drafting IPS Drafts IPS Helps design intial fund menu Builds initial fund menu Provides monitoring Monitors menu Recommends changes Makes changes Recommends mapping Determines mapping strategies strategies Provides documentation Provides documentation

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It should be noted that while plan sponsors can hire outside investment professionals to make investment decisions for the plan, plan sponsors still retain the responsibility to select and monitor the advisor, regardless of the fiduciary’s status. In doing so, they should consider the financial advisor’s experience, skill, and level of service before hiring them. In addition, they should take into account the advisor’s willingness to take on the fiduciary liability and act as a named fiduciary to the plan. Most large plan sponsors are wise to the difference between those advisors who are willing to act as a fiduciary and those who are not and are looking for every opportunity to minimize their legal liability. Because of this, those advisors who are unwilling or unable to take on this responsibility are finding that they are either losing their existing business or failing to win new business to other advisors who will act as a fiduciary.

In light of these new rules and the increased scrutiny by the DoL regarding

It should be noted that while plan sponsors can hire outside investment professionals to make investment decisions for the plan, plan sponsors still retain the responsibility to select and monitor the advisor, regardless of the fiduciary’s status.

plan compliance, it is incredibly important that plan sponsors adequately evaluate and vet all of the investment advisors associated with their respective retirement plans. It is important that those considered are willing to serve as a fiduciary (and put it in writing) and are dedicated retirement plan specialists with the proper experience, qualifications, and training to help keep plan sponsors out of trouble. In my opinion, the investment advisor is hired for two reasons: To provide quality education so plan sponsors can make informed decisions, and to keep the plan sponsor out of trouble. Remember: Anyone can say that they will act as a fiduciary, but the DoL will determine a fiduciary by

his or her actions, not necessarily by the AZ CPA title that they use.

John Chichester, CFP®, CPA, PFS, is a retirement plan specialist who specializes in ensuring that plan sponsors understand their responsibilities and are given the tools needed to make good decisions. He is a Registered Representative offering securities through First Allied Securities, Inc., a Registered Broker/Dealer and member FINRA/SIPC, and an Investment Advisor Representative offering services through Hermening Advisory Services LLC and First Allied Advisory Services, Inc. He can be reached at john@chichesterfinancial. com or (602) 283-2793.

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BERATUNG 12 AZ CPA y JUNE 2013

Creating a Dream Team

Examining the Financial Advisor—CPA Relationship

by Brian Hartstein, MSFS, CLU, ChFC I was speaking to a large group of CPAs recently and I asked them how many had ever heard of a report from the Journal of Accountancy (December 2011) called CPA Horizons 2025: A Road Map for the Future. Less than 10 percent raised their hands. Then I asked how many had ever read an article from the Journal of Accountancy (May 2012) by Lindsey Ferguson titled “Gaining (from) your Clients’ Trust.” Again, less than10 percent of the audience raised their hands. I found these reactions both illuminating and shocking as these two publications concisely signal the dynamic shift in not only the CPA-client relationship, but the CPA-financial advisor relationship as well.

JUNE 2013 y AZ CPA

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CPAs have long been sought after as Centers of Influence (COI) by members of the financial services profession for many years. The two publications I mentioned above outline the groundwork that has been laid for a new era in regard to CPAs as COIs. Those in the vanguard of the accounting profession now strive toward a new goal of becoming the most “Trusted Business Advisor” of their clients. Concurrently, those financial advisors who wish to work with them must evolve in their thinking and processes or be left far behind. Lindsey Ferguson’s article, in particular, explores in depth the way CPAs will need to be engaged as COIs in the future.

Currently there are many independent programs, such as Perfect Client, Winningwithcpas and CPA Squared, offered to those in the financial services industry that are focused on educating and training financial advisors who want to work with accounting professionals. Similar programs have been offered for many years by insurance and financial services organizations, such as CPA Advantage from National Life Group, for advisors and agents as well. I have spoken with several of the leaders of these companies as well as the attendees to get a feel for the main tenets of their approaches and the benefits of these programs. Each has a unique methodology and deliverables in which they engage and embrace the CPA as a COI; however, there are distinct areas in common. In compiling my data, I find that three primary (and seemingly most desirable) concepts stand out and illuminate the future of the relationship between the financial advisor and the CPA. The first and foremost is that the CPA is now the “client” not the end user.

