AZ CPA March April 2014 by ASCPA

CPA MARCH/APRIL 2014

The Arizona Society of Certified Public Accountants

Life Member

Rick Goldenson The Mobile Office

New Partner Strategies Six Solutions to Stop Hackers www.ascpa.com

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MARCH/APRIL 2014 y AZ CPA

CPA

MARCH/APRIL 2014

Volume 30 Number 3

Admitting New Partners — Succession Best Practices

A key part of succession planning is to evaluate how you bring in new partners. by Gary Adamson

Avoidance of a Secured Loan as a Fraudulent Conveyance

Debtors frequently transfer property prior to filing bankruptcy. Find out when this activity is considered to be fraudulent conveyance. by Jeffrey Sumpter, CPA

Features Richard Goldenson, CPA, to Receive Life Member Honor

Rick Goldenson will be recognized as the ASCPA’s newest Life Member at the Annual Meeting in May. by Patty Gannon

Mobile Office Necessities

Technology tips for successfully implementing a mobile office. by Thomas G. Stephens, Jr.

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

4 AZ CPA y MARCH/APRIL 2014

The Hackers are Coming! Six Solutions to Protecting your Information

Find out how you can help protect yourself from increasing data breaches. by Marcus A. Clarke

Columns & Departments 6

Chair’s Message by Karen Abraham, CPA

Focus on Members

Legislative Focus — John C. Todd, II, CPA

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

10 Board of Directors’ Highlights 22 Classifieds

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

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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MARCH/APRIL 2014 y AZ CPA

Chair’s Message

by Karen Abraham, CPA

Highlights of My Term as Chair At a recent Arizona Society of Certified Public Accountants (ASCPA) event honoring Bruce Nordstrom, the topic of being the ASCPA board chair came up. Bruce, being a past ASCPA chairperson, looked at me and said, “Karen, you know the hardest part of being the chair?” I replied, “Yes! Writing the monthly column!” During the last year, I’ve come to appreciate and respect the work of the ASCPA chairperson. This includes not only the work that goes into the newsletter, but the effort that is put forth for all duties required of the chairperson and the Board of Directors. As others have said before me, I get a lot more out of volunteering than I put in. I am very grateful to have been your chairperson for the past year. The success of our Society is in large part due to the diligent work and service that is provided by Cindie Hubiak, ASCPA CEO, and her team. They have been a pleasure to work with and strive to support the chairperson in any way possible. The second ingredient to our success is the many volunteers who help in various capacities. I want to thank everyone for their efforts, including the ASCPA Foundation members, Section Committee Chairs, Chapter Presidents, members who help with the PAC/Legislative endeavors, Conference Planning Committees and those

who help by sharing their knowledge either by speaking, writing or helping others on our Connect site. Your support makes the work much easier, and I would encourage everyone to volunteer for activities sponsored by the Society. It is fun and you get a chance to meet other CPAs. Despite what people think, we are not the most boring people on the planet! One of the highlights of my term as chair was traveling throughout Arizona with Cindie to meet with the chapter members in Flagstaff, Tucson, Prescott and Yuma. It’s always interesting to hear what our regional chapters are thinking about and what problems they are encountering. Cindie always provides a valuable update on what is going on within the Society office and what is happening in the legislature that could potentially impact the profession. The advocacy work done by the Society is most impressive. At the last board meeting, our lobby team at DeMenna & Associates pointed out that many

Did you Know? The U.S. Bureau of Labor Statistics reported that volunteerism in the United States declined, with about 64.5 million people volunteering at some point doing the fiscal year that ended Sep. 2012. About 42 percent of people volunteered because they were asked. So, I’m asking you to think about volunteering and assisting with the Society or with other endeavors that may interest you. Remember, you will likely get more out of it than you put in! 6 AZ CPA y MARCH/APRIL 2014

times it is more important to prevent some legislation than to pass legislation. Our busy day-to-day lives do not allow us to always follow what is happening in the legislature that could affect how we conduct business. We should all be grateful for the vigilance displayed by the Society in protecting our interests. Another highlight for me was to see the workings of the American Institute of Certified Public Accountants (AICPA). They too work behind the scenes to promote the profession and to make sure we are properly represented at both the federal and state level. The easiest column for me to write was for the legislative issue when I wrote about my trip to Capitol Hill. I gained a much better appreciation of our government and the effort that is made by each State Society and the AICPA to make sure we have an active voice in the legislative process. Your continued support of the Society PAC is much appreciated and helps us be heard. Finally, it has been my pleasure to meet so many of the members. We are only as strong as our membership, so I thank you for your continued support and membership in the Society. AZ CPA

Focus on Members Karin M. Smith, MBA, SFO, was promoted to partner at Heinfeld, Meech & Co., P.C. The firm also recently announced the following promotions: Kara Jungbluth, CPA, and James Shankland to senior associate and Katlin M. Bryant, CPA, Joseph Wagner, and Jordan King to staff associate II. Matthew Gene Walker, CPA, has been promoted to senior client associate at Miller Russell Associates. Joseph Losada, CPA, was elected chairman of the board of directors of Valle del Sol. Craig Rudolphy, CPA, is now an accountant at The Town of Fountain Hills. Grant Thornton partners and principals elected Brad Preber, CPA, to their Partnership Board. Wallace, Plese+ Dreher promoted J. Douglas Bishop, CPA, to partner.

Karpinski, Berry & Company, PLC and Mitchell R. Adler CPA have merged. The combined firms are now Karpinski, Berry, Adler & Company, PLC. Rik Klotzbach, CPA, Trudy Clark, Owen Jennings and Christine Sapp were promoted to accountant II at REDW LLC. Gray and Terkelsen, PLLC, in Yuma has changed its name to Terkelsen, Smith, Tyree & Snell, PLC. Vicki Rios, CPA, was hired as assistant finance director at the City of Glendale. Ryan Rold, CPA, is now CBIZ managing director and MHM shareholder, and Erich Pflumm, CPA, is a director at CBIZ and Mayer Hoffman McCann PC.

