Insight Magazine - Winter 2023

Will ESOPs Become the Norm?

Managing Corporate Cash

Preparing for the IPO Comeback

Managing Risk in Tax Season

Difficult Auditor-Client Interactions

Home Sale Strategies And More!

ILLINOIS CPA SOCIETY

550 W. Jackson Boulevard, Suite 900, Chicago, IL 60661 www.icpas.org

Publisher | President and CEO

Geoffrey Brown, CAE

Editor

Derrick Lilly

Assistant Editor

Amy Sanchez

Senior Creative Director

Gene Levitan

Copy Editor

Mari Watts

Photography

Derrick Lilly | iStock

Circulation

John McQuillan

ICPAS OFFICERS

Chairperson

Jonathan W. Hauser, CPA | KPMG LLP

Vice Chairperson

Deborah K. Rood, CPA, MST | CNA Insurance

Secretary

Brian J. Blaha, CPA | Wipfli LLP

Treasurer

Mark W. Wolfgram, CPA, MST | Bel Brands USA Inc.

Immediate Past Chairperson

Mary K. Fuller, CPA | Citrin Cooperman

ICPAS BOARD OF DIRECTORS

John C. Bird, CPA | RSM US LLP

Jennifer L. Cavanaugh, CPA | Grant Thornton LLP

Brian E. Daniell, CPA | West & Company LLC

Pedro A. Diaz de Leon, CPA, CFE, CIA | Cherry Bekaert Advisory LLC

Kimi L. Ellen, CPA | Benford Brown & Associates LLC

Lindy R. Ellis, CPA | Ernst & Young LLP

Jennifer L. Goettler, CPA, CFE | Sikich LLP

Monica N. Harrison, CPA | Tinuiti

Joshua Herbold, Ph.D., CPA | University of Illinois

Scott E. Hurwitz, CPA | Deloitte LLP (Retired)

Joshua D. Lance, CPA, CGMA | Lance CPA Group (Deceased)

Enrique Lopez, CPA | Lopez & Company CPAs Ltd.

Leilani N. Rodrigo, CPA, CGMA | Roth & Co. LLP

Richard C. Tarapchak, CPA | Verano Holdings Corp.

BACK ISSUES + REPRINTS

Back issues may be available. Articles may be reproduced with permission. Please send requests to lillyd@icpas.org.

ADVERTISING

Want to reach 21,700+ accounting and finance professionals? Advertising in Insight and with the Illinois CPA Society gives you access to Illinois’ largest financial community. Contact Mike Walker at mike@rwwcompany.com.

Insight is the magazine of the Illinois CPA Society. Statements or articles of opinion appearing in Insight are not necessarily the views of the Illinois CPA Society. The materials and information contained within Insight are offered as information only and not as practice, financial, accounting, legal or other professional advice. Readers are strongly encouraged to consult with an appropriate professional advisor before acting on the information contained in this publication. It is Insight’s policy not to knowingly accept advertising that discriminates on the basis of race, religion, sex, age or origin. The Illinois CPA Society reserves the right to reject paid advertising that does not meet Insight’s qualifications or that may detract from its professional and ethical standards. The Illinois CPA Society does not necessarily endorse the non-Society resources, services or products that may appear or be referenced within Insight, and makes no representation or warranties about the products or services they may provide or their accuracy or claims. The Illinois CPA Society does not guarantee delivery dates for Insight. The Society disclaims all warranties, express or implied, and assumes no responsibility whatsoever for damages incurred as a result of delays in delivering Insight. Insight (ISSN1053-8542) is published four times a year, in spring, summer, fall, and winter, by the Illinois CPA Society, 550 W. Jackson, Suite 900, Chicago, IL 60661, USA, 312.993.0407.

Copyright © 2023. No part of the contents may be reproduced by any means without the written consent of Insight. Send requests to the address above. Periodicals postage paid at Chicago, IL and at additional mailing offices. POSTMASTER: Send address changes to: Insight, Illinois CPA Society, 550 W. Jackson, Suite 900, Chicago, IL 60661, USA.

18

spotlights

4 CEO Outlook Advocacy: Looking Back to Move Forward

6 Capitol Report

Are You Ready for Beneficial Ownership Compliance Reporting?

46 In Play

Allan Koltin, CPA, CGMA, shares his advice for firms exploring growth via private equity.

48 Gen Next Paying It Forward: Inspiring the Next Generation of CPAs trends

8 Risk Management

Managing Risk in Tax Season and Beyond

10 Tax Planning

The Like-Kind Exchange Home Sale Strategy

12 Professional Issues

What the Future of Accounting Really Needs

14 Auditing

What Drives Difficult Auditor-Client Interactions?

16 Corporate Strategy & Finance Preparing for the IPO Comeback insights

30 Leadership Matters

2 Types of Goals You Need to Succeed in the New Year

32 Growth Perspectives

Deal or No Deal? My 2024 M&A Predictions

34 Evolving Accountant Assessing SAS 134-140: How Did It Go?

36 Financially Speaking

The State of Philanthropy: How CPAs Can Help Donors

38 Corporate Insider

What’s Old Is New Again in Corporate Finance

40 Tax Decoded

It’s Complicated: A Closer Look at Cannabis Sales and 280E

42 Ethics Engaged

The Ethics of Burnout

44 Practice Perspectives

In Succession Planning, What Constitutes Success?

ceooutlook

Geoffrey Brown, CAE President and CEO, Illinois CPA Society

Advocacy: Looking Back to Move Forward

Our legislative successes in 2023 pave the way for important advocacy initiatives in the year ahead.

In a time of great turbulence and polarization, the advocacy efforts of professional organizations like ours are paramount. Among gridlocked legislative bodies, it’s imperative that we keep the lines of communication open and ensure our important advocacy agendas advance, as we have a duty to effectively represent the interests of our constituents and stakeholders before a variety of regulatory agencies. I can assure you that our entire Government Relations team and volunteers take their responsibilities very seriously.

Advocacy is one of our key pillars. We track a wide range of legislative, regulatory, and legal issues to identify policy matters potentially impacting CPAs and their firms, among others. We regularly engage federal and state policymakers to help ensure you have a say in the policies that impact the CPA profession and your business.

I’m proud to look back on 2023 and say that we met our legislative priorities. Our team worked diligently to see that the Illinois Public Accounting Act was successfully and meaningfully updated and extended through 2029 and that the charitable audit threshold was increased from $300,000 to $500,000. These important policy wins have paved the way for future efforts. Some of the issues that are front and center now include:

• Professional licensing processing delays and the Illinois Department of Financial and Professional Regulation’s plans for the upcoming CPA license renewal period.

• Local government audit backlogs.

• Compliance with the Corporate Transparency Act and new beneficial ownership information reporting requirements going into effect on Jan. 1, 2024.

While we work with stakeholders on these issues and advocate on your behalf, we also encourage you to get involved in the important issues that the CPA profession is facing. You can support our advocacy initiatives and policy efforts by getting engaged:

• Use your local legislative voice. When called upon, contact your legislators and regulators to amplify our messaging.

• Engage your local media. Media outlets often seek CPAs for their expertise and professional opinions on a wide variety of business and finance topics. Don’t be shy about engaging with media outlets in your area. Even sending a “letter to the editor” can be a surprisingly effective way of raising awareness of important issues and advancing our professional point of view within your local community and among your legislators and policymakers.

At the very least, stay knowledgeable of our advocacy efforts on your behalf by keeping up with our legislative updates, utilize our Advocacy Toolbox, and consider supporting the Illinois CPAs for Political Action Committee (CPA PAC). The CPA PAC is a wellrespected nonpartisan political action committee that supports candidates for state offices who support the legislative goals of the profession. The CPA PAC serves as a strong collective voice for CPAs and provides a foundation for successful legislative advocacy.

We represent not only you, our dedicated members, but also every current and prospective CPA throughout our state. Your involvement is integral to the success of our advocacy actions! I encourage you to stay aware, get engaged, and use your voice as a respected CPA in Illinois.

capitolreport

Martin Green, ESQ Senior Vice President and Legislative Counsel, Illinois CPA Society @GreenMarty

Are You Ready for Beneficial Ownership Compliance Reporting?

Small businesses, including CPA firms, will soon be required to report beneficial ownership information per the Corporate Transparency Act. Here’s what you need to know to prepare.

By now, you’ve likely seen a number of warnings on the upcoming beneficial ownership information (BOI) reporting requirements imposed by the Corporate Transparency Act (CTA). Beginning Jan. 1, 2024, the CTA will require small business entities in the United States and non-U.S. entities—including CPA firms—to report information about their beneficial owners (i.e., the persons who ultimately own or control the entities) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Overall, the goal of the CTA and beneficial ownership reporting requirements is to combat “dirty money” issues, including tax evasion, money laundering, and other financial crimes. Though, I’d add that the name itself, “Corporate Transparency Act,” is somewhat deceiving in that the reporting requirements are far reaching for small businesses.

Of course, with the effective date fast approaching, now is the time to familiarize yourself with these reporting requirements. After all, being prepared to advise your clients or companies, and execute these required filings on their behalf, will be an essential service as their trusted and strategic advisor.

That said, here are some questions and answers you need to know:

1. What’s considered a reporting company? Generally, there are two types of reporting companies: domestic and foreign. A domestic reporting company is a corporation, limited liability company, or other entity created by filing with the secretary of state within the U.S. A foreign reporting company is a corporation, limited liability company, or other entity formed

under the law of a foreign jurisdiction and registered to do business in the U.S.

2. Are there exemptions? There are 23 types of entities exempt from reporting, many of which are already subject to substantial federal and state regulatory reporting and oversight. Generally, qualifying entities exceed $5 million in gross receipts and have 21 or more full-time employees. At first glance, it may appear that your accounting firm may be exempt from BOI reporting; however, exemptions only apply to firms registered with the Public Company Accounting Oversight Board as required by the Sarbanes-Oxley Act of 2022, and those with more than $5 million in gross receipts and 21 or more full-time employees.

3. What information needs to be reported? Entities required to meet the new reporting requirements are obligated to identify and report beneficial owners. Notably, beneficial owners are defined broadly in the CTA. If by chance a company is owned by another company, further inquiry will be necessary to identify the person owning the parent company. Overall, beneficial owners include those with substantial control, such as a person with indirect or direct ownership equal to or greater than 25% of the company, or a company applicant. For domestic entities, the company applicant is the person who directly files entity-creation documents with the secretary of state. For foreign entities, this would be the individual who first registers the entity to do business in any state.

Additionally, the company and beneficial owners and company applicants will have to respond to 50-plus questions, including

details about the reporting company, beneficial owners, and company applicants.

4. What are the penalties for not reporting? The final rule provides for both criminal and civil penalties for reporting violations. Civil penalties may include $500 for each day the violation continues. Criminal penalties may include up to $10,000 in fines and imprisonment of up to two years. My sense is the criminal process is reserved for willful misconduct and fraud.

Of course, entities must begin reporting BOI by Jan. 1, 2024, and must do so through FinCEN’s secure electronic filing system. All initial reports must be completed before Jan. 1, 2025, and any changes in previously reported information will require supplemental reporting within 30 days of those changes.

On Sept. 18, 2022, FinCEN released a guide to assist small entities in complying with the reporting requirements. The Illinois CPA Society (ICPAS) has posted this guidance and other resources on the Government Relations page of the ICPAS website.

With so much uncertainty surrounding these reporting requirements, ICPAS, along with the AICPA and other state CPA societies, have been working with their respective Congressional Delegation members to pass legislation extending the initial reporting deadlines. Additionally, ICPAS is part of a coalition of state CPA societies that signed onto an AICPA letter to FinCEN commenting on proposed agency regulations and asking for a delay in the BOI reporting implementation. As we continue to monitor this situation, we’ll of course provide any necessary updates to our members.