In nurturing the relationship in this manner, it is essential that the advisor build value, trust, and treat the CPA as their client and partner. The end user is not engaged without the CPA directly involved. Additionally, the solutions to specific planning issues and problems are initially presented to the CPA, not the end user, so they can make the

presentations and recommendations, if desired. This puts the CPA in an entirely different position and helps to solidify them, and not the financial advisor, as the end user’s most “Trusted Business Advisor.” In addition, the financial advisor is backed by a team of experts in a variety of topical areas, ranging from specialized qualified and non-qualified planning to asset management and protection, and gives the CPA full access with the advisor at the hub. Giving the CPA the ability to deliver a wide range of specialized solutions and services to their client base, enhance their value and relationships with their clients, and helping to differentiate themselves from competitors in their industry is critical.

This leads into the second theme which is how financial advisors must deliver value to the CPA by not only providing the best team and resources, but also creating organic growth of their practice from within via their best clients. In the past, the CPA might refer a client directly to a financial advisor.

If the financial advisor was successful, the client might, for example while on the golf course, say to their friend, “You need to see this financial advisor as he/ she really helped me.” There is no value created for the CPA in this scenario, nor is there any organic growth. The endorsement by the client to his friend possibly creates another client for the financial advisor, not the CPA, and at worst, if the work done for the client is not satisfactory, reflects badly upon the CPA. With the new paradigm of the CPA as the trusted business advisor, the financial advisor’s role shifts to the “hub” of a team of top-notch professionals and resources. The CPA has the ability, if desired, to make the initial presentation and recommendations to their client. Nothing is done or accomplished without the CPA directly or indirectly involved. In the scenario above, now the client on the golf course says to their friend “you really need to see my CPA as he/she has the expertise and team of top-notch professionals that provided the solutions to my problems.” The CPA now gains that referral and truly builds

their practice via organic growth from within. Real value is created and a true, mutually satisfying relationship is built and fostered between the CPA and the financial advisor on a “win-win” basis.

Finally, the financial advisor must focus on fewer, yet deeper and more meaningful relationships, with CPAs. Historically, it has always seemed that the ultimate goal of the financial advisor was to engage and work with as many CPAs as possible. Concurrently, the financial advisor in most cases did not fully bring an expert team of professionals to the relationship but relied solely upon his or her own skill set in one or perhaps multiple practice areas. Thus, it was left to the CPA to fully construct their own comprehensive team in which they may or may not have had the time or resources to assemble, vet, and oversee quality control.

In order to thrive in this new environment, less becomes more. Initiating and developing perhaps only 3-4 new relationships per year, depending on the size of the firms involved, is desired.

A more comprehensive approach of providing expertise and resources to the CPA, which they possibly could not have obtained nor had access, all while delivering value and building trust is at a premium. The end goal is to enable the CPA to cement their role as the most trusted business advisor and expand their practice by offering on a continual, not periodic, basis high-end comprehensive support and solutions.

Focusing more time and resources on fewer, yet more powerful, relationships is crucial and a key to success.

According to Anthony Lombardi, founder and Chairman of Perfect Client, “What CPAs are desperately searching for and what their best clients are expecting and demanding is a model that an entire industry is anxiously hoping to find. This is the true ‘Collaborative Model!’ One that delivers on the promise the CPAs are making to their best clients and transforms the existing CPA practice in to a CPA firm of the future. Anything less will continue to put their practice, their best clients, and their quality of

life at risk.” CPAs and those advisors that work with them who have a keen understanding of the above concepts will be rewarded with real growth, new revenue streams, and a rock-solid position in the future marketplace. AZ CPA Brian D. Hartstein, MSFS, CLU, ChFC, serves as CEO and principal of Economic Concepts, Inc. in Scottsdale.

He concentrates primarily on working with CPAs, financial advisors, success-

ful business-owners and affluent clients in the qualified and non-qualified plan markets, estate planning and financial and investment planning. He is currently on the advisory board of the Phoenix Tax Workshop, a member of the Society of Financial Service Professionals, a member of the Arizona Business Leadership Association, and served as president of the Financial Planning Association of Greater Phoenix. He can be reached at brianh@ecico.com.

Highlights of Board of Directors’ April Meeting Among other actions at its April 24, 2013 meeting, the ASCPA Board of Directors reviewed the following: Consent Agenda The consent agenda, which included the board minutes, financial statements, 2013-2014 budgets for the Foundation and Society, net assets designation and donation to the Foundation, was approved.