Newsworthy CPAs “The discovery process in federal litigation is a license for legal blackmail. As a practicing CPA for 44 years, I repeatedly saw my clients, although innocent of charges, settle Federal lawsuits to avoid discovery costs and disruptions.” —Dennis Mitchem, CPA, quoted in the Wall Street Journal, online edition, regarding former Sen. Jon Kyl’s suggestions for the Federal AdvisoryCommittee on Civil Rules. Jeff A. Buehrle, VP & CFO of Banner Health Arizona East Region, was quoted in Market Watch for the Wall Street Journal.

In Memoriam Thomas R. Johnson

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Legislative Focus - John C. Todd, II, CPA “I would like to thank the Arizona Society of CPAs for their efforts to eliminate the statutory requirement for mandatory auditor rotation for Arizona charter schools. The requirement was buried in proposed legislation and passed in 2011. When we informed ASCPA President and CEO Cindie Hubiak in July 2011, she immediately went into action and got this reversed in 2012. The ASCPA held meetings with legislators to understand their concerns regarding both fiscal integrity of the charter schools and audit quality. The ASCPA then coordinated meetings between experienced charter school auditors and the Arizona State Board for Charter Schools, resulting in enhanced audit guidelines. These enhancements were

John C. Todd, II, CPA, is president of John C. Todd II, P.C. and is

sufficient to satisfy the legislators, who then removed the auditor

a member of the Arizona State

rotation requirement from statute.

Board of Accountancy Law Review Committee.

We never could have accomplished this without the efforts of the ASCPA. Thanks for all you do for our profession!” — John C. Todd, II

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A Dash of SALT

The Annual Deadline for Filing Real Property Tax Appeals with the County Assessor is Coming Soon This month’s state and local tax (SALT) column explains Arizona’s annual administrative appeals process for challenging the values and classifications assigned to real property by county assessors.

How Property Taxes are Calculated Savvy CPAs know that property tax bills are calculated by multiplying: (1) The value of the property × (2) The assessment ratio applicable to that particular type of property × (3) The local tax rate. Most real property is valued by county assessors using mass appraisal techniques, which often result in values that differ from the value that a qualified appraiser would assign to a particular property if the appraiser focused on that particular property. Thus, property owners should review the value assigned to their property each year. Assessment ratios are dictated by statute according to the classification assigned to the property. Classifications for most real property are assigned by county assessors based on how the property is used. For example, for tax year 2014, most commercial and industrial properties will be subject to tax on 19% of their value while most agricultural properties will be subject to tax on 16% of their value and most residential properties will be subject to tax on 10% of their value. So, it is important for property owners to make sure that their property is properly classified based on its actual use, and to consider whether it may benefit from a blended assessment ratio if it is a mixed-use property.

Tax rates vary from county to county, from school district to school district, and based on the rates set by other local and special districts that the property may be located in, like fire districts, library districts, flood control districts, etc. So, other than deciding where they want to purchase property, voting for local government officials who have similar fiscal priorities, and encouraging local officials to adopt budgets that they agree with, individual property owners do not have much control over tax rates.

Most Appeals for Tax Year 2015 Must be Filed in 2014 Of the three factors that determine one’s property tax bill, the only two factors that property owners can appeal for any particular property are the value and classification assigned to the property. However, property owners who wait until they receive their tax bill to consider filing an appeal generally miss out because most property tax appeals for tax year 2015 must be filed this year, in 2014.

Arizona’s Property Tax Calendar and Appeal Deadlines Here’s how Arizona’s property tax calendar works: every year, on or before March 1, county assessors are required to notify property owners of the value that they assigned to their property for the following tax year. Thus, most prop-

erty owners already received valuation notices for tax year 2015. Then, the first half payment for 2015 taxes is not due until October 1, 2015, which gives property owners time to appeal the value assigned to their property before they have to pay taxes based on that value. (But, if the appeal is not complete before the taxes are due, the owner still needs to pay the taxes as assessed before they become delinquent or their appeal must be dismissed.) Property owners who believe that the value assigned to their property is excessive, or that their property is not classified properly, may file an appeal with the assessor’s office within sixty (60) days from the time that the assessor mailed the notice of valuation. Then, property owners who are not satisfied with the result of their appeal to the assessor’s office may appeal to the State Board of Equalization (for properties located in Maricopa or Pima County) or to their local County Board of Equalization (for properties located in all other counties in Arizona) within twenty-five (25) days from the time that the assessor’s decision was mailed. Property owners who either did not file an appeal with the assessor’s office, or who were not satisfied with the results of their appeal to the assessor’s office and/or to the State or

MARCH/APRIL 2014 y AZ CPA

Highlights of Board of Directors’ January Meeting Among other actions at its January 22, 2014 meeting, the ASCPA Board of Directors reviewed the following: Consent Agenda The consent agenda, which included the board minutes, ASCPA financial statements and the 2014-2015 Foundation budget, was approved. 2014-2016 Strategic Plan and 2014-2015 Strategic Measurements The Board approved the plan and measurements. ASCPA Investment Policy The Board approved the policy. Nominating Committee Anita Baker presented the Nominating Committee’s report to the Board. Legislative/Advocacy Update Kevin and Ryan DeMenna, Society lobbyists, updated the Board on several items, including implications related to the increase in political contribution limits and a possible opportunity for the Society to participate in the Department of Revenue sunset review process. They also spoke about some of the issues that haven’t materialized, partially due to our advocacy efforts, including a tax on professional services and private investigator licensing for CPAs. Strategic Plan Review Cindie updated the Board on several items, including that the Arizona Tax Guide is available and selling well, Steve J. Rodis has agreed to take over as chair of the Phoenix Tax Workshop and that several members participated in Ambassador training sponsored by the AICPA.