Managing Risk in Tax Season and Beyond

Now more than ever, CPA firms need to be proactive—not reactive—to potential risks associated with their client relationships. Consider these risk management tips as another tax season nears.

BY SUZANNE M. HOLL, CPA

• Deteriorating relations (e.g., not taking your advice, unresponsive, or acting in a way that suggests compromised integrity).

• Potential conflicts of interest.

ALTHOUGH the current tax year has shown signs of returning to more normalcy after the pandemic-induced chaos of recent years, CPA firms continue to face unique challenges and risks they shouldn’t ignore. In addition to trying to keep up with the increasing complexities of evolving tax laws and regulations (e.g., state passthrough entity taxes, K-2s/K-3s, etc.) and easing but ongoing challenges of working with the IRS and other taxing authorities, many firms are experiencing significant capacity challenges as they struggle to find and retain qualified talent to support and meet their clients’ service needs.

To mitigate these risks, firms need to prioritize performing the “right services” for the “right clients.” Here are three client-related questions to consider that may help you identify potential risks to your firm and position it for long-term success.

1. IS THE CLIENT STILL A GOOD FIT?

From a timing perspective, there’s no better time than now to review your client list to decide whether clients remain a good fit for your firm—and do so before and after every tax season. Disengaging from clients that don’t meet your firm’s needs will better position you going forward. Consider these red flags with clients:

• Difficult or uncooperative behavior (e.g., withholding critical information, argumentative, or disrespectful to firm members).

• Changes in a client’s business.

• Constantly questioning your fees or requesting a discount before services commence.

• Late, slow, or partial payments.

Pay particular attention to difficult or manipulative clients who are slow in accommodating your requests, don’t return your calls, or are unresponsive. When a client seems unwilling to provide you with the information needed to complete an engagement, assess the underlying cause: Is the problem merely sloppy recordkeeping or is the client deliberately delaying or withholding information? Be cautious in situations where it appears that documents are deliberately withheld or you’re urged by a client to proceed without appropriate or sufficient documentation.

Abrupt changes in a client’s behavior may be indicative of a failing business, financial problems, substance abuse, or other personal problems. Trying to uncover the source of the problem could be beneficial, but whatever you do, don’t ignore the warning signs of a deteriorating relationship. And always be on the lookout for potential conflicts of interest. It’s extremely important to examine potential or actual conflicts of interest from each party’s point of view.

Conflicts of interest have long been a major factor in professional liability claims against CPAs. Part of the problem is that if CPAs aren’t proactive and sensitive to their existence, potential conflicts of interest aren’t perceived before the incidents that trigger these claims. If potential conflicts are identified, you must assess whether

you can objectively represent the parties involved, and if you determine you can, assess whether there are reasonable safeguards to eliminate or reduce the threat to an acceptable level.

2. IS THE ENGAGEMENT A GOOD FIT?

Firms who dabble in practice areas outside of their expertise have a much higher risk of having a claim. Learning the art of saying “no” to clients is an important, but often overlooked, risk mitigation tool. If clients seek your help with transactions or activities outside your comfort zone or skill set, you’ll be better served suggesting they seek the advice and counsel of professionals with expertise in those areas.

It’s important to recognize, embrace, and maintain your competencies. Frankly, this rule is fundamental to the profession, as the AICPA’s Code of Professional Conduct requires CPAs to only undertake professional services they can reasonably expect to complete with professional competence.

3. ARE YOU MANAGING CLIENT EXPECTATIONS?

Effective communication is a key factor in any CPA-client relationship, and when you work to stay informed and in control of managing client expectations, you help to safeguard your firm. To that end, good documentation is critical to successfully managing client expectations. Jurors (members of the public) generally consider CPAs to be experts in documentation, and falling short of that expectation may be viewed as negligent and perceived as performing below the standard of care. Consider these documentation tips:

• Utilize engagement letters. While these letters won’t immunize you from lawsuits, they can be your first line of defense if a client makes a claim against you. You likely already have executed engagement letters with your tax clients. However, to prevent engagement creep, memorialize the additional services by updating your letter or obtaining a signed addendum, clarifying the revised scope and limits.

• Always document significant meetings and communications. Follow up with written communications in circumstances including but not limited to:

- Change in engagement scope (may require a new engagement letter).

- Negative information (e.g., tax return is already late, client’s failure to timely provide information, or client is facing an audit).

- Judgment calls (e.g., aggressive tax positions taken by your predecessor).

- Client agreement to take significant action.

- Conversations regarding transactions, extensions, or estimated tax payments.

• Advise clients of opportunities and risks. Consider obtaining a tax representation letter or stand-alone certification letter to mitigate high-risk scenarios, such as:

- If your firm is preparing amended income tax returns to reflect employee retention credit (ERC) adjustments as required by the taxing authorities, and the firm isn’t responsible for assessing or opining on the client’s eligibility for the ERC, it’s recommended to have the client sign a tax representation letter in addition to having a signed engagement letter for such services. This added defensive documentation will help protect the firm if clients later allege that the firm should’ve opined regarding ERC eligibility, and/or if clients later allege the firm didn’t appropriately advise them of the potential risk given the extended statute of limitations afforded by the IRS

for assessments without a corresponding extension for taxpayers to pursue refunds on the income tax returns.

- For clients with known extensive digital asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement addressing crypto asset implications. This additional defense provides evidence of the client’s understanding and acceptance of their responsibilities regarding digital asset transactions and the limitations of the services your firm provided.

- In addition to the above examples, there’s a new area of potential risk associated with the Corporate Transparency Act (CTA), which introduces a new and expansive reporting regime for entities deemed to be reporting companies. Therefore, CPA firms are strongly recommended to inform and advise their clients of the beneficial ownership reporting requirements under the CTA.

• Ensure written documentation is factual, professional, and without personal commentary or unsubstantiated opinions. Unprofessional or inappropriate comments can damage documentation integrity. Ask yourself whether your documentation would be helpful or harmful if presented at trial.

• Mind fees, billings, and collections. The challenging economy has brought fee issues to the forefront as some clients struggle to meet their financial commitments, including bills owed to their CPAs. Good communication with non-paying clients is important and may spur payment. At the very least, contemporaneously memorialized communications create a defensive documentation trail demonstrating that the client, by not responding to your communications, didn’t have a valid basis to claim your fees weren’t owed. When dissatisfied with work, clients normally respond to such communications by detailing their dissatisfaction.

• Strategically and respectfully disengage. Skillfully handled transitions can be mutually beneficial to firms and clients. However, care is needed when disengaging from engagements after they’ve begun. Disengaging too late and without sufficient cause may increase the likelihood a firm could face allegations of damages if the successor is unable to meet the deadline. Whether you decide to disengage with a specific client, type of business, or area of practice, it’s extremely important to terminate relationships professionally, formally, and in writing. At a minimum, your disengagement letter should always contain clear statements, a description of your work, and a list of any due dates or filings. When done effectively, disengagements are a good risk management tool for your firm, and knowing how to execute them skillfully and professionally will help you grow your practice and avoid potential liability exposure.

• Report potential claim situations early. Promptly report potential claims, including potential errors or omissions. Doing so protects your firm’s full policy limits.

Above all, it’s important to tread carefully when working with any client. Be sure to arm yourself with knowledge, know your limitations, and be willing and able to say “no” to some clients— your firm’s reputation and success depends on it.

Suzanne M. Holl, CPA, is senior vice president of Loss Prevention Services with CAMICO. With more than 30 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide CAMICO’s policyholders with information on a wide variety of loss prevention and accounting issues.

The Like-Kind Exchange Home Sale Strategy

As home values rise, tax structuring becomes more important in how your clients sell their homes.

BY DANIEL F. RAHILL, CPA/PFS, JD, LL.M., CGMA

SINCE the beginning of the COVID-19 pandemic, median home prices in the United States have skyrocketed, increasing by 41.6% from March 2020 to July 2023 as inventories have declined, according to the National Association of Realtors. The pandemicdriven shift to remote work, increasing demand for suburban and rural homes, and formerly low interest rates combined to accelerate demand and home values.

More recently, a significant rise in interest rates has limited the supply of homes for sale, as homeowners who had locked in low interest rate mortgages don’t want, or can’t afford, to give up those low rates to purchase a new home. The decreased inventory of homes for sale has further driven up values, and at this point, many homeowners have significant unrealized capital gains embedded in their homes well in excess of the home sale exclusion.

For taxpayers who find themselves in this situation, thoughtful tax planning is essential. One possible solution could be a like-kind exchange (Internal Revenue Code [IRC] Section 1031). Here’s how this home sale strategy can help your clients be more tax savvy while navigating today’s real estate market.

UNDERSTANDING THE TAX CONSEQUENCES

Capital gains tax should be a significant consideration when selling an appreciated home. It applies to the profit made from the sale and is categorized into two types: short-term capital gains and longterm capital gains. Short-term capital gains are applied to properties held for one year or less, while long-term capital gains apply to properties held for more than one year.

Short-term capital gains are taxed at ordinary income tax rates, which can be significantly higher compared to long-term capital gains. Long-term capital gains typically benefit from preferential tax rates of 0%, 15%, or 20%, depending on your client’s taxable income and filing status. Married filing jointly (MFJ) couples can qualify for

the 0% capital gains tax rate if they have 2023 taxable income of less than $89,249. If they have taxable income of more than $89,250 but less than $553,849, they qualify for the 15% capital gains tax rate. If their taxable income is more than $553,849, they’ll qualify for the top 20% capital gains tax rate.

A taxpayer may also be subject to an additional 3.8% surtax on net investment income (NII) on a sale. NII includes capital gains, dividends, taxable interest, annuities, royalties, passive rents, and certain income from passive activities, and it increases the top tax rate to 23.8% on long-term capital gains. The NII tax, commonly referred to as the “Medicare surtax,” applies to MFJ couples with modified adjusted gross incomes (MAGIs) exceeding $250,000 and to single filers with MAGIs exceeding $200,000. These income thresholds aren’t indexed for inflation, so an increasing number of people are subject to the tax. If your client is in a high-tax state, the combined capital gains, NII, and state taxes could exceed 30% on the realized gain. For example, a $4 million gain could easily result in a tax bill of $1.2 million or more.

THE BUY AND HOLD STRATEGY

Perhaps the simplest, but least desirable, capital gains tax planning strategy is to hold an appreciated asset until death. When appreciated property transfers to an heir at death, its cost basis is adjusted (i.e., stepped-up) to fair market value at that time. Should the heir decide to immediately sell that asset after receiving it, there would be no capital gains tax associated with the sale because of the step-up in basis to fair market value. For your clients who want to hold on to their homes long term, this could be the best tax strategy.

THE HOME SALE EXCLUSION RULE

The Taxpayer Relief Act of 1997 repealed a longstanding rollover rule that allowed homeowners to defer recognition of capital gains from the sale of a principal residence. Instead, the replacement Home Sale Exclusion Rule permanently eliminates the tax on capital gains realized up to $500,000 for MFJ taxpayers and $250,000 for single taxpayers. For your clients to qualify, the property being sold must be their primary residence and they must have lived in it for at least two of the last five years before the sale.

THE LIKE-KIND EXCHANGE

A like-kind exchange (IRC Section 1031) allows the seller to defer capital gains taxes by reinvesting the proceeds from the sale of the real estate held for investment into a similar real estate investment property. To qualify, your client must meet several requirements.

For example:

• The exchange must be completed within 180 days of the sale of the relinquished property. Rental real estate is considered likekind property; real estate investors can exchange rental property for other rental property.

• To obtain fully tax-free treatment on the exchange, the replacement property must be identified within 45 days of the sale of the relinquished property, the cash proceeds from the exchange must be fully applied toward the acquisition of the replacement property, and the value of any debt on the relinquished property must be replaced with equal value on the replacement property.