The following guests provided updates • Don Henninger, Publisher of the Phoenix Business Journal, dialogued with the board about the Arizona business community and CPA contributions.

• John Phelps, CEO/Executive Director of the State Bar of Arizona, provided an update on the State Bar of Arizona activities.

• Randy Fletchall, past AICPA chair, introduced the Pathway Commission’s report. The report provides seven recommendations for charting a national strategy for the next generation of accountants. Randy encouraged board members to get involved.

A Day in the Life

Board members appreciated hearing from fellow board member George Raysik, regional CFO for Penske Automotive Group, on the challenges and joys he experiences in his life and job.

Year-end Wrap-Up

Outgoing board members Corrine Wilson, Mark Anderson, Elva Vivas and Craig Robb (in writing) shared thoughts about their time on the board.

Other Business

No other business was conducted.

If you have questions or would like additional information, please contact Cindie Hubiak at (602) 324-2888; AZ toll free at (888) 237-0700, Ext. 203; or chubiak@ascpa.com.

JUNE 2013 y AZ CPA

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Reverse Mortgages:

A Financial Planning Tool

by Bill Parker, CPA

Reverse Mortgages (“Home Equity Conversion Mortgages” or HECMs) are a unique mortgage product designed to help older homeowners live a more financially secure life. With 10,000 people turning 62 every day, it behooves us and our clients to know more about them: If not for our sake, then maybe our parents’ sake. Let’s delve into what a HECM is; the costs involved; and, when they should be used or not.

History HECMs were introduced in the 1970s to meet the needs of elderly homeowners who did not have enough income to do what they wanted and were not worried about passing a debt-free home to their heirs. None of these products lasted, however, as the sponsors were unknown, the documentation was complicated, and the elderly feared losing their homes.

The lack of consumer protections reinforced those fears.

FHA got involved in 1988, with new borrower protections to ease the fears. Lenders also liked it because FHA assumed most of the risk. HECMs reached their peak in 2009 at 115,000, but the impact of the Great Recession dropped that to 78,000 in 2012. Currently, 580,000 are in place, representing $136 billion in home equity. Senior citizens have $3.2 trillion in home equity (down from $4 trillion in 2006; up $50 billion in 4Q 2012), so the

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role of HECMs in financial planning will only increase. HECMs can be used to refinance an existing home or help purchase a new home.

Qualifications All borrowers on the loan must be 62 or older, and the home must be their primary residence. The home’s value, the age of the youngest borrower, and the interest rate used, determine the amount of funds available, with a maximum loan amount of $625,500.

The homeowners must continue to pay the property taxes, homeowners insurance, any HOA dues, and maintenance of the property. Neither income or credit is currently used in determining borrower qualification (HUD is reviewing these rules). Any current mortgages

or liens must be paid off at closing. If there are structural defects, the borrowers must complete the repairs within six months of closing. In addition, the borrowers must participate in a counseling session with a HUD-approved administrator.

“In the future, it is

Costs The upfront costs are probably the biggest reason people have shied away from HECMs. HUD requires the “Total Annual Loan Cost” be presented to applicants as part of the counseling. The costs include many of the same fees as a regular mortgage—title company, appraisal, and origination fee (dictated by HUD at 2 percent of first $200,000 of value plus 1 percent of remaining value, with a $2,500 minimum and $6,000 maximum). The origination fee can be reduced by lenders, usually in exchange for higher interest rates.

Other upfront fees include mortgage insurance (MI) and servicing fee. The Monthly Adjustable Standard HECM comes with an Upfront Mortgage Insurance Premium (UFMIP) of 2.0 percent of the home’s value and annual MI of 1.25 percent (up from .5 percent in 2009). To counter this high upfront cost, HUD introduced the “HECM Saver” (Fixed or Monthly Adjustable) in October 2010. It comes with an UFMIP of only .01 percent ($400,000 home value = $40.00 vs. $8,000!), but charges a higher interest rate, reducing the amount available to the borrowers by 10-18 percent, depending on age.