County Board of Equalization, may appeal to the Arizona Tax Court. Those who did appeal to the assessor’s office must appeal to the Arizona Tax Court within sixty (60) days from the time that the assessor’s office or the State Board of Equalization mailed their decision. Property owners who did not appeal to the assessor’s office, and those who are not satisfied with the value determined by the County Board of Equalization, have until December 15, 2014 to appeal the value of their property for tax year 2015 directly to the Arizona Tax Court. (In addition, sometimes new property owners also have additional rights and extended deadlines to appeal the value and/or classification assigned to their property.) Practice tip! – Be your client’s hero by reminding them to consider appealing the value and/or classification of their AZ CPA property before it is too late. James G. Busby, Jr. is a state and local tax attorney and CPA 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. A Dash of SALT ™ is provided for educational and informational purposes only and does not constitute legal counseling or other professional services. If you have any questions, please contact the author. He can be reached at (602) 322-4146 or jbusby@ cavanaghlaw.com.

Day in the Life Adam Miller, Diane Groover and Debra Johnson shared with board members a view of the challenges and joys they experience in their lives and jobs on a day-to-day basis. 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.

Searching for something? Look for it on Connect!

Find answers to your questions by searching Discussions ...or post your own question. Connect at www.ascpa.com

10 AZ CPA y MARCH/APRIL 2014

Richard Goldenson, CPA, to Receive Life Member Honor by Patty Gannon

“I was expecting Ashton Kutcher to jump out and say I was being ‘punked,’” said Rick Goldenson, with his typical self-effacing humor, when he got the call learning of his honor as a Life Member in the ASCPA. “It is a wonderful and unexpected honor,” says Goldenson, who is managing principal of CliftonLarsonAllen and leads the Arizona region that includes offices in Phoenix and Tucson. Goldenson says he always wanted to be an accountant. He began his career with CliftonLarsonAllen (formerly Clifton Gunderson) almost three decades ago, working in their Peoria and Macomb, Illinois offices for 15 years before transferring to Arizona. “When I first moved to the Tucson office, we had only 18 people working there. The firm now has 45 people in Tucson and 118 in Phoenix. Goldenson has helped to expand the firm, holding several leadership positions and received the Clifton Gunderson, J. Curt Mingle Outstanding Principal Award in 2000. And even though he worked in the profession for quite a while, his involvement with the Society is relatively recent, becoming involved on the ASCPA Board of Directors in 2004 and chairing the Board in 2009, and serving as a council member of

MARCH/APRIL 2014 y AZ CPA

Rick enthusiastically supports our profession as a leader of the ASCPA and AICPA, and also to his fellow practitioners. Time and time again, I have called on Rick with a business challenge. Rick readily offers his wisdom and guidance, sharing his management acumen, technical expertise, industry contacts and his wonderful wit! —Peggy Ullmann,CPA Ullmann & Co., P.C.

Rick is the perfect example of how CPAs should get involved with their professional organizations. I have had the privilege to know and work with Rick for many years. He always approaches all that he does with style and integrity. Rick’s commitment to the profession was demonstrated again when he encouraged our firm to increase our participation with Society-sponsored causes and events and then he successfully repeated this approach with multiple firms. We are all very proud of Rick and delighted to have him as a friend. Rick is a classic case of nice people finishing first and we congratulate him on his recognition as an ASCPA Life Member. —Mark Eberle, CPA Henry & Horne, LLP

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the AICPA from 2009-2011. “I wish I would have known how much fun this was going to be,” says Goldenson. “I would have done it a long time ago!” One of Goldenson’s most outstanding accomplishments for the Society is growing the PAC, even earning him the nickname, “PACman.” “Contributing to the PAC and getting involved in the legislative process, makes sure we have a good working environment here in Arizona,” states Goldenson. “The best way to support something is to get involved,” says Goldenson who jokes that he works best with a “catch and release program” in his PAC fundraising efforts. “I bring them in and then turn them over to Cindie Hubiak to work her magic.” “Rick has taken fundraising for the ASCPA PAC to a new level,” says ASCPA President & CEO Cindie Hubiak. “He made fundraising his particular ‘niche’ and it continues to be a priority for him. We are incredibly grateful for his involvement in this area.” “One of the highlights of my Board involvement was when I got to go to ‘the Hill’ and seeing just what was at stake,” reflects Goldenson. “Even though I’m not a political person per se, I know as a profession we need to take care of ourselves. It sometimes can only

take one firm to ruin the reputation of the whole profession (as in the Madoff case.) We need the ASCPA to help us keep current with all the changes regarding the profession. As a CPA, you have got to stay on your game and be accountable. Your decisions affect the profession.” Goldenson says he enjoyed his work on the Society Board, gaining plenty of friendships along the way, even if they might be friendly competitors in the marketplace. “I am so honored to have great friends and work in a great community. I’ve gotten to meet people I never would have met if I hadn’t gotten involved in volunteering with the Society.” He is active in the community, and was president of the board of the Executive Associates of Greater Phoenix and serves on the NAU Accounting Advisory Board. He is also supportive of the Ronald McDonald House, St. Jude Hospital and Easter Seals. In his free time,Goldenson enjoys playing golf, traveling and spending time with his family, dogs and “grand-dogs.” Goldenson enjoys being a part of the CPA profession and believes that every day is a different adventure, which is just perfect for someone who has always wanted to be an accountant. AZ CPA

Join us as we honor Rick Goldenson as a Life Member at the ASCPA Annual Meeting If you like Ted Talks, then you are sure to enjoy what we have in store for you at the Annual Meeting. In addition to honoring our Life Member, we will offer a different kind of program — Ignite CPAs — a fastpaced event where six CPA speakers

CPAs Annual Meeting May 14

will present a topic, giving them five minutes of fame. Join us at the Arizona Biltmore Resort on May 14.