• Both the relinquished property and the replacement property must be held for investment or used for productive use in the taxpayer’s trade or business. This is important to prove intent should the business purpose of the exchange be called into question.

CONVERSION OF A RENTAL TO A PRIMARY RESIDENCE

Converting a primary residence into a rental property doesn’t disqualify your clients from a like-kind exchange, but all the rules must be followed. Rev. Proc. 2008-16 provides a safe harbor for taxpayers who exchange their rental or investment property under IRC Section 1031. To qualify, your client must meet the following requirements:

• The relinquished dwelling unit must be owned by your client for at least 24 months immediately before the exchange.

• Within the 24-month qualifying use period, in each of the two 12month periods immediately before the exchange, your client must rent the dwelling unit to another person(s) at a fair rental rate for 14 days or more.

• The period of your client’s personal use of the dwelling unit must not exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling unit is rented at a fair rental rate.

• The replacement property must continue to be owned by your client for at least 24 months immediately after the exchange. Similar rules for rental and personal use (as noted above) will apply to the new property following the exchange.

If your client meets all Rev. Proc. 2008-16 safe harbor requirements, the IRS will not challenge the IRC Section 1031 transaction. This allows a taxpayer to defer the recognition of a capital gain on the exchange. The tax basis of the home exchanged would carry over to the new property.

CONVERSION OF A VACATION HOME TO A PRIMARY RESIDENCE

After the two-year requirement is met, your client can convert the investment property to a primary residence. However, upon later sale of the new residence, some of the gain could be ineligible for the home sale exclusion. The ineligible portion of the gain would be based on a ratio of the time that the home was a second residence or investment property to the total time that your client owned the property. The remaining gain would be eligible for the $250,000/$500,000 home sale exclusion.

Finally, IRC Section 1250 depreciation recapture rules could apply to a later sale if your client took depreciation deductions on the property while it was a rental. When depreciable real estate is held for more than a year and sold at a gain, previously deducted depreciation must be recaptured and taxed at a 25% top rate. Of course, if your client holds on to the home until death, these taxes would be avoided, and the property would receive a step-up in basis for the heirs.

Buying or selling a home is a stressful, complicated process— especially in an undesirable market. A like-kind exchange could be a valuable tax planning tool for a client looking to sell their home, but the rules are complex and must be adhered to. As qualified tax professionals, our strategic advice is paramount. If you can help your client plan four years in advance, the like-kind exchange strategy can be effective in deferring capital gains taxes when acquiring a new home.

Daniel F. Rahill, CPA/PFS, JD, LL.M., CGMA, is a wealth strategist and creative tax writer at Wintrust Wealth Management. He’s also a former chair of the Illinois CPA Society Board of Directors and is a current officer and board member of the American Academy of Attorney-CPAs.

What the Future of Accounting Really Needs

If the accounting profession is to remain relevant to future generations of workers, changes in work-life balance, diversity, and pay are needed now.

BY SETH FINEBERG

If we’re going to make accounting a more attractive career to pursue and stay in, I believe there are three things the profession needs to embrace.

1. A FLIP TO ‘LIFE-WORK’ BALANCE

I’VE said this in a multitude of ways, but I think it’s time to spell it all out: If the accounting profession is to thrive, let alone survive, some serious changes need to occur—and in fairly short order.

This is a profession I’ve observed, and thankfully gotten to know closely, for more than two decades. In that time, I witnessed a few major setbacks and milestones: the impact of the Sarbanes-Oxley Act of 2002, multiple recessions, and the more recent digitalization and automation of the profession, to name a few.

But nothing, in my view, has impacted the profession more than the global pandemic. Any hesitations about automation, cloud utilization, and remote work had to be dealt with head on, because it was the only way work could get done. Firms large and small—even those that felt they couldn’t ever work from home or utilize cloud or automation tools—were forced to reckon with their new reality, which was only compounded by what seemed like a never-ending tax season and a lack of acceptable guidance from the IRS about the employee retention credit and Paycheck Protection Program.

The result? For the first time since I began covering this profession, I saw accountants literally in tears with claims they officially wanted out of accounting altogether. A growing number are simply saying they’ve had enough. It’s understandable that the numbers of accountants entering the profession and still available to do the work are in decline.

The idea of work-life balance has been discussed for years. For professionals who are required to regularly earn continuing professional education credits to retain their credentials, on top of working likely anywhere from 60 to 80 hours per week during the multiple busy seasons throughout the year, balance is a bygone for anyone looking to get ahead. At some point, we have to say “enough.”

Therefore, I believe the concept of work-life balance has to be flipped to life-work balance, which prioritizes people’s time, sanity, and sense of purpose. I’m not suggesting the profession should accept that the needs of clients or companies be ignored, but a pathway to “balance” where both people’s and businesses’ wellbeing matter. This profession needs to set boundaries and stick to them. Let that be the norm.

Just consider the cyclical nature of what’s accepted (in an almost dystopian rite of passage) as “busy season.”

This cycle of abuse accountants endure year in and year out, to the point at which I’ve seen so many want to leave the profession because they simply can’t take it anymore, has to end.

It’s also time to say “enough” to the expectation that serving bad clients, extra hours, working weekends, and completing the majority of work during predetermined blocks of time is just the way it is. If these things don’t change, the profession will never be attractive to future generations of accountants.

2. A CONTINUED PUSH FOR DIVERSITY AND INCLUSION

Saying and doing uncomfortable things isn’t necessarily in the DNA of accountants. But, as is the theme of this article, accountants are humans and need to treat themselves—and others—as such. In order for this profession to progress and be one people want to come into, those of us in it now need to help foster a more diverse and inclusive work environment and community.

When I first began covering accounting more than 20 years ago, the number of women in leadership positions was a paltry few, as white males dominated those roles. Calls for this to change were heard and, while there’s still a long way to go to achieve true balance, today there are far more women leaders in the profession than ever before.

When it comes to people of color in leadership roles, that number is still a paltry few and doesn’t begin to reflect the demographics of our country. I believe this profession has to begin to reflect the society it serves if it’s going to be a welcome career choice.

This may be an uncomfortable conversation (for some) to have, particularly for those currently in leadership roles, but we must face the fact that our country has a deep history of not being inclusive or equitable. Allowing people to be their authentic selves at work has become as important as the life-work balance I mentioned above, if not more so.

Collectively, the profession has to do far better than it has and offer more than just lip service to become truly inclusive. People want to work in an environment where they’re seen and judged equally on their merits as professionals.

3. AN HONEST CONVERSATION ABOUT PAY

Finally, it’s time for the profession to have an honest conversation about compensation. Regardless of where you live, starting and even mid-level salaries for accountants simply aren’t high enough to justify one’s investment in education and professional development. Those well established in the profession know that a lucrative career may arise, but students and young professionals have a very hard time seeing when, or if, a payoff awaits. Just look at the starting salaries Robert Half’s 2024 Salary Guide estimates for the roles students and young professionals are commonly hired into:

• Associate, audit/assurance services: $49,000

• Tax associate: $52,750

• Senior associate, audit/assurance services: $57,750

• Senior tax associate: $67,250

If compensation doesn’t become more competitive with entry-level roles in comparable professions, the number of students pursuing accounting careers will certainly continue to decline.

I’ve seen time and again that the accounting profession can adapt and change when it needs to. Now is another time that it needs to. If this profession is to have a future, that change needs to be driven by those of you in the profession now. You all have the means to inspire change and help redefine what it means to be an accounting professional.

Seth Fineberg is an independent consultant to the accounting profession, working with firms and vendors that serve it. He’s been a journalist and editor for over 30 years, spending most of his career as an editor with Accounting Today and AccountingWEB.

What Drives Difficult Auditor-Client Interactions?

The relationship between an auditor and their clients is very complex and often met with conflict. Here, researchers explore these dynamics to identify areas for improvement.

BY JOSHUA HERBOLD, PH.D., CPA

WHEN I teach accounting courses, the students and I start off in what I call “Homeworkland.” In Homeworkland, the numbers work out nicely, all the characters behave ethically and rationally, predictions are accurate, the rules are clear, and there’s one—and only one—answer to every question. While visiting Homeworkland, we gloss over the intricacies of human motivation—not to mention the interaction of multiple humans and motivations—so that we can focus on learning the material in its most basic form. Pretty quickly, we leave Homeworkland and talk about the complicated and oftentimes messy “real world” because, of course, that’s where we actually live, and things get interesting here.

THE REAL WORLD

While audit regulation assumes that clients cooperate with and are helpful to auditors, experts warn that isn’t always the case.

Recent research from Christine Gimbar, Ph.D., MAcc, associate professor of accounting and management information systems at DePaul University, and her co-authors Melissa Carlisle, CPA, Ph.D., assistant professor at Case Western Reserve University, and J. Greg Jenkins, Ph.D., MS, professor at Auburn University, examines what happens when auditors leave Homeworkland and start working with real people. Discussing their research article, “Auditor-Client Interactions—An Exploration of Power Dynamics During Audit Evidence Collection,” Gimbar notes: “The relationship between the auditor, the audit client’s management, and investors is very complex. Management pays the auditor, but the auditor is working for investors, and the audits are mandated by U.S. Securities and Exchange Commission (SEC) regulations. So, there’s an issue because the auditor is supposed to be protecting the public interest, but when I was in practice, we’d always talk about having a client service role and working with the client to conduct the audit. That’s a really difficult dynamic to navigate.”

Gimbar and her co-authors began their exploration of this dynamic by interviewing staff auditors (associates and seniors) from Big Four

and regional audit firms. The interviews were conducted on a semistructured basis; the same five pre-written questions were used to guide each interview, but the researchers interrupted the interviewees as little as possible to allow them to discuss any aspect of their audit experiences.

“Basically, what we're trying to look at is how interactions go between staff level auditors and their clients during audit evidence collection. How do they ask the client for information and data? How do they obtain those things? How do they encounter clients?” Gimbar says.

Interactions between staff auditors and clients are especially important today considering more complicated tasks are being driven down to lower levels of the audit team. According to the AICPA’s CPA Evolution webpage, “Procedures historically performed by newly licensed CPAs are being automated, offshored or performed by paraprofessionals. Now, entry-level CPAs are performing more procedures that require deeper critical thinking, problem-solving, and professional judgment, and responsibilities traditionally assigned to more experienced personnel are being pushed down to the staff level.”

AUDITOR-CLIENT INTERACTIONS: A SOCIAL MISMATCH

While conducting interviews, Gimbar and her co-authors uncovered an apparent “social mismatch” between staff auditors and their clients, with all auditors stating they had a negative experience. Here’s what they learned:

• Client personnel sometimes exert control over the audit through unfriendly and hostile behaviors.

• Interviewees often feel inexperienced and unprepared for client interactions.

• Addressing challenging audit issues can lead to difficult interactions.

While there are no studies that measure the proportion of audit clients that are unfriendly or hostile to the auditors, Gimbar says, “The one thing we can hang our hat on is, when we asked about negative or hostile client interactions, every single person could tell a story. Every staff auditor we interviewed had that experience.”

Notably, staff auditors often felt that client personnel didn’t understand the purpose of the audit or why the staff auditors were requesting particular pieces of information. Unfriendly clients also tended to show a misunderstanding of the audit methodology and sometimes even questioned the abilities of the auditors.

As one interviewee noted: “The controller didn’t directly say that we were dumb or anything, but she told us both that we don’t know anything, that we shouldn’t need to ask these questions every year, and, you know, she’s an expert in what she does, and we’re not qualified to do this.”

Other negative auditor experiences included interactions with unfriendly clients who:

• Were in a bad or temperamental mood.

• Required auditors to formally request meetings with client personnel (as opposed to informal conversations).