The Service Fee covers customer service; tracking the loan balance, payment of taxes and insurance, and annual certification of the occupancy status; and, the final disposition of funds. Again, some lenders will reduce or waive this fee, usually in exchange for an increased rate.

the entire retirement

HECM Issues When one spouse is under 62, unless they do not occupy or have an interest in the property, an HECM should be deferred. Borrowers were being advised to take the younger spouse off title and just use the older spouse. That is caus-

likely that tapping home equity will be viewed as part of planning process.” ing grave problems when the borrower dies, forcing the surviving spouse to sell the property or pay it off. HUD now requires all people on the deed and non-owner spouses to be counseled.

If there is a lower cost or interest rate alternative, such as a HELOC, with affordable payments, that might be a better alternative.

If the homeowners expect to move in a few years, the HECM will have to be repaid just when their finances may be tight.

Do not use a HECM unless the borrowers have a substantial nest egg to draw upon to continue to pay taxes, insurance premiums and maintenance of the home.

Borrowers should avoid an HECM to meet basic living needs, as the money can run out. It is best to put off the HECM until as late in life as possible.

It should not be used to purchase other financial products. In fact, the Housing and Economic Recovery Act of 2008 forbids requiring the purchase of any financial product with HECM proceeds, and forbids originators from having any financial interest in selling any other financial products.

HECM Benefits While borrowers can use the proceeds for anything they like, the main benefit of an HECM is there are no monthly payments, as the equity in the home funds the mortgage. In a 2006 AARP study, 19 percent of HECMs were used to pay off the current mortgage, eliminating the mortgage payments.

Another 18 percent were used for home repairs and improvements.

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VA LU E D B Y T H E C O M PA N I E S W E VA LU E

2800 N. Central Ave. Suite 1725 Phoenix, AZ 85004 602-544-3550 www.kotzinvaluation.com

Provided purchase price allocation services in accordance with ASC Topic 805

Provided valuation consulting services in accordance with ASC Topic 718

Provided valuation consulting services

Provided valuation consulting services

Provided valuation consulting services

Provided purchase price allocation services in accordance with ASC Topic 805

Provided purchase price allocation services in accordance with ASC Topic 805

Provided purchase price allocation services in accordance with ASC Topic 805

The homeowners get to stay in their home, with the title in their names, which is a great comfort to them. The HECM comes due upon the death of the last borrower, the home’s sale, or upon vacating the home over a year. The interested parties then have up to a year to work out the repayment.

HECMs are non-recourse loans, so neither the borrowers nor their heirs ever owe more than the home’s value.

There is no prepayment penalty so the loan can be paid off any time. If the home is sold and there is equity, the borrower or heirs get the excess proceeds.

Upon death, the debt can be satisfied by heirs paying the lower of amount due or 95 percent of appraised value.

If the home is sold while the borrowers are alive, with more owed than the home’s value, the mortgage insurance pays any excess.

Barbara Stucki, Ph.D., vice president of the National Council on Aging, stated: “In the future it is likely that tapping home equity will be viewed as part of the entire retirement planning process.” Dr. Stucki conducted a NCA study which supports HECMs as the critical financing vehicle to help seniors afford long-term care services at home.

She states “there is simply no other pot of funds sitting around that is going to solve the long-term care situation.

The idea is to use your home to stay at home.”

If done correctly, an HECM can reduce the withdrawal rate on a homeowner’s retirement portfolio. Clients will be best served by advisors who are knowledgeable in when to use a HECM and when not to, and at least entertain the advanAZ CPA tages offered by an HECM. Bill Parker, CPA, has focused solely on residential and commercial lending since 1999. He is a member of the Financial Planning Steering Committee and can be reached at bparker@GenCorMortgage.com or (480) 525-8496, ext. 743.

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Renewing Your CPA License?

Failed Applications on the Rise Due to Poor CPE Reporting

by Laura Belval, CPA, and John Cotton, CPA Getting a letter from the IRS stating that you are getting audited can cause most people to feel apprehensive, however, we, as licensed CPAs may be subject to a similar letter.

It could be just as disconcerting when receiving a “Via Certified Mail” and “Timely Response Required” letter from the Arizona State Board of Accountancy (“Board”). The letter announces the registrant has been randomly selected to have their continuing professional education (CPE) verified by a group of individuals who audit the coursework. The audit is performed by the Continuing Professional Education Advisory Committee of the Arizona State Board of Accountancy (“Committee”).