Mobile Office Necessities Technology Tips for Successfully Implementing a Mobile Office by Thomas G. Stephens, Jr.

Accountants and other professionals are migrating to mobile offices like never before. Some do it in an effort to cut costs, others do it to provide better client/ customer service, and still others do it for the sake of personal convenience. No matter the reason for moving to a mobile office, to be successful you must first address a few technology necessities, as outlined below (Note that other issues such as policies and procedures, workflow, and legal implications of working remotely are also necessary considerations; however, the scope of this article focuses on technology considerations only.) Properly handling these items significantly enhances your chances of success with a mobile office and, conversely, failing to manage these items almost guarantees that you will not be as happy or as productive in a mobile office as you could be.

First Things First â&#x20AC;&#x201D; Define Your Mobile Office

The term mobile office means different things to different people. For some, not maintaining a traditional office and working exclusively from home constitutes the mobile office. For others, working from the office a portion of the time, working from home another portion of the time, and working at client/customer locations yet another portion of the time constitutes mobility. Before addressing the technology necessities for a successful mobile office, you should consider what â&#x20AC;&#x153;mobile officeâ&#x20AC;? means to you, because the technology required can vary depending upon your definition. For example, if your idea of the mobile office means splitting time between a traditional work environment and a home office, your Internet connection needs are much different from those who will work from many locations, including customer premises. Identifying the Right Hardware for Your Needs

To avoid overly complicating matters, simplicity makes sense in your mobile office. To achieve simplicity, seek to reduce the number of devices and operating systems you work with. For

MARCH/APRIL 2014 y AZ CPA

example, instead of a desktop at your traditional office and a separate laptop for use when away from that location, consider migrating to a “business class” laptop so that you will not have to worry about maintaining multiple devices and so that you will always have access to your data and applications. Examples of “business class” laptops to consider include HP’s ProBook and EliteBook lines, Dell’s Latitude series, and Lenovo’s ThinkPad Edge series. If you believe that a tablet computer such as an iPad could benefit you, instead of purchasing a tablet in addition to your computer, consider looking at the emerging class of “convertible” laptops. Units such as Microsoft’s Surface Pro, Lenovo’s ThinkPad X230t, and Dell’s XPS 12 combine the power of a Windowsbased laptop with the convenience of a tablet. This class of computing device is growing and options in this market continue to expand. While your computer will likely receive the lion’s share of attention, your mobile office will not be complete without other devices. External monitors, printers, and scanners will all likely be components of your hardware environment, so carefully consider which models will work best for you. Additionally, if you will frequently visit client/customer locations, you should likely buy a docking station for your laptop to make it easy to connect to all of your peripheral devices. Software for the Mobile Office

What software titles will you need in your mobile office? The answer is simple – the same ones you need in a traditional office. For most of us, that means Microsoft Office and some form of PDF software such as Adobe Acrobat. If you work in public accounting, that also means – depending on your area of practice – access to tax, write-up, payroll, engagement, practice management and document management systems. If you work outside of public accounting, you may need access to the corporate accounting/ERP system and other specialized software applications.

14 AZ CPA y MARCH/APRIL 2014

When considering software for the mobile office, you may wish to examine Cloud-based solutions, instead of traditional software implementations. Moving to this environment eliminates the need to install the software locally on your computer and provides you with access to your tools of the trade. Additionally, for your Microsoft Office licenses, you should examine obtaining those licenses through a Microsoft Office 365 subscription plan. Depending on the plan you choose, in addition to providing desktop licenses to Microsoft Office that can be installed on up to five computers you use, you also receive Microsofthosted email through Exchange Online, intranet services through SharePoint Online, communications through Lync, and synchronization of data through SkyDrive Pro. Further, many companies will find that the cost of licensing through the Office 365 subscription model to be much less than the traditional models. Consider Communications

Just because you will be working outside of a traditional office does not mean that you will not need to communicate with team members; in fact, the need for communication tools is greater in the mobile office because of the lack of “water cooler” time that we have in a traditional environment. Certainly, cell phones are a major asset in this area, but also carefully consider using tools such as Microsoft’s Lync, Skype, GoToMeeting, and Voice Over Internet Protocol (VOIP) phones to facilitate communications not only with team members, but also with clients/customers. Ensuring Connectivity

In the mobile office, the Internet becomes the backbone of your data network, so ensure that you have reliable, high-speed connectivity. At a minimum, DSL or cable-modem services in the home office are necessary. In addition, consider how you will connect when you are away from a fixed work location. In these instances, you will likely need some sort of cellular data service.

These services can be add-ons to your existing smartphones data plans or can take the form of separate devices commonly known as “MiFi cards.” In either case, monthly fees typically in the $10 to $60 range are necessary to provide true mobile access to the Internet. Further, you can use your cellular data service as a backup to your in-home Internet connection, should that connection become unavailable. Taming the Data Security Threats

Lastly, consider how you will handle security threats, particularly the threat posed by potentially losing a laptop, smartphone or tablet on which you have stored sensitive information. The legal issues related to such a breach are significant, as are the client/customer relations issues. If you are carrying sensitive data on a portable device, ensure that you are using “long-and-strong” passwords on that device. Additionally, consider using a whole-disk encryption utility such as Windows BitLocker or PGP Whole Disk Encryption to provide additional security in the event your laptop is lost or stolen. While no security tool is perfect, using these types of tools, in addition to a healthy dose of common sense, will help to minimize data security threats. Going mobile offers many benefits such as reduced costs, increased productivity, and the ability to serve clients/ customers better. As a mobile worker myself, I can personally attest to these benefits. I also know that simply using a laptop or tablet does not constitute an effective mobile office. Rather, you must address numerous technology issues in order to ensure the success of your mobile office. Once you manage these necessities, you will be well on your way to working effectively in your rendition AZ CPA of the mobile office. Thomas G. Stephens is a shareholder in K2 Enterprises, where he develops and presents continuing professional education programs to accounting, financial, and other business professionals. Contact him at tommy@k2e.com.