• Ignored or were slow to reply to information requests.

• Claimed requested documents had already been provided.

• Effectively forced auditors to conduct remote audits.

• Frequently moved the engagement team from one room to another.

Most interviewees also felt inexperienced and unprepared relative to their clients. These kinds of interactions clearly have the potential to impact audit results. One interviewee described it this way: “Let’s say you don’t mesh well with the controller, your main person getting you information and answering 80% of your questions for the audit. There’s no one else to go to. So, you’re kind of stuck.”

Additionally, while prior research has shown similar social mismatches between staff auditors and clients, Gimbar says the effect is likely to be worse now that more client engagements are being performed by newer CPAs: “We hear from firms who say, ‘We want to hire students who we can put in front of clients.’ They want to hire students that can interact with senior client personnel. But greater differences in experience, knowledge, and age lead to greater social mismatches in auditor-client interactions, and audit staff feel it.”

HOW DO STAFF AUDITORS RESPOND?

When responding to or dealing with unfriendly clients, Gimbar says staff auditors reported spending more time:

• Preparing for interactions.

• Getting help from other auditors on the engagement team.

• Explaining the relevant audit issue to client personnel.

• Ingratiating themselves to the client.

Interviewees also reported sometimes delaying client interactions or avoiding clients.

In the first two interviews they conducted, Gimbar and her coauthors noticed that both interviewees, while talking about avoiding clients, mentioned something that the researchers refer to as “ghost ticking.” In academic research, ghost ticking is more formally known as a “premature signoff,” which happens when auditors document having completed tasks without actually having performed those tasks.

In fact, nearly half of the interviewees said they had engaged in ghost ticking and one-third reported that they were aware of ghost ticking done by others.

“These behaviors absolutely can affect audit quality,” Gimbar warns. “Our project is one of the first few papers to document that ghost ticking happens. Not only is it happening, but staff auditors are willing to admit to it and tell us about it. They may think to themselves, ‘My work is low risk, what I’m doing isn’t all that important. Will this really change the audit opinion? Probably not.’ But that audit evidence is the foundation for everything else in the audit.”

Overall, Gimbar stresses interactions with unfriendly clients can be and need to be improved if we want to retain CPAs in the audit profession: “I’m a former auditor. I’m trying to improve auditors’ experiences and, in turn, attract people to the profession.”

Importantly, both auditors and clients have roles to play in improving their interactions. On the client side, they need to understand that auditors aren’t coming in to do an efficiency audit—these audits are required by the SEC. And on the auditor’s side? “There needs to be more coaching of staff auditors on difficult interactions,” Gimbar suggests. “That way, staff can be prepared for the worst but hope for the best.”

Joshua Herbold, Ph.D., CPA, is a teaching professor of accountancy and associate head in the Gies College of Business at the University of Illinois Urbana-Champaign and sits on the Illinois CPA Society Board of Directors.

CORPORATE STRATEGY & FINANCE

Preparing for the IPO Comeback

Will initial public offerings (IPOs) return big in 2024? Many experts are saying yes— here’s what CPAs and CFOs need to know now to prepare.

BY JEFF STIMPSON

AS both investors and issuers wait for market conditions to improve, the initial public offering (IPO) backlog continues to expand. As of Nov. 2, 2023, there’s only been a meager 133 IPOs so far this year, trailing 2022’s 181, according to the market observer site Stock Analysis. This is a dramatic decline from 2021’s massive 1,035 IPOs.

According to Kiplinger, looming IPOs to watch for in 2024 include online retailer Fanatics, tech companies Cerebras Systems and Waystar, and travel services company Navan, among others. Health care, fintech, artificial intelligence, and green energy companies are also expected to be among hot issues in the coming year.

In other words, all signs point to a more fervent offering revival in 2024. Here’s what CPAs and chief financial officers (CFOs) should do now to get their clients and companies ready for an IPO.

MIND THE IPO PREDICTIONS

During Deloitte’s recent “Path to Public Series: IPO Readiness Panel and Presentation,” experts predicted an uptick in equity activity to close out 2023, with even more activity in 2024, particularly in the first half of the year as companies look to get ahead of the United States presidential election in November. Jim Clayton, BDO’s private equity national co-leader in Philadelphia, notes that most surveys show an expected improvement in valuations by the second half of 2024. In fact, a recent poll by his firm showed that 80% of respondents believe an optimal IPO market will return in 2024.

But elections bring up more uncertainty, says Dean Quiambao, partner at Armanino in San Ramon, Calif. “Because of the uncertainty, I predict there will be a big concentration of companies going public in the second quarter of 2024,” he says. “Right now, you see companies dipping their toes and trying to assess the uncertainty—they’re trying to give themselves more runway for more profit and better numbers to tap the public market.”

“In days past, it was good enough for companies to say, ‘We have enough sizzle here, and we can sell the sizzle.’ What CFOs are now saying is once their companies reach profitability or have a very clear path to profitability, they’ll try to go public because a stall in the IPO market doesn’t last forever,” Quiambao says.

A tighter credit market is also driving companies to seek cash elsewhere. While some entities have been creative in debt and other financing, Gary Klintworth, senior managing director at CBIZ ARC Consulting LLC in San Francisco, notes that growth is difficult without funding or cash flow.

“Stripe, Instacart, ARM, and Klaviyo have been anticipated IPOs for several years, so these are exceptions. However, there’s an appetite for companies to tap the public markets for funding, even at lower valuations, in order to create some liquidity,” Klintworth says.

GET IPO READY

Clayton says companies thinking about IPOs shouldn’t wait long to start getting ready: “When looking back at the downturn in IPOs during the financial crisis, it’s important to mind that many companies waited, and in some cases waited too long, to start the IPO process and therefore weren’t ready when the market turned.”

Getting ready might involve a new way of documenting operations. Certain provisions of U.S. generally accepted accounting principles for public entities differ from those for non-public entities. For instance, public business entities are generally required to adopt new accounting standards before private companies, and a company undertaking an IPO must present financial statements that are consistent with public-entity accounting principles and must comply with the disclosure requirements for public entities for all periods presented.

Other topics where accounting principles or disclosures may apply to public entities but not to non-public entities include earnings per share, segment reporting, temporary equity classification of redeemable securities, certain income tax-related disclosures, and certain disclosures related to pensions and other postretirement benefits.

When it comes to getting IPO ready, it’s often best to get some help.

“Accounting firms can help companies evaluate their systems, processes, and people, as well as their overall financial, management, and IT controls,” Klintworth says. “In addition, being able to forecast accurately is an area where assistance is necessary. Having good advisors in place to assist in the heavy lifting and pre- and post-IPO staff augmentation, outsourcing, and co-sourcing is critical.”

Clayton says that accounting firms often start by assessing the current organization—its people, processes, technology, and recent audits—to understand what’s needed to get to an IPO: “Providing a client with a roadmap and plan from the start to IPO filing, as well as guidance for operating as a public company after the flip, is important.”

When helping clients through an IPO transaction, firms should keep their clients focused on the goal of long-term growth—not just nearterm profitability. The reality is, according to Deloitte, that planning should start anywhere from 18 to 36 months in advance of the anticipated IPO date. During this time, companies should work to:

• Develop a business model with sustainable growth potential.

• Assemble a strong team for the IPO journey and beyond.

• Build a solid business infrastructure and implement systems that facilitate financial planning and forecasting.

• Prepare for a smooth financial reporting close process and develop appropriate risk management practices.

• Allow adequate time to ramp up for the IPO.

“Prior experience with an IPO, especially for the CFO, is extremely beneficial, and it’s also a comfort to the investment bankers and attorneys involved in a deal,” Clayton adds.

Unfortunately, prior experience with an IPO isn’t common, says Guy Gross, Chicago-based SEC practice leader with RSM US LLP: “For most smaller IPOs, it’s a first-time experience for the company’s accounting personnel. In these cases, allowing the appropriate amount of prep time is invaluable to ensuring the process goes as smoothly as possible.”

Gross suggests this poses an opportunity for accounting firms to step up further as strategic advisors and ensure their clients not only engage with and bring in the appropriate consultants for a successful IPO process but also develop their internal teams to thrive throughout and after the IPO. Gross notes this could include forging relationships with investment bankers, Securities and

Exchange Commission (SEC) attorneys, and consultants who assist with IPO readiness. It could also include helping the client to develop internal control documentation and testing and learn how to prepare quarterly and annual SEC filings, among other matters.

Gross says firms should also work closely with the consultants to ensure their clients are doing everything necessary before they go public, including complying with all the SEC reporting requirements: “Closing the books and issuing financial statements in 45 days for a quarterly filing is very quick—likely much faster than the company performed these tasks as a private company. Some companies believe they have the bandwidth to prepare for the IPO and also do all of their daily activities. This can be a big mistake.”

Klintworth stresses that nobody is ever really ready to be a public company.

“Companies need to show that they can execute on their business plans, financial projections, and key metrics for two to three consecutive quarters prior to being in a great position to prove IPO readiness. Systems, processes, and people must also be in place in order to scale,” he says.

“When you think of the big picture, the goal isn’t to just go public,” Quiambao says. “The goal is to be a successful public company that’s ready and able to consistently grow its market value.”

Jeff Stimpson is a New York-based reporter and has covered tax for 20 years. His work has appeared in various business and general interest publications, including Accounting Today and Financial Advisor magazine.

Treasuring Stability

Managing Corporate Cash in an Uncertain Economy

Preserving cash, capitalizing on opportunities, and remaining flexible are key moves for any finance team during uncertain times. Here, six finance experts share added advice for managing treasuries today.

BY TERI SAYLOR

tAits core, effective treasury management plays an instrumental role within a company’s strategic plan, helping drive decisions across all financial areas, including capital planning, internal budgeting, overall growth planning, risk management, and relationships with customers and suppliers.

Of course, instability and uncertainty in the financial sector— whether due to stubborn inflation, rising interest rates, threats of a looming recession, global conflicts, lingering pandemic impacts, or other factors—have challenged traditional treasury management tactics in recent years.

Fortunately, companies are finding ways to adjust. In fact, recent studies suggest chief financial officers (CFOs) and chief executive officers (CEOs) in the United States are slowly becoming more optimistic about the economy again.

According to the AICPA & CIMA 3Q 2023 Business and Industry Economic Outlook Survey, 29% of respondents, including corporate decision makers, are optimistic about the economy, up from 14% in Q2. Further, 45% reported they’re optimistic about their own organizations. Additionally, respondents reported making higher projections for revenue and profits in the year ahead.

Yet, despite these positive responses, organizations of all sizes remain wary of the impacts of high inflation and interest rates, along with the state of the workforce (39% of survey respondents reported the need for additional employees).

As such, corporate finance leaders are turning to shrewd treasury management strategies to weather the current economic environment and be positioned to quickly react to opportunities that arise, like a strategic acquisition or purchasing incentive from a supplier.

“A properly managed treasury strategy should create flexibility to manage through various fluctuations in the economy,” says Anthony J. Gattuso, senior vice president and director of commercial banking at BMO Commercial Bank. “Regularly reviewing your treasury management goals—including with key partners—can help you tailor your strategy and stay on track in your efforts to moderate risk and improve predictability of your cash cycle.”

For Carla Tolomeo, assistant vice president at BMO Commercial Bank, treasury management today is about remaining nimble: “Companies that are nimble will fare better than those that are cumbersome and slow to take action.”

Double Down on Debt

For watchful companies, accelerating debt repayment has paved a pathway to stability.

Frank Cesario, CEO and director at Yunhong Green CTI Ltd., a manufacturer of film-based products, relied on forecasting strategies to pay down his company’s debt five years ago in anticipation of rising interest rates.