Using data from 2008 to 2012, the Committee has performed audits on 555 registrants’ CPE. Of those 555 audits, 488 or 88 percent of those applications presented sufficient evidence with their original audit submissions that shows the CPE was completed. However, the data shows a disturbing trend. For the period 2008 to 2011, 91 percent of the applicants submitted CPE that was supported by the required documentation. In 2012, this number dropped to 79 percent. In 2012, 31 out of 150 applicants failed to provide adequate proof for their CPE with their original audit submission. Of the 31, 10 registrants had their license suspended by the Board. This compares to six total applicants between 2008 and 2011 that failed.

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The purpose of this article is to present the opinions and thoughts of the Committee with regard to the CPE course work submitted with renewal applications every two years. But first let us discuss what those requirements happen to be.

1. The registrant is required to have participated in 80 hours of CPE over a two-year period. Of those 80 hours, 16 hours must be in the field of accounting, audit or taxation. A further 24 hours must be in the fields of business law, management advisory services or additional hours of accounting, auditing or taxation. Another way to describe this is that 50 percent of the CPE must be in core specific subjects.

2. Of those 80 hours, 16 hours must be in a live format. Examples include live classroom, seminar and interactive webinar or webcast formats.

3. Of those 80 hours, four hours must be in the subject of ethics. Of the four hours, one must review the Arizona statutes and administrative rules of the Arizona Board of Accountancy.

Another hour must address the practice of accounting including the American Institute of Certified Public Accountants Professional Code of Conduct.

4. When a registrant submits their renewal application, they are stating, under penalty of perjury, that they have completed all of the CPE requirements and are maintaining the appropriate records documenting those hours. The initial statement is a list of hours that includes the a) sponsoring organization, b) location of the program, c) title or description of the program, and d) dates of the program.

5. Once the CPE has been completed, the registrant must retain the record of attendance for at least three years. The records include: a) course outlines, b) proof of attendance or participation, and c) proof of completion. The purpose of retaining these records is to provide the necessary documentation should the registrant’s renewal application be selected for audit.

After the letter is received by the registrant from the Board announcing their renewal application has been

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Registrants go to great pains to obtain their license so why put it at risk by submitting sloppy work product for the audit of their license renewal? selected for audit, if the registrant is prepared, it should be a snap. The registrant’s response should contain one set of documents (course outline, proof of attendance or participation, and written proof of completion) for each course listed in the renewal application. The Committee has seen renewal application work product that is professional and concise. We have also seen work product that is thrown together in a haphazard way. It is distressing to see sloppy audit submissions from registrants. First, it puts an undue burden on the Board’s staff that admirably assembles the submissions for the Committee’s review. More importantly, the Committee cannot always find the required documentation in the submission, even though it could be there, leading to delays in the completion of the audit process and/or unnecessarily sending registrants to the Board for action. Registrants go to great pains to obtain their license, so why put it at risk by submitting sloppy work product for the audit of their license renewal?

The Arizona statutes and rules provide us specific direction as to the form of the CPE submitted, however the substance is open to interpretation. Two members of the Committee will each re-

view the audit work product and do one of three things: confirm that it meets requirements, conclude that there are deficiencies and revert back to the registrant for further information, or send the registrant’s file directly to the Board for action. If the audit work product is complete, the CPE is accepted. If on the other hand, the audit work product does not include the appropriate documentation, the Committee will provide the registrant one more opportunity to submit the documentation in support of the reported CPE. If the requested documentation is not submitted to the Committee, the registrant is referred to the Board for non-compliance with CPE requirements The Committee will also review the audit work product for proper classification. The course work is reviewed for status as live or self-study as well as categorized properly as audit, accounting, taxation, business, management, ethics or other. The reviewer will make any corrections deemed appropriate for proper classification. These types of corrections may have an impact on the overall determination of acceptance of the submission based on the criteria previously defined.

In conclusion, it is not difficult for a registrant to meet the requirements to retain his or her license. The Committee’s responsibility is to ensure that registrants meet their CPE requirements in an effort to fulfill the Board’s primary duty which is to protect the public from unlawful, incompetent, unqualified or unprofessional certified public accountants through certification, regulation and rehabilitation.

Note: There are a number of other issues and requirements with CPE that are not covered in this article. We suggest you visit the Arizona Board of Accountancy website for further information. Specifics can be found at http://www.azsos.gov/public_services/ AZ CPA Title_04/4-01.htm#Article_4.

Laura Belval, CPA, and John Cotton, CPA,are members of the Arizona Board of Accountancy committee on Continuing Professional Education.

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Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034

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