Admitting New Partners — Succession Best Practices by Gary Adamson

As we work through the succession and retirement of senior partners in our firms, a lot of us are also reviewing and updating our internal documents and agreements. A key part of the update should be focused around how we bring new partners into the firm to replace the retiring partenrs. There have been changes in valuations and process that we really need to be aware of. Following are some of the best practices.

How Many Partners do you Really Need? More often than not firms are supporting too many partners based on the firm’s revenue. That also usually means that the partners are doing a lot of work that could be done by staff. Take a look at the Rosenberg or IPA surveys for average revenue per partner and you will see that the trend is to push more leverage of

the work and to get more done with fewer partners. On top of that, the demographics in our firms today tell us that fewer people than ever want to be an equity partner based on the traditional definition. Although our initial reaction to that reality is “we just don’t have enough of the right people to replace us,” maybe it’s not such a bad thing. With the retirement of some of our senior people, we have an opportunity to look for ways to improve the leverage. Said a little differently, we should be challenging the pyramids in our firms by asking “is there a different way to serve our clients and get the work done” and “do we really need all of these partners”? Too often we’re on auto pilot worrying only about how to fill the holes the way that we have always done it. Now is the time to step back and challenge it.

Do you have a PIT program? Many firms have developed a partnerin-training (PIT) process that they use to evaluate and develop their new partner candidates. It generally runs for a year or two. The candidate is invited to attend partner meetings and other partner interactions, is given goals specific to

MARCH/APRIL 2014 y AZ CPA

Financing the Buy-In The trend in the profession is that ownership percentages are having less and less to do with what a partner’s compensation and retirement payouts will be. It is more about your performance and relative contribution among your partners. the program, is exposed to firm financial and other partner level information, is provided leadership and other education and is mentored through the process by a partner. The purpose is to give both sides the opportunity to observe the other and to make sure that there is a good fit.

Non-Equity or Low Equity Partners One of the ways that some firms are addressing the “how many” question is by using the Non-Equity or Low Equity partner position. It is a spot on the organizational chart that carries with it significant client responsibility and recognition inside and outside the firm as a partner. It stops short of the commitment and compensation of a full equity partner. Some firms will use the position as a stepping stone to the full equity spot. Others will allow an individual to stay in the role indefinitely. There are probably people in your firm right now that fit that spot and would actually be more comfortable there. It opens up other choices and possibilities on the decisions you have to make on equity partners.

Buying In Not too many years ago it wasn’t unusual for new partners to buy in at valuations that included a large goodwill factor on top of a capital account amount. The large numbers really weren’t affordable and firms figured out creative ways to internally finance them (borrow from Peter to pay Paul). Another common practice was purchases of partnership interests outside the firm between partners which produced a lot

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of wheeling and dealing and inconsistencies. The good news is that both of these practices are almost gone. The normal today is that capital transactions for both new and exiting partners are with the firm and controlled by the firm’s partner agreements. Values for buying in are usually based on the firm’s accrual basis balance sheet and the new partner starts out buying only a piece of that. The goodwill value is earned over time by the incoming partner through a vesting process that is often based on years of service and the firm’s normal retirement date.

How Much Capital? “It depends“ is not a good answer but there is really not a rule of thumb for the percentage of equity that the firm sells to the new partner. It depends on the firm and how it approaches a number of things including partner compensation and retirement. We can however give you a few numbers and thoughts. First, the average buy-in for a new partner based on 331 firms in the 2012 Rosenberg survey was $137,000. Second, the trend in the profession is that ownership percentages are having less and less to do with what a partner’s compensation and retirement payouts will be. It is more about your performance and relative contribution among your partners. Capital is becoming more about voting rights and supporting a portion of the firm’s balance sheet. I am seeing the profession move to capital accounts that are similar for all partners except for new partners where they may start out at some smaller level and move up to “full equity” status over time.

Recognizing that most of our younger associates are not able to write a check for $137,000, firms must figure out a way to assist with financing it for the new partner. The normal route is that the firm will withhold the amount over some period of time from future profit distributions to the new partner. There is another approach used by some firms that I happen to like a lot. It is using outside financing rather than inside. Basically the firm guarantees a loan for the new partner at a bank. Normally the firm can help the new partner receive attractive terms. The new partner borrows the $137,000 and contributes it to the firm in exchange for the partnership interest. The firm will make sure that the new partner receives a compensation increase that is at least enough to cover the new debt service. Here is why I like it. The firm gets the new capital dollars which most firms can certainly use. Yes it comes with a guarantee but it is off — balance sheet debt. More important, there is something very personal about the new partner borrowing that $137,000 from a bank. It is pretty sobering and it brings a certain level of seriousness to the transaction that you won’t get otherwise. On a personal note, I will never forget when I borrowed the money to make my first capital contribution as a new partner. It was a huge deal to me. Some of you may remember when the prime rate was 22 percent back in the 1980s, which made it even more interesting! Regardless of whether you change anything or not, the Baby Boomer succession wave presents an opportunity to review and challenge how we bring new partners into our firms. 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) 4880691 or gadamson@adamsonadvisory. com. For more about Adamson Advisory, visit www.adamsonadvisory.com or follow the company at www.adamsonadvisory. com/blog.

Avoidance of a Secured Loan as a Fraudulent Conveyance by Jeffrey Sumpter, CPA Debtors frequently transfer property prior to filing for bankruptcy protection that diminishes their bankruptcy estate and unsecured creditors’ ability to recover on unpaid claims. Depending on the circumstances, this may be considered to be a fraudulent conveyance, which would allow the transfer to be avoided and the property recovered for the benefit of the debtor’s estate. Bankruptcy Code §548 details the requirements for a transfer to be considered fraudulent and differentiates between actual fraud, where the transfer is done intentionally to defraud creditors and/or thwart collection efforts; and constructive fraud, where fraud is determined by the circumstances surrounding the transfer. In the latter instance, the transfer can be recovered even if the debtor’s actions were not deliberately dishonest. The following example addresses the elements of constructive fraud in the context of the avoidance of a secured loan as a fraudulent conveyance under Bankruptcy Code §548.