“Although we had experienced interest rates near zero for an extended period of time, we knew it wouldn’t last forever,” he says. “We determined we owed too much money and went through a dedicated process to bring that down.”

Today, he says his company’s debt load is about a quarter of what it used to be.

“Imagine how much more exposed we’d be to the recent rise in interest rates if we still had that debt load,” he notes.

Point being, as borrowing costs have climbed to highs not seen for decades, Cesario urges corporate finance leaders to be mindful of eliminating costly, and possibly crippling, debt as soon as possible. That could be done through a variety of strategies, whether through accelerated payments, raising capital, refinancing, or other moves relevant to the company’s financial position.

Notably, both Gattuso and Tolomeo agree that paying down debt to free up cash is key to enabling companies to remain flexible now.

Remember Cash Is King

“Cash is king, and cash flow is the lifeblood of any business,” Gattuso stresses. “An effective treasury management strategy can help unlock working capital capacity, reduce reliance on debt and exposure to related borrowing costs, and create flexibilities to manage through down cycles.”

Generally, for businesses in a well-capitalized cash position, Gattuso suggests balancing strategy around operating cash, reserve cash, and strategic cash that’s forward looking.

“In an environment with a relatively flat or inverted yield curve, businesses are largely keeping excess cash in short-term bank products, such as liquid money market accounts, which are producing attractive returns while maintaining more immediate access to cash,” he says.

Cesario advises taking an aggressive approach to maintaining liquidity for practical needs, like funding operational expenses (e.g., payroll, mortgages, and rent).

“You can only survive on borrowed funds for so long,” he stresses. “While debt can be a strategy for lengthening the runway to achieve

success, don’t assume you can keep borrowing indefinitely—I’m not aware of any business model that can make that work.”

However, managing working capital comes with its own risks, says Derek Sasveld, CFA, director of investment strategy and research at Busey Wealth Management, who advises finance executives to closely watch interest rates. He predicts the Fed may stop raising lending rates, which could begin lowering short-term investment rates in the early part of 2024.

“If you’ve become accustomed to earning 5.5% on your money market accounts, prepare for lower interest rates in 2024 and 2025,” Sasveld cautions. “To protect against that to some extent, maybe consider going out a little longer in terms of the maturity of the investment products you buy.”

Additionally, Sasveld urges caution when balancing the need for liquidity against the desire to earn the highest interest rates available.

“Weigh the return on investment when considering your cash management strategy. Working capital is supposed to be conservatively invested,” he says. “It’s one thing to paint around the edges to earn a little extra yield if you want to take some risk to do that. But if you're managing corporate cash for working capital, you need to play it safe and build in protections against potential negative market fluctuations.”

Seek Strategic Opportunities

In today’s fast-paced and fickle financial markets, even small fluctuations can make a significant impact on an organization’s bottom line. Implementing a robust treasury risk management framework that enables CFOs to assess and manage threats associated with cash and investments, such as interest rate

changes, currency fluctuations, and other market factors that impact a company’s financial position, is essential to ensuring long-term stability and staying poised to seize opportunities that come along.

“Companies should always be thinking about how to best position themselves to manage risk and take advantage of opportunities,” Gattuso says. “For the first time in many years, businesses have an opportunity to think more strategically about how they deploy their excess liquidity given the currently more rewarding interest rate environment.”

Peter Moirano, director of liquidity sales at BMO Commercial Bank, believes economic cycle changes create an environment ripe for opportunities. Currently, he’s seeing activity in the mergers and acquisitions market from corporations that have held cash in their strategic reserves earmarked for taking advantage of the changes in the current economic cycle.

“Companies that haven’t been well-managed during stressful times create opportunities for stronger corporations to acquire them,” Moirano says. “Those that have liquidity and are well-positioned to take advantage of these opportunities will benefit in the long term.”

Other disruptions, like supply chain backups, have also created opportunities for corporate leaders to strategically capture inventory.

“When there’s stress in the supply chain system, there’s a tendency for companies to try to overorder and for suppliers to try to overproduce. When things normalize, that buyer or producer may need to unload the excess inventory they’ve stored up, setting up great buying opportunities for other companies with liquidity that can take advantage of the situation,” Moirano says. “Simply, liquidity enables companies to be flexible, pivot, and move quickly.”

Listen to Learn

For Robert Chan, treasurer at Underwriter Laboratories LLC, having a strong foundation in treasury management is key to mitigating financial risk, managing liquidity, and enabling growth.

Chan advocates for companies of all sizes to have a dedicated treasurer on board instead of relying solely on their CFO or controller for treasury management.

“Treasury management should be a core component of every business, and it’s critical to at least have somebody on board with treasury experience to listen to,” he says. “You must make sure you have strong cash management—both on the receipts and disbursement sides—and safeguard your assets to ensure your fraud protections are in place.”

For organizations not quite large enough to afford a dedicated treasurer, Moirano suggests there’s insight to be gained from tapping into your network: “Building strong relationships with customers, suppliers, and peers, and keeping open lines of communication with them, offers plenty of learning opportunities.”

“These are the people who’ll be describing the challenges they’re facing and the opportunities they’re seeing and experiencing,” he says. “Many people haven’t had to deal with the situations we’re seeing now, so coming together and sharing perspectives and insights into the market provides invaluable advice for navigating this environment.”

Teri Saylor is a Raleigh, N.C.-based writer who covers a range of topics from business to lifestyles.

Breaking the Partner Model

Will Employee-Owned Firms Become the Norm?

As accounting firms struggle to find effective solutions to their talent acquisition and retention challenges, one creative restructuring practice has made its way into the profession—but will it last?

BY CARRIE STEMKE

he last decade has seen many changes to the accounting profession: the onset of the digital age, obstacles wrought by the pandemic, and rapidly changing client needs and expectations, just to name a few. Now, the industry is facing a particularly difficult set of challenges: fewer students are pursuing accounting degrees, young professionals no longer accept the profession’s promise of excessive work hours or the tedium of tax season, and long-established accountants are departing the profession at a rapid rate.

Accounting firms have struggled to find effective ways to handle the ballooning talent recruiting and retention issue. Recently, some firms, including BDO USA LLP, the sixth largest accounting and consulting firm in the United States, have decided to make drastic changes: They’ve abandoned their traditional partnership models and adopted employee stock ownership plans (ESOPs).

An ESOP is a benefits plan in which employees own part or all of the company they work for. Employers have the option of either replacing workers’ traditional 401(k)s with an ESOP or including it as an additional employee benefit on top of an already existing retirement plan (BDO opted for this latter choice).

Perhaps surprisingly, undergoing an ESOP transition doesn’t take an incredibly long time, making it a very viable option for accounting firms looking to make a talent retention change within a year.

“The normal timeline is four to 12 months,” says Aziz El-Tahch, managing director and ESOP and ERISA advisory practice co-leader of Stout, the company that acted as BDO’s financial advisor as they underwent the transition. “The first step is a feasibility analysis, where the key decision makers of the company really understand what the ESOP looks like financially from both the perspectives of corporate and individual shareholders. Once they see that, then we undertake an iterative process where we tweak the design of the transaction to meet certain corporate objectives. Once the board has a good sense of how much capital to raise, that’s when we start execution. Then, it’s a four- to six-month process.”

Why an ESOP?

Often, exploring an ESOP is triggered by either the retirement of a senior partner or by the lack of having someone in the company who could feasibly take over the business—or both. An ESOP can

be an incredibly useful succession planning tool, and many business owners opt for them in order to ensure that when they retire, the business stays with its employees rather than selling to an outsider who might come in and change the company culture.

Prioritizing culture and incentivizing talent with a great benefits package are two elements of effective talent retention, and both of these were top of mind for BDO’s senior partners when they were considering buyout offers from private equity (PE) firms.

“We realized so many benefits by transitioning to an ESOP that weren’t possible with a PE deal,” says Stephen Ferrara, chief operating officer of BDO. He notes that accounting firms often experience a loss of control, becoming beholden to the PE firm, which has oversight.

By undergoing the ESOP transition, Ferrara says every employee at BDO will continue to earn their salary, bonus, matching 401(k) contributions, and, on an annual basis, now receive a 10% ESOP contribution paid on their behalf by the firm.

“To me, the ESOP is a game changer,” he explains. “With it established, every employee has a wealth-building opportunity they haven’t had in the past. It makes every employee an owner without requiring them to make a huge investment. It ties employee benefits to firm performance, and we really think that’ll help with talent retention.”

Ferrara adds that the ESOP transition was a way to make working at BDO more appealing to recent college graduates: “With the ESOP, we hope to demonstrate to new graduates that they can have more ownership over their own destiny—a talent retention tool that’s worked well in other professions.”

A Viable Solution for the Profession?

The introduction of ESOPs in the accounting space begs this question: What will other firms do? Is this a viable talent retention and succession planning solution for an industry that’s been in a state of flux for years now?

Andy Kamphuis, CPA, a shareholder and managing director at Vrakas CPAs + Advisors, thinks so. He views BDO’s decision as not only a creative one, but also reflective of the many catalysts for change tugging the accounting profession in different directions. “There are many effective ways to respond to these changes that aren’t necessarily one-size-fits-all solutions,” he says.

From his experience of working at an accounting firm that serves the needs of many clients using ESOPs, Kamphuis finds these types of structures work well for companies where people are the primary value creators. “This factor alone makes CPA firms great candidates for utilizing ESOPs as a talent retention tactic,” Kamphuis says.

If you want a comparable, profession-wide success story, El-Tahch says to look at the engineering industry. “It’s extremely similar to accounting,” he notes. “The companies that have been most successful with ESOP transitions have highly engaged workforces, very good earnings in cash flow metrics, and generally are part of

growing industries—all of which apply to accounting. Both professions have educated workforces, and people are really important in terms of the value their labor creates. Decades ago, one or two well-known firms transitioned to ESOPs, then dozens and dozens of others followed.”

Just like engineering firms, El-Tahch expects accounting firms will take note of BDO’s transition and its first-mover advantage and start to explore this option at a greater frequency than they have in the past.

What Challenges Await Firms?

As accounting firms consider whether moving forward with an ESOP is right for them, it’ll be important for firm leaders to be aware of the challenges associated with the transition in order to position themselves for success. According to experts, there are a few major obstacles that company owners tend to face. The good news? They’re challenges that, by setting the right expectations and engaging in careful planning, can be avoided or overcome.

The first challenge: raising the capital. To successfully launch an ESOP, you’ll need to find a bank that’s experienced in this finance niche. Not all banks understand the structure and what’s involved in the transaction, experts caution. So, accounting firm leaders shouldn’t be surprised if they have to put extra time and effort into finding a bank that’s good at working with companies undergoing an ESOP transition—and they should expect that some lenders will simply be overwhelmed by the proposal and say no.

Additionally, firms can expect to deal with a lot more service providers when undergoing an ESOP transition. “This can be extremely surprising to companies that are previously used to it being just them, so to speak,” Kamphuis says. “All of a sudden, they have an ESOP advisor, they’re going through an auditor review for the first time because that’s required, and they have new benefit plans that might trigger new audit requirements—there’s more people looking at your stuff, and you’re paying more fees for the oversight.”

One other “surprise” to be aware of? Transitioning to an ESOP requires you to take on debt as a capital-raising function. For firms that haven’t been in debt, this can mean a shift in their mindset and in the way they do business. Of course, overcoming this challenge may require firm leaders to think about whether an ESOP is right for them.

El-Tahch encourages firms considering this transition to do a feasibility analysis. “Literally sketch out what an ESOP would look like for your firm. There are different ESOP structures you should think about—the one that worked for BDO may or may not work for your firm,” he stresses. “This is a flexible and customizable transaction, and until you sit down and do an analysis, it’ll be hard to know whether or not it makes sense for your firm.”

The good news in this regard: Doing a feasibility analysis isn’t extremely difficult, and nor does it require any detailed financial information that you don’t have readily available.