Debtor Management Company (the “Debtor”) started doing business during 2001. Dr. A and his wife, Mrs. A, have been the owner/members and have contributed property to the company since its inception. The Debtor’s primary source of annual income came from leasing its commercial property, most of which was occupied by health care providers and medical related businesses. Between May and July of 2008 Dr. A encumbered the commercial building owned by the Debtor with $1.5 million in liens. The liens resulted from three loans from Bank for $500,000 each, secured by trust deeds. The loans came due between March and May of 2009. The Debtor defaulted on the loans which led to its filing for bankruptcy protection in 2010. In this example, the bankruptcy trustee commenced an adversary proceeding against the Bank to avoid the liens against the commercial building as fraudulent conveyances. Prior thereto, the trustee engaged a forensic accountant to perform an investigation and ultimately testify as an expert witness relative these transactions and opine on the financial condition of Debtor and consideration received, if any. Certain factors that led to the bankruptcy filing were that the proceeds from the Bank’s loans were not paid to the Debtor but utilized elsewhere instead, the Debtor’s financial condition was so debilitated from and after the creation of the liens that repayment was very unlikely if not impossible, and the capital that remained with the Debtor after the transactions was unreasonably small. This scenario resulted in funds available to pay unsecured creditors being significantly diminished. The relevant Bankruptcy code in this situation is §548(a)(1): (1) The trustee may avoid any transfer … of an interest of the debtor in property, or any obligation … incurred by the debtor, that was made or incurred on or within two years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

MARCH/APRIL 2014 y AZ CPA

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(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or (B) (i) Received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) Was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; (III) Intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or (IV) Made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. The focus for this case was on §548(a) (1)(B). This article summarizes how the forensic accountant assisted the Trustee in establishing that the Debtor’s transfers to the Bank met the relevant fraudulent conveyance elements of the Bankruptcy Code. The avoidance of the transfers created by the recordation of the trust deeds would free up significant equity in the property for the benefit of the unsecured creditors of the Debtor’s estate.

Lack of Reasonable Consideration

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Based upon the forensic accountant’s review of the Debtor’s business records, tax returns, and bank records, none of the underlying loan proceeds were paid to the Debtor. The evidence indicated that all of the loan proceeds were paid directly to Dr. A personally and/or to another entity owned by him. The loan proceeds were utilized in large part by Dr. A to fund his separate investment in a gas station business. Tracing of the loan proceeds illustrated that the Debtor did not even receive an

indirect benefit from the loans either. As a result, the Debtor was stripped of any related equity yet still strapped with the Bank’s debt obligations. The net effect on the Debtor’s estate was that funds that could have otherwise been available to pay unsecured creditors were significantly diminished, if not eliminated. There wasn’t any specific tangible quantifiable evidence of direct or indirect reasonably equivalent value being given to the Debtor from the loan transactions with the Bank. Therefore, the Debtor received less than reasonably equivalent value in exchange for incurring the obligations to the Bank.

Financial Condition Establishing that a debtor’s poor financial condition is evidence of constructive fraud can be done by proving that the debtor was insolvent at the time of the transfer, or by showing that the debtor was undercapitalized and/or intended to incur debts that it would be unable to pay. The first method, insolvency, can be proven by showing that the value of the debtor’s liabilities exceed the value of their assets. Under the second method, the trustee needs to make the case that a transfer left the debtor undercapitalized or unable to pay its debts as they came due. One of the challenges faced by the forensic accountant in order to establish insolvency in the Debtor’s case was that the value of the Debtor’s assets, which were primarily real estate, most likely changed dramatically between the transfers in 2008 and the bankruptcy filing in 2010. The expert would have had to determine the value for this property at the date of transfers, and because of inflated property values, the evidence may not have supported an insolvency opinion. Because of this, the expert decided that focusing on the Debtor’s capitalization and ability to make debt payments would be the most effective way to establish the case. In proving that the Debtor’s financial condition was evidence that the transfers were avoidable, the expert chose to focus on two alternative determining

factors. First, the Debtor had debts, or should have reasonably believed that it would incur debts, between the date the obligations to the Bank were incurred and the bankruptcy petition date, that would be beyond its ability to pay as they matured. Second, when the Debtor incurred the obligations to the Bank, the Debtor was engaged in (or was about to) business or a transaction for which any property remaining with the Debtor was “an unreasonably small capital” throughout the period from 2008 through the Petition Date. In Moody vs. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1070 (3d Cir. 1992), the Court stated: “[A]n ‘unreasonably small capital’ would refer to the inability to generate sufficient profits to sustain operations. Because an inability to generate enough cash flow to sustain operations must precede an inability to pay obligations as they become due, unreasonably small capital would seem to encompass financial difficulties short of equitable insolvency.” To determine a debtor’s ability to pay its debts as they come due, one can look to evidence of the creditors’ claims from the Debtor’s historical records and the bankruptcy pleadings, compared to the debtor’s cash flow and liquid assets, from the date of the initiation of the debt through the bankruptcy petition date. In the Debtor’s case, after reviewing their tax filings, financial statements, bank statements and other business records, it was obvious that the Debtor would not be able to pay the $1.5 million debt due to the Bank when it came due a year later. In 2007 and 2008 the Debtor had net income of approximately $26,000 and $30,000, respectively, and from November, 2008 through June, 2009, the Debtor’s ending bank balances ranged from $0 to $23,149 and averaged less than $7,700 per month. Due to Medicare limitations on related party lease transactions, the Debtor’s lease agreement with its medical tenants provided that the monthly base rent payment was only an amount sufficient to cover the Debtor’s costs of owning the premises

(for ex., insurance, real property taxes, utilities and maintenance costs). As a result, the Debtor’s ability to generate positive cash flow from operations was significantly restricted. The Debtor’s only liquid asset then available to pay obligations was a minimal amount of cash on hand. As of May 21, 2009, the Debtor had accumulated only $9,000 in cash on hand, and as of June 17, 2009, the Debtor’s cash on hand had declined further to only $5,000. As of May 2009 the Bank’s loans were in default and the amount due on the Bank’s liens exceeded $1,525,000. As you can see, the Debtor didn’t have sufficient cash flow, or capital, to cover the Bank’s monthly loan payments, which exceeded $30,000, let alone the $1,525,000 due to the Bank as of May, 2009. As a result, the Debtor’s subsequent bankruptcy filing was not only likely, but reasonably foreseeable.

Conclusion Based on the forensic accountant’s analysis it was obvious that the Debtor received insufficient consideration in exchange for the Bank’s obligation and it was or should have been apparent that, based on the Debtor’s poor financial condition, it would be unable to pay this debt as it came due. Finally, the Debtor was engaged in business or a transaction for which any property remaining with the Debtor would be an unreasonably small capital throughout the period from the initiation of the loan through the Petition Date. Based on the expert testimony in this case, other evidence submitted and the arguments of the Trustee’s counsel, the Court granted the Trustee’s motion for summary judgment, and the Bank’s secured lien were avoided thereby freeing up equity for AZ CPA unsecured creditors. by Jeffrey Sumpter, CPA, is at director at CBIZ MHM, LLC. He can be reached at jsumpter@cbiz.com,

MARCH/APRIL 2014 y AZ CPA

The Hackers are Coming!

Six Solutions to Protecting Your Information by Marcus A. Clarke

Every month it seems there’s a new massive data breach—Target, NiemanMarcus, Hilton and Adobe. Where does this all end? Unfortunately, it doesn’t, and to understand why, you must first forget everything you thought you knew about hackers. There exists a global illicit economy that lives in the shadows of the “real” economy. A large part of this is fueled by credit card fraud. This fraud is the “bread and butter” of cybercrime, which today dwarfs the global illicit drug trade. This “dark economy” is truly massive; close to a trillion dollars annually, and a growing force already flexing its political power. Certain sovereign nations turn a blind eye to such activities because they serve a valuable purpose of providing economic growth, generating hard currency, and poking the rich western nations in the eye. In the past, these bands of hackers have enjoyed a certain popular “Robin Hood” appeal, but the business has now grown far beyond its quaint roots. It is today a highly competitive, ruthless market where there are no rules whatsoever. The global Internet has many legacies that are hugely positive; unfortunately this is not one of them. This dark economy really took off when the Internet became a means of conducting financial transactions, such as shopping. Credit card companies quickly realized they could hit the jackpot. At that time, most transactions were conducted by cash or by check, in person or by mail. Check processing actually cost money for the bank, but credit card transactions made a two to four percent fee right off the top. This was like a pot of gold at the end of the Internet rainbow. The promise of transforming the consumer economy such that banks would get a cut of virtually every consumer financial transaction was mind-boggling. All banks

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had to do was encourage cardholders to shop on the Internet. So they made it easy, and even provided assurances that transactions would be safe and liability for fraud would not exceed $50. The rest is history. For the global banking system, the Internet has become immensely profitable, as they have effectively become a taxation authority on all consumer purchases. However, there is a hidden, dark side. They have been paying an enormous price in fraud and this is what’s fuelling much of the dark economy. Banks are extremely circumspect on this issue, because they absolutely do not want to scare people away from using their credit cards online. How do they cover this fraud? It’s not rocket science. Banks are paying perhaps two percent for their money, charging 12-18 percent to consumers, charging merchants close to three percent for every sale and consumers a fee every time they hiccup. There’s so much profit that even with massive fraud, banks are still making a killing. True, banks are spending enormous sums to combat credit card fraud. However many have balked at making the shopping process more secure because it might inconvenience the consumer and slow down their spending. U.S. credit cards could in fact be made more secure, like those in Europe, by adding a smart chip in the card but this hasn’t happened for the reasons above. At some point in the near future, the bank’s cost/benefit equation will tip. Consumers will become less wary and growth in online shopping will slow while data breaches and cybercrime continue to grow. So now you get the picture. Big banks don’t want to spook us from shopping and paying bills on the Internet because it’s fabulously profitable. However, in making it so easy, they are also knowingly feeding an ever-growing dark economy by allowing massive amounts of fraud. It’s a strange, parasitic relationship in which we, the consumers are the “host” and the banks are feeding off us, and the cybercriminals are feeding off the banks.

Of course you and I are paying for all of this, but the price may soon become much higher if this situation continues. The banks, by their own voracious appetite for profit, have allowed criminal organizations to grow to a size that presents an almost impossible challenge for law enforcement. Now you know the real story behind what you see in the headlines. So what does all this mean for you as a professional or small business owner? No technology available today can fully secure your network. No one, not even Google, Adobe, Microsoft or the U.S. Government has achieved this. That doesn’t mean you can’t take effective, affordable actions. Six Precautions You Can Take Now 1. If your organization allows personal Internet use, your risk of infection is vastly higher. Any Windows desktop that has access to sensitive data should have very restricted Internet access, and no personal use privileges. I recommend eliminating all personal use, or separating the two by having separate desktops on separate networks. Using a secure virtual desktop for work is one approach that is gaining popularity. 2. It is likely that one or more of your computers have some type of malware that could potentially expose your data. However, it is unlikely that anyone is actually looking around your network. It’s simply not worth the effort for a human hacker to do this, but this will likely become automated. Then all bets are off. 3. Ransomware, a form of malware that encrypts all your files with a secret key and demands a payment for this key, is becoming more prevalent. Your only recourse is to restore from backup (you’ve tested your backups, right?) or pay about $300.