In addition to setting the right expectations about finding a lender and taking on debt, El-Tahch and other ESOP experts can’t stress enough the importance of surrounding yourself with the right transition team.

“It’s absolutely crucial to have good legal counsel; get someone who understands corporate transactions, tax law, and ESOP transactions. This is a specialized niche. Work with good advisors who understand how to structure and execute an ESOP transaction,” El-Tahch advises. “With an ESOP, there are a lot of parties involved. You’ll need an ESOP trustee and lender who’ll do their due diligence. You want to work with someone who’s done it before, who knows what they’re doing, and who can help you navigate this as efficiently as possible. Remember, you’ll be doing this transaction while you still have your day job.”

Of course, another challenge firms can expect is communicating the benefits of an ESOP to other senior partners and employees. “People need to understand the long-term value they’re creating in a way that drives their behavior,” El-Tahch says. “After all, the dividends the shareholder-employees will reap are now tied directly to the performance of the firm.”

While transitioning to an ESOP is a retirement plan that can bring big benefits when optimized properly, Ferrara says it’s particularly crucial to emphasize that it’s one that requires patience. Ferrara estimates it’ll take BDO until about mid-2024 for employees to receive their first ESOP statement. Of course, it’ll demonstrate the value in a powerful way (in financial terms that are on paper). However, it does mean that about a year will have elapsed since BDO completed the transition and when employees begin seeing the first dividends they’ll receive.

So, how can employers engage and educate employees to ensure success? El-Tahch frequently attends conferences where he talks about this very subject, and he has a couple of suggestions.

1. Overcommunicate. Establish communication committees led by individuals who people respect. “Have them teach their peers about the ESOP. Peer-to-peer education is a lot more effective sometimes than command-and-control, top-down management,” El-Tahch says.

2. Be transparent. El-Tahch stresses that companies who regularly share how they’re performing and establish a link between their sales, earnings, and stock price in a clear and intentional way will be more successful in helping employees understand what they should be doing to drive value.

Take it from BDO, taking care to get partners’ buy-in and equal enthusiasm from employees was a heavy focus as they made the transition. In the end, Ferrara says, “We wanted to evolve as a firm. We wanted to create value for our partners and employees and set us up for future success.”

Carrie Stemke is a freelance writer based in New York City. She’s the former senior editor of AccountingWEB US, and has been covering B2B, finance, accounting, and technology for six years.

Finding Your Balance Ahead of Another Busy Season

Each busy season, burnout looms heavy over accounting professionals. Here, four CPAs share strategies to beat burnout and achieve better work-life balance.

BY KASIA WHITE

It’s that time of year again: Busy season is right around the corner. This means another busy season of long, grueling hours, heavy workloads, and pressures to meet deadlines awaits. And with all this comes added stress, which can quickly boil over and lead to workplace burnout.

Today, burnout isn’t just another buzzword—it’s now classified by the World Health Organization (WHO) as an occupational syndrome resulting from poorly managed chronic workplace stress. According to WHO, burnout is characterized by “feelings of energy depletion, increased mental distance from one’s job, and reduced professional efficacy.”

For accountants, especially during busy season, it’s not uncommon to have 50-plus-hour (or more) workweeks. Therefore, it comes as no surprise that a recent study by FloQast and the University of Georgia found that almost all (99%) accountants experience some level of burnout throughout their careers.

So, what’s the solution to combating burnout during busy season (or any season, for that matter)? Here, four professionals share some guidance on ways CPAs and other accounting professionals can achieve the healthy work-life balance they want and need.

Set Boundaries

“There’s a risk of burnout for all CPAs during the busiest times,” says Adriane Wong, CPA, managing director in Deloitte’s Chicago office. “Anytime someone experiences prolonged periods of unmanageable stress, the risk of burnout is real.”

As Deloitte’s well-being leader of the Chicago audit and assurance business since 2018, Wong mentors her peers and helps them navigate their work-life balance by focusing on mental, physical, and financial health. On a regular basis, Wong answers questions, speaks to the firm, creates newsletters, and partners with other experts on well-being initiatives.

According to Wong, the No. 1 way to prevent burnout is to set boundaries at work.

“Setting boundaries takes practice, but boundaries are important in helping us make time for ourselves,” she says. “We all have different priorities. Communicating our boundaries for those priorities helps the people we work with better understand how to best work with us.”

One way to effectively communicate your boundaries at work is to meet with your team, supervisor, or career advisor in-person and say, “This is important to me because….”

“Think about the things in your life that are nonnegotiable, things that are important—maybe it’s having dinner with your family or picking up the kids from daycare,” she says. “When I was younger, I wasn’t as confident about communicating my boundaries, but I realized how important it is now.”

Like Wong, Amber Sarb, CPA, audit senior manager at RSM US LLP, understands the value of setting healthy boundaries and advocating for yourself.

“If you have a family or social obligation, don’t be afraid to ask for the time away,” Sarb stresses, who’s worked for RSM for the last 13 years. “If you want to continue playing in your intramural volleyball league during busy season, there’s no reason why you can’t. Sometimes young professionals are nervous to even ask for it, but flexibility can still be part of busy season. Yes, you’re going to be working a lot of hours, and it might not always be pleasant, but you have every right to ask for what you need socially, emotionally, and mentally.”

For Sarb, having a schedule where she can shut down her laptop early on Saturdays and not turn it back on until Monday was a critical boundary to her well-being.

“I used to always feel like I was ready to have a breakdown by midFebruary because I really just needed a break,” she says. “We deserve that for the hard work we’re putting in during the week. You can’t work four months straight without a break.”

Manage Expectations

While long hours and an intense work schedule come with the territory, Andrew Guerrero, CPA, audit manager at Adelfia LLC, strongly urges CPAs to set boundaries and manage expectations not only at work but also with their families—and themselves.

“How you communicate and prioritize among all parties sets the tone for how you achieve work-life balance,” Guerrero says, who’s been with the small Chicago-based firm for 11 years. “Keeping everyone on the same page requires open lines of communication, especially when you’re managing busy season expectations.”

Admittedly, Guerrero says finding a firm that’s the right fit for you is key. “It’s definitely easier said than done, but I’m very fortunate to have found a place where all parties I’m involved with are understanding of my priorities.”

In addition to having a supportive network at work, Guerrero, who’s busy raising a young family at home, attributes the firm’s option to work remotely as greatly improving his work-life balance.

“Before the pandemic, it was very difficult to have work-life balance,” he says, adding that his commute was more than an hour each way. “If the pandemic didn’t happen and inspire changes in the way we work, I don’t know if I’d still be where I’m at today.”

Stay Healthy

Of course, working from home comes with its own set of challenges, as the line between professional and personal life often blurs.

“This is very often an issue when we start working remotely. In many cases, it’s much easier to burn out versus being in the office,” says Dorothy Sobocinska, senior tax manager at Crowe LLP’s Oak Brook, Ill. office.

Sobocinska, who’s been in her role since 2016, works 90% remotely and says having a routine and sticking to it is essential. For example, instead of brewing a cup of coffee and heading straight to the computer, Sobocinska starts her day with a morning workout at a nearby gym.

“This allows me to leave the house because working from home, sleeping at home—it can be too much,” she says. “Even a 30-minute gym workout in a different environment is beneficial for not only physical but mental health.”

To get more people at the firm moving and eating better, Crowe offers its employees an incentive-based program, which tracks their activity and meal patterns using a mobile app. Points can then be redeemed for rewards, such as cash for gym membership dues or even a reduction to medical insurance premiums, among other things.

“It’s a great incentive,” Sobocinska says, who’s participated in the program since its inception in 2016. “Crowe is very understanding of people’s personal time and mental health. If someone takes an hour to do a yoga workout, no one has a problem with it because they’re taking care of themselves—and they’re going to have more energy to work.”

Prioritize Tasks

To boost productivity at home and stay focused, Sobocinska is a big believer in making lists that establish priorities for the day and the week ahead.

“It helps, especially when you’re overwhelmed with work and have a lot going on,” she says. “Working from home creates this nonexistent separation for many people between work hours and personal hours. Creating to-do lists lets you know when you’re done with work and that you’re going to go back to it the next day— not overnight or by staying very long hours unless you have to.”

Similarly, Sarb uses time blocks to structure her day. “They’ve always really helped me,” she says. “Every day, there’s at least one hour on my calendar that makes it look like I’m occupied, and that’s either for work tasks I haven’t gotten a chance to get to or for running an errand. If you’re working from home, there’s nothing wrong with taking your lunch break and running to the grocery store. Anything that you can do to make yourself feel a little more human during busy season helps.”

During the day, Wong suggests taking microbreaks (i.e., breaks lasting 10 minutes or less). “Try building in some recharge time throughout your day. Three of my favorite microbreaks are taking a walk outside, getting coffee with a co-worker, and team quiz competitions,” she says. “It’s easy to get swept up in upcoming deadlines or back-to-back meetings without taking time for yourself.”

Get Help

Of course, the firm you work for also plays a crucial role in helping to prevent or manage your burnout. According to Sarb, it’s worth speaking with your manager or firm’s leaders if you believe your team isn’t adequately staffed.

“This is a hard conversation to have. We all know everybody is struggling with staffing, but a lot of the times when I see people leaving their jobs, it’s because they felt like too much landed on their shoulders and they didn’t know if it would ever change.”

Before you, or one of your team members calls it quits, Sarb suggests proposing the use of interns or outsourced support staff to help alleviate the burden of burnout across the firm.

When times get tough, Sarb also suggests simply asking the firm’s partners and senior-level professionals for guidance: “The partners and managers have figured out how to be successful—leverage their experience, opinions, and advice when looking to make a change or just get through a tough situation.”

Take Charge

Overall, practicing self-care, being proactive, and taking charge of preventing burnout is essential to having a well-rounded life and career.

“It’s always better to try to head off burnout by taking care of yourself, because coming back from being burnt out is a challenge,” Wong stresses.

As Guerrero says, “Working in public accounting is a lifestyle. To find balance, you have to embrace the fact that you’re not going to be working a 9-to-5 job. Once you do that, it’s much easier to focus on finding your own unique path to work-life balance, whether that be during busy season or beyond.”

Kasia White is a freelance writer who specializes in profiling small businesses and leaders of global companies.

Jon Lokhorst, CPA, PCC Executive Leadership Coach, Lokhorst Consulting jon@lokhorstconsulting.com

2 Types of Goals You Need to Succeed in the New Year

Using a two-part goal-setting structure will get you closer to achieving your goals in 2024 and beyond.

It’s that time of year again, when organizations and individuals alike review their performance in comparison to goals set at the beginning of the year. How did you do? Did you achieve your goals? Or was it a year of disappointment and unfulfilled potential?

If you came up short, you’re not alone. A global study by The Economist found that 90% of businesses fail to achieve their strategic goals. The success rate for individuals is even lower, with an astounding 92% of people missing the mark, according to research by the University of Scranton.

What’s the culprit? What are the typical barriers that keep organizations and individuals from achieving their goals? Is it a lack of willpower? Is it a lack of discipline? While these are often contributing factors, my work with executive coaching clients has uncovered it’s something else: A structural gap in the typical goal-setting structure. What’s missing is the link between two types of goals.

SMART GOALS ARE A GREAT START (BUT NOT ENOUGH)

Most goal-setting advice centers on establishing SMART goals (i.e., goals that follow the formula of being specific, measurable, attainable, relevant, and time-based). To illustrate, let’s apply the SMART formula to a common personal goal that people begin at the start of the year: “I will lose 15 pounds by March 31.”

Does this short, simple goal align with the SMART framework? You could argue, yes, as it checks all the boxes. Yet, it’s the type of goal often marked by failure.

THE TWO-GOAL FRAMEWORK: OUTCOME GOALS AND PROCESS GOALS

Although the weight-loss goal meets the SMART criteria, it’s only an outcome goal. It’s what you hope to accomplish in the end. What’s missing are the steps it’ll take to be successful. That’s where process goals come into play.

Looking at it another way: Outcome goals are the scoreboard, while process goals are the playbook. Outcome goals define results, like your goal to lose 15 pounds (in this case, your scale is the scoreboard). Process goals define action, like determining that losing 15 pounds will require 50% of your daily food intake to be fruits and vegetables.

What makes process goals so powerful is that you have more control over the process than the outcome. This is because outcomes are vulnerable to external circumstances and conditions that you can’t control. But generally, the right actions and behaviors lead to the right outcomes and results.

Now apply this concept to a common business goal: increasing revenue. Here’s an example of how you might pair process goals with an outcome goal for the quarter.

Outcome Goal:

• We’ll increase monthly recurring revenue by $50,000 by March 31.

Process Goals:

• We’ll create a client case study highlighting one of our valueadded services by Jan. 31.

• We’ll meet with five clients with the potential to add new service lines by March 31.

• We’ll ask each advisory service client for a referral by March 31.

• We’ll make 10 calls to prospective new clients each week.

Furthermore, to increase your likelihood of success, here are some additional tips to weave into this two-goal framework.

• Write your goals in the form of commitments. Following the examples above, start your goal statements with phrases like “I will” or “We will.” Beyond strengthening your resolve with clear intentions, framing your goals this way puts them in a positive light.

• Economize the number of goals. It’s easy to open a new year with elevated hopes, dreams, and expectations, only to experience a crash into reality when the going gets tough. Narrow your goals down to the few that are most crucial to your success, as “there will always be more good ideas than you and your teams have the capacity to execute,” according to Chris McChesney, co-author of “The 4 Disciplines of Execution: Achieving Your Wildly Important Goals.” In fact, McChesney and his co-authors suggest that an individual or team can only work on two or three goals at a time if they expect to be successful.

• Shorten your year. Many annual goals are doomed from the start simply because 12 months is a long time. Complacency and procrastination set in when the finish line is too far off. To overcome these pitfalls, use a quarterly cycle. The shorter time frame brings the finish line closer, creates a sense of urgency, and enhances your ability to focus on desired outcomes. It also allows you to recalibrate when circumstances change. You get a fresh start each quarter, which increases the number of goals you can accomplish in a year. For more on this concept, check out the book, “The 12 Week Year: Get More Done in 12 Weeks Than Others Do in 12 Months.”

• Establish a weekly planning and review process. Schedule a weekly meeting with yourself or your team to review your outcome and progress goals for the quarter. Some goals can be evaluated with quantitative measures, like dollars, days, and other metrics. Other goals are more subjective and can be measured with a “Red, Yellow, or Green” framework to gauge progress. Then, translate process goals into action steps on your calendar. (Yes, schedule them to create time to work on these priorities and increase your chances of getting them done.) If you’re successful in achieving process goals, your outcome goals will likely be achieved as well.

• Find a partner to hold you accountable. According to the American Society of Training and Development, you have a 65% chance of achieving a goal if you share your commitment with another person. Your likelihood of success jumps to 95% if you have a regular accountability check-in. Whether you meet with a business partner, work colleague, friend, mentor, or coach, structured accountability enables you to go from good intentions that fall by the wayside to the fulfillment of achieving your personal and professional goals.

While SMART goals are great, they’re not enough to take you to the finish line. Speaking from experience, using a two-part goal-setting structure will provide you with a higher rate of success in achieving your goals. And in cases where the goal isn’t met? Trust me, you’ll get closer than you would have without following this process.

Brian J. Blaha, CPA Growth Partner, Wipfli LLP bblaha@wipfli.com ICPAS member since 2011

Deal or No Deal? My 2024 M&A Predictions

The merger and acquisition landscape continues to evolve at a rapid pace as firms seek to expand their offerings and accelerate growth.

The accounting industry used to move in packs in terms of service offerings, with very little discernable differences between firm strategies. A few years ago, I predicted divergences would begin to emerge. While it hasn’t quite transpired at the pace I expected, we’re seeing more changes in the makeup of firms, largely driven by a variation in merger and acquisition (M&A) strategies, technological innovation, and the expansion of private equity (PE) ownership and influence across the industry.

So, what does all this change mean, and how will it impact the profession? Here are my observations and predictions as we head into 2024.

WHAT’S HAPPENING WITH M&A DEALS?

The M&A landscape across the accounting and broader professional services market continues to evolve. In looking at the diverse competitor set alone, the profile and service offerings of typical accounting firms have changed significantly. Gone are the days of CPA firms focusing exclusively on core compliance, audit, and tax services. Instead, firms today are generally focused on offering a full set of consulting and advisory services built on the foundation of trust, which are then supported by their audit and tax practices.

From 2020 to 2022, the number of M&A deals in the accounting industry increased significantly, with most occurring among the top 75 firms in the country, which has led to more large firms having multifaceted capabilities. There are now 12 firms outside the Big Four that generate more than $1 billion in revenue, and there are even more firms nearing that threshold.

While deal volume slowed a bit in 2023, with 57 deals completed through June 2023, compared to 69 over the same period in 2022, the number of deals in the industry have been consistently high for several years. Interestingly, non-CPA firm acquisitions have risen to 30% of deals in 2023, compared to 25% in 2022. I expect this trend to continue as firms look to acquire other capabilities as the shift toward an advisory firm model accelerates. On average, 32.3% of services are non-compliance related services for most firms, and that number rises to 45.9% for firms with over $150 million in revenue.

Of course, the most talked about topic in accounting firm M&A is the entry of PE into the industry, and many firms are asking important questions on this trend: What does this

mean for the future of traditional partnership models? How will they compete with PE-led firms? How will they operate if they were PE-owned?

Notably, PE has impacted the M&A landscape in several ways:

• Value: Overall, valuations for CPA firms are on the rise. PE firms view CPA firms as attractive targets as they offer them stable and diverse income streams, the ability to navigate recessionary times, and the ability to take advantage of growth opportunities. Because CPA firms don’t report earnings before interest, taxes, depreciation, and amortization in the same manner as companies in other industries, there’s been a push to normalize CPA firm earnings in a similar manner.

• Structure: With increasing firm valuations, deal structures are changing. There’s more cash being brought to transactions as sellers are asking for some of the risk to be taken off the table. Partner incomes are then recalibrated (or cut) to bring the economics in line. In non-CPA firm deals, a mixture of upfront cash and shorter earnouts are trending, as firms are looking to integrate practices at a much faster clip.

• Competition: With additional equity infused into the industry, the competition for qualified deals has increased, with more buyers pursuing each potential deal.

WHAT MAKES A DEAL IDEAL?

When evaluating M&A deals, firms typically look for certain elements:

• Culture: If a culture fit isn’t present, it’s best to walk away and search for the next deal. It might be surprising to know that most active acquirers have a significant number of deals that don’t advance because the culture fit isn’t there.

• Strategic fit: M&A is a critical component to growth. While many look at organic and inorganic growth separately, inorganic growth often provides room for organic growth to flourish. When looking at what determines a good strategic fit, industry fit, client acquisition, service capabilities, and market expansion are all considerations that support growth.

• Size: Typically, larger CPA firms are coveted for their scale, industry alignment, and talent expertise. Non-CPA firm acquisitions typically end up being more dependent on deal economics and the buyer’s ability or appetite to close a cash deal.

WHAT’S AHEAD IN 2024?

Considering the trend of CPA firms pursuing advisory service models, as well as a growing need to scale, I expect the pace of M&A transactions to remain robust in 2024. However, I believe the percentage of non-CPA firm deals will increase as a percentage of overall deals. The number of larger firms looking to sell appears to be lessening, so I expect there will be an uptick in smaller deals, particularly among industry-focused boutique firms looking to join larger firms with full suites of services attractive to meeting the expanding needs of their clients. Additionally, I expect deal values could increase due to growing competition for quality firms and the access to PE capital.

Of course, markedly weaker economic conditions may temper some of my predictions. Either way, it’ll be interesting to see everything unfold in the year ahead.

Andrea Wright, CPA Partner, Johnson Lambert LLP

awright@JohnsonLambert.com ICPAS member since 2010

Assessing SAS 134-140: How Did It Go?

Before tackling SAS 143-145, let’s see how you did on the former suite of auditing standards. Consider these post-implementation reminders.

As auditors prepare for another busy season and three new, significant statements of auditing standards (SAS 143-145) for periods ending on or after Dec. 15, 2023, it’s a good time to reflect on the previous suite of standards and offer some post-implementation reminders.

As you may recall, SAS 134-140 became effective for audits of financial statements for periods ending on or after Dec. 15, 2021. The most visible changes were to the auditor’s report required by SAS 134 and 136. Here’s an overview on both:

SAS 134

SAS 134 changed the layout and the content of the auditor’s report to more closely align with the Public Company Accounting Oversight Board and the International Auditing and Assurance Accounting Standards Board. It required the content to be presented in the following sequence:

1. Opinion.

2. Basis for opinion.

3. Key audit matter (optional).

4. Responsibilities of management for the financial statements.

5. Auditor’s responsibilities for the audit of financial statements.

As noted above, reporting key audit matters (KAMs) is optional; they’re only required when those charged with governance have engaged the auditor for the information. Notably, the determination of KAMs is a matter of professional judgment, and therefore, the reporting of KAMs will vary between entities—even within the same industry—as well as from period to period for the same entity.

In determining which matter(s) to report on when engaged by governance to report, the auditor should evaluate matters that required significant attention during the audit. These matters include:

• Areas of high-assessed risk of material misstatement.

• Significant risks.

• Areas requiring significant auditor judgment.

• The impact of significant transactions and/or events.

Lastly, an item reported as a KAM shouldn’t be included as an emphasis-of-matter paragraph or other paragraph in the auditor’s report.

OTHER INFORMATION IN ANNUAL REPORTS AND THE AUDITOR’S RESPONSIBILITY

Many organizations issue annual reports that include “other information,” which is defined as financial and non-financial information other than financial statements and the auditor’s report.

When other information is included in an annual report, and the annual report is available before the auditor’s report is issued, the auditor’s report is required to include an “other information” section. This section is required to detail the responsibilities of both management and the auditor regarding other information included in the annual report and a statement that the auditor’s opinion doesn’t cover the other information.

Notably, SAS 134 defines “annual report” and provides examples of reports that don’t meet the definition, such as IRS Form 990 and Form 5500.

SAS 136

SAS 136 applies to audits of employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). This standard changed:

• The form and content of the auditor’s report, including when management elects to have an audit performed pursuant to ERISA Section 103(a)(3)(c)—the audit formerly known as “limited scope.”

• Conforming modifications to the engagement letter, communications to those charged with governance, and management’s representation letter.

• Procedures related to audit risk assessment and response.

• Considerations related to filing Form 5500.

The most significant change brought on by SAS 136 was to the auditor’s opinion, particularly when management has elected to have auditors exclude testing of certain investment information that’s prepared and certified by a qualified institution (as described in 29 CFR 2520.103-8). This election no longer constitutes a scope limitation, and as a result, the disclaimer of opinion paragraph is eliminated.

Of course, the objective of SAS 136 was to provide more transparency to users of employee benefit plan financial statements. As such, the audit opinion of an ERISA Section 103(a)(c)(3) audit now includes information on the procedures performed on both certified and non-certified information.

Appendix A of the AICPA’s “Audit and Accounting Guide: Employee Benefit Plans,” provides illustrative examples of the auditor’s report. When management has elected the ERISA Section 103(a)(3)(c) option, the content of the auditor’s report should be presented in the following sequence:

1. Scope and nature of the ERISA Section 103(a)(3)(c) audit.

2. Opinion.

3. Basis for opinion.

4. Responsibilities of management for the financial statements.

5. Auditor’s responsibility for the audit of financial statements.

6. Other matters, such as a supplemental schedule required by ERISA.

As you can see, the changes brought on by SAS 134 and 136 were significant—both to the report and required communications. Therefore, it would be wise for auditors to take a post-implementation assessment of these changes before tackling the latest suite of standards to ensure they’re remaining compliant.

Mark J. Gilbert, CPA/PFS, MBA President, Reason Financial Advisors mgilbert@reasonfinancial.com ICPAS member since 1982

The State of Philanthropy: How CPAs Can Help Donors

Has the pandemic had any effect on charitable giving? Yes—but the results may surprise you.

What’s the state of philanthropy in the United States today? Has the pandemic made an impact? Are people giving more or less to charities?

With a new year approaching, these were the questions I wanted to know, as now is often the time of the year when clients come to me with questions about charitable giving. So, here’s what I found.

According to an annual report from the Giving USA Foundation, in conjunction with the Indiana University Lilly Family School of Philanthropy:

• Total giving in 2022 was estimated at just over $499.33 billion, a 3.4% decline from 2021. Broken down by group type:

- Individuals: $319.04 billion (down 6.4% from 2021).

- Foundations: $105.21 billion (up 2.5% from 2021).

- Bequests: $45.6 billion (up 2.3% from 2021).

- Corporations: $29.48 billion (up 3.4% from 2021).

• 2020 and 2021 were the two strongest years for giving in history.

• It’s likely that overall giving fell in 2022 due to economic uncertainty brought on by falling stock prices and rising inflation/interest rates, which reduced disposable income and lowered wealth levels.

• High-net-worth individuals comprise a significant amount of individual giving, and they increasingly utilize non-cash vehicles to donate their gifts.

• More “mature” donors (baby boomers and Gen Xers) often donate out of loyalty and take a hands-off approach to giving. Younger donors (millennials) take a more active approach, like volunteering and annual giving.

Additionally, the Fundraising Effectiveness Project annually surveys nonprofit organizations on their success at raising funds for operating and program expenditures. According to its latest report, overall dollar donations have fallen by 0.7%, and the number of donors have fallen by 3.8% since 2022.

Overall, this research allows me to conclude a couple of things. First, at the height of the pandemic—when workers and others suffered as a result of the economy “closing,” coupled with federal government assistance—we saw the highest levels of giving on record. Second,

rising stock markets during the pandemic, along with a generational increase in the values of investment securities, left many Americans with the resources needed to meet their charitable intents.

What this tells me is that Americans as a whole are inclined to give to charitable organizations—especially when they have a little extra cash to give.

So, how can CPAs help their clients (at all levels of wealth) meet their charitable intents for the year? Here are three ideas:

1. QUALIFIED CHARITABLE DONATIONS

Individuals aged 70 ½ are eligible to make up to a $100,000 annual donation to qualified charities directly from their individual retirement accounts (IRAs). While no Schedule A (Form 1040) itemized deductions are available for this type of donation, the donated amounts are excluded from taxable income. This donation method is most effective for a taxpayer who’s required to take a minimum distribution from their IRA and doesn’t need to use the funds for living expenses. Aside from potentially reducing current income, the qualified charitable donation serves to reduce the IRA balance, therefore providing for smaller required minimum distributions (RMDs) in future years.

Your client must process all qualified charitable donations (QCDs) for the year prior to withdrawing any funds that are considered to be part of the RMD. And, if your client plans to do a Roth conversion of any balance in the IRA, that can only be processed after both the QCDs and the RMD payments have already been made. Obviously, with multiple distribution options available to IRAs, you and your client must plan carefully. Further, it’s best to consider employing the use of one or multiple QCDs earlier rather than later in the client’s tax year.

2. DONOR-ADVISED FUNDS

Donor-advised funds, commonly administered by brokerage and mutual fund firms, are ideal for clients who wish to make sizable donations but choose to do so later in the tax year because of either procrastination or an unexpected increase in their projected taxable income for the year. They can also be suitable for donors who wish to make one or more impactful gifts to a favored charity that might represent an amount equal to at least two or more years’ of otherwise annual gifts. A donor-advised fund is a qualified charitable organization and gifts to it are eligible for Schedule A itemized deduction treatment, subject to limits. By making an eligible gift to a donor-advised fund, the taxpayer gets a current year tax deduction for a donation and can hold off on directing that donation to the charity until a future date. Using this strategy, a procrastinating donor can first secure a charitable donation tax deduction, then take their time (well into the future) to evaluate which charity or charities should receive those funds. The donor wishing to use several years’ worth of annual donations to make an impactful gift to a favored charity can likewise make the gift well past the years in which they made the donations to the fund.

3. AFTER-TAX DONATIONS

Cash and non-cash donations (such as appreciated securities) are the methods by which most donors make gifts to charitable organizations. Cash gifts—including those by check or credit card— are generally simple, straightforward, and easy for clients to track. However, with the current historically high standard deduction level, many donors will lose the ability to realize an income tax deduction for their donation.

Donations of appreciated securities (stocks, mutual funds, etc.) from a client’s after-tax brokerage or other account may also fall prey to the standard deduction level. However, these donations may still be attractive for at least two reasons: 1) they allow a taxpayer who’s otherwise feeling cash poor to make a meaningful contribution to their favored charity without depleting cash; and 2) the unrealized long-term capital gains associated with the securities escapes the taxation that the donor might otherwise be subject to if they sold the securities in order to raise cash to make the gift because the charitable organization can liquidate the securities at no tax cost.

Not unlike a QCD, making a gift of appreciated securities should be planned for and executed before the last week of the tax year. Rising markets in recent years have resulted in the rising popularity of this gift vehicle. Consequently, a donor’s brokerage or mutual fund firm, which must carry out the transaction with a charity’s brokerage firm, may set a deadline of several weeks prior to the year’s end.

Now, with the worst of post-pandemic inflation behind us (or at least we hope), it’s reasonable to anticipate a pickup in overall charitable giving. I suggest preparing for more client questions on how they can give strategically—hopefully these three options can help.

Shifra Kolsky, CPA Senior VP, Chief Accounting Officer, Controller, Discover Financial Services shifrakolsky@discover.com ICPAS member since 2017

What’s Old Is New Again in Corporate Finance

To stay adaptable and responsive to today’s business challenges, corporate finance teams need to consider their lessons from the past.

This time of year is when we often find ourselves both looking back in review and also looking ahead to our future goals. As I sit here reflecting on the past year, I find myself thinking of Peter Allen’s song, “Everything Old Is New Again.” In it, the lyrics say: “Don’t throw the past away, you might need it some rainy day.”

In many ways, these lyrics ring true to the ways in which finance teams operate. Although specific details may change in nuanced and important ways, the key themes that are relevant to a successful and impactful finance department are similar from year to year. That said, I believe the lessons from the past can—and should—be applied to the challenges of today.

With this in mind, here are five old issues for corporate finance teams to keep top of mind as they plan ahead for the new.

1. STRATEGY AND RISK MANAGEMENT

It’s no surprise that strategy and risk management goals continue to be a top priority for year-end planning. As we all know, finance departments play an important role in determining a company’s strategic direction. They:

• Use projections and financial analysis to decide whether a particular project or product will yield the desired results.

• Measure and monitor the progress of a project’s goals based on its defined objectives and key results.

• Influence results through effective communication of its analysis of risks and opportunities.

The finance department also leads the company in identifying and assessing potential financial risks. Through scenario planning, they can analyze and study the impact of these risks using different approaches and provide an action plan for the company. While specific scenarios may vary over time, finance teams can learn from previous business and economic cycles to plan for future changes.

2. TECHNOLOGY AND TRANSFORMATION

As teams continue to search for ways to remain competitive, efficient, and relevant with the times, technology and transformation will be key issues for finance teams to consider

each year. Notably, process optimization should be the primary consideration for finance teams ahead of any automation efforts. This requires a clear understanding of the desired outcomes of routine activities, along with the data sources and inputs the activities require and the controls to ensure quality. Additionally, highlighting key operational opportunities for improvement can allow for process enhancement and more efficient finance operations.

Of course, finance departments must continue to prioritize automation as a key to success in managing the increasing needs of their business partners and generating robust analysis to support data-driven decision making. Some finance teams will need to continue down the path of migrating systems and data to the cloud to take advantage of its constantly evolving capabilities. Others may need to focus more on prioritizing data-related projects to enhance accessibility and improve analytic capabilities. More advanced teams may want to consider looking for ways to leverage artificial intelligence and machine learning to gain new insights from their data, understand trends and variances, and assist in report writing processes.

Internal controls related to technology will also continue to demand focus. It’ll be important moving forward to find new ways to monitor performance of controls, and data security must remain at the forefront as companies enhance their systems and aim to meet the industry’s evolving needs.

3. ECONOMIC OUTLOOK

The last several years have required finance departments to polish their crystal balls in effort to predict how fiscal policies may impact the economy. The pandemic, ongoing inflation, geopolitical events, and more have thrown a number of unanticipated twists into the mix, taking a toll on global supply chains and commodity prices. Taking the lessons learned from these economic challenges, finance teams should focus on the long game, stay disciplined in spending, build strong relationships with suppliers and customers, and consider multiple scenarios as they manage their financing and capital needs.

4. REGULATORY CHANGES

Regulatory changes are an evergreen issue for finance departments. Among the most pervasive issues affecting a wide swath of businesses today are the global and domestic requirements for disclosures related to environmental, social, and governance (ESG) matters. Many companies have turned to their finance departments to lead efforts to ensure the accuracy and reliability of metrics and measurement for ESG disclosures, and there will be an ongoing need to allocate resources for implementing and maintaining strong systems and procedures for producing disclosures that’ll stand up to regulatory and audit reviews. Additionally, with different timelines for implementation, finance teams will need to plan strategically to ensure timely compliance.

Although ESG will be top of mind, finance departments must continue to monitor other ongoing rulemaking efforts from other agencies. For example, election-year politics, the expiration of certain tax policies, and governments seeking to reduce deficits are all things that could impact future tax rates. Also, the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission continue to have a robust list of ongoing projects and proposed rules that’ll affect companies and industries differently based on applicability.

5. TALENT DEVELOPMENT AND MANAGEMENT

Lastly, the talent landscape continues to evolve and challenge finance teams. To help future-proof the department’s skill sets, finance teams will need to ensure there’s ongoing professional development that’s timely and relevant.

With a dwindling supply of accounting professionals in the pipeline, recruitment will continue to be a challenge, making retention a key issue. Additionally, questions surrounding remote/hybrid flexibility will likely continue. Therefore, companies will need to evolve their policies, and finance teams will need a seat at the table to ensure they can staff flexibly and effectively.

Of course, the challenges we face will differ for each of us, as our specific priorities and circumstances vary by industry, region, and unique situation. Still, we can all consider what we’ve learned from past experiences. As the song says: “We can order now what they ordered then.” What’s old is new again, and we should use that knowledge to stay adaptable and responsive to today’s business landscape.

The opinions presented in this article are those of the author and other contributors, in their individual capacity, and not necessarily those of Discover.

Keith Staats, JD Executive Director, Illinois Chamber of Commerce Tax Institute kstaats@ilchamber.org

It’s Complicated: A Closer Look at Cannabis Sales and 280E

Although sales of recreational and medical cannabis are legal in Illinois, they remain illegal at the federal level. Here’s how it complicates taxable income.

In Illinois, sales of recreational and, to a lesser extent, medical cannabis are subject to a plethora of state and local taxes. And although sales of both are legal in the state as of 2020, they still remain illegal under federal law, adding more