4. Spam email remains the most common way computers become infected. Usually by an infected attachment or links to an infected web site. This is the number one area to focus attention for security awareness training and defenses. Allowing any personal email access from a business computer will likely bypass all defenses except the desktop anti-virus. 5. If you are still running Windows XP on any machine on your network, get rid of it. On April 8, 2014, Microsoft will end XP security updates. Cybercriminals will attack it with glee because they know that millions will fail to upgrade and that any zero-day bug will not be fixed. 6. Your biggest problem today is having to legally report a data breach and notify customers. This will most likely occur via a lost or stolen computer or storage device that wasn’t encrypted. Sensitive data or client files should never leave your business premise in an unencrypted form. Any notebook should be encrypted, as should any USB drive. After reading this, you might feel hopeless, but don’t despair. You can effect great improvements with solid policies, some updated technology and professional help. But take note, it’s unrealistic to expect an all-around computer professional will have the skills necessary to effectively secure your organization. Even the best don’t know what they don’t know, so get help from an experienced cyber-security specialist. A good way to start is an external vulnerability scan combined with an audit of all your Internet traffic. This gives you an objective report that shows what’s really going on. I have to say that rarely have I seen such a report that doesn’t have some big surprises. Are you ready to take a look? AZ CPA

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Marcus A. Clarke is a principal at REDW. He can be reached at mclarke@ redw.com.

Complimentary Program: Hackers Are Coming, Minimize the Pain — April 24; 8 – 10:15 a.m. Listen to a timely presentation and learn from our experts by attending Hackers Are Coming…Minimize the Pain. These experts will talk about their experiences, how to strengthen your protection to lessen the chances of being hacked and what to do if you are hacked. Recommended CPE: 2.5 hours Register for the in-person version or the webinar at www.ascpa.com.

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Classifieds Business Opportunities/ Practices for Sale OUR CPA FIRM IS LOOKING TO BUY BUSINESS CLIENTS — With 30 years in the valley, we are a wellestablished and growing practice who seeks business clients of every level. While our main firm is in Scottsdale, we have satellite offices in Phoenix and Glendale. Our firm is experienced at transitioning new clients after a sale and welcome CPAs looking to retire. Contact craig@awcpas.com or call (480) 990-2727 with any questions about how we can help you. Retirement-minded Northcentral CPA — Sole practitioner looking toward retirement would like possible merger with other CPA or CPA firm with gradual take-out. Contact me at cpa@wexlercocpa.com for further discussion.

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D. Jay Ryan Attorney at Law City North 5415 E. High St., #200 Phoenix, AZ 85054 (623) 937-3737 or (602)840-8075 (fax) Free Telephone Consult Mr. Ryan is a former Assistant Attorney General who represented the Board. The Board’s first lay member/ President Law Committee Member ASCPA Honorary Member

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Employment Associate — Business Valuation — Kotzin Valuation Partners, LLC is currently seeking qualified candidates for Associate positions in our Phoenix, Arizona office. Primary responsibilities will include financial analysis and modeling, company and industry research, and preparation of valuation and other expert reports to be utilized for valuation, litigation and forensic accounting purposes. Starting compensation will be commensurate with educational background, experience, and professional accomplishments. Relevant qualifications include an undergraduate degree in Finance, Accounting, and/or Economics with a strong understanding of financial statements and finance theory. A high level of proficiency with Microsoft Excel and Word is required. Send resumes to: dwenk@kotzinvaluation.com. SENIOR TAX MANAGER — CPA required. Prepare and review complex business tax returns. Part time position. Dynamic firm. Paperless environment. Highly technical. Qbooks, Lacerte, RIA and Practice CS are utilized. Flexible hours are available. Attach resume in pdf to lams12@aol.com. ACCOUNTANT (PART-TIME) — PERA Club — Candidate will act as an Assistant to the Controller and help with various accounting projects.Must have an accounting degree with 7 years exp

in an accounting office, be proficient in excel, a self- starter, and well organized. Insurance, budgets and financial statement preparation experience required. 10-20 (flexible) hours per week which may vary. Please submit resume to: hmbaxley@srpnet.com. Comptroller — Washoe County, NV seeks a Comptroller to serve on the County’s newly formed executive team. Candidates must possess relevant bachelor’s degree and five years of related experience OR equivalent combination of education and experience. Certification as a CPA in the State of Nevada or as a Certified Public Finance Officer from GFOA required within one year of appointment; outof-state reciprocity available. Experience with SAP ERP desirable. Salary range $99,000-$128,000 annually, DOQ. Apply online at www.bobmurrayassoc.com. Contact Valerie Phillips or Bob Murray at (916) 784-9080 with questions. Brochure available. Closing date March 28, 2014.

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restaurants. Class A Office. Please call Lance at (602) 741.7876 Check it out at www.office4cpa.com. 2,000 to 5,005 SF Office — $11.95/SF — Squaw Peak Corridor Sale/Lease/Lease to own/ terms available — Former CPA Office - Freestanding Building - 16th and Glendale. Up to 15 offices, conference, reception, kitchen, storage. 16th St Signage, Phone System Available. Richard (480) 214-9404 - R & G Commercial Real Estate, LLC http:// www.rgcre.com/images/Flyer_7150%20 N%2016th%20St.pdf.

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Services BUSINESS PROPERTY TAXES TOO HIGH? — I’ve been successfully appealing property tax assessments for over 15 years, both real estate and personal (business) property on a contingent fee basis. The annual business property reports are also filed for a flat fee. Reasonable rates. Arizona CPA. Visit my pages on Linked In, Facebook and Twitter. Call John at ASMR Consulting LLC, (480) 204-1289. http://www. asmrconsulting.com.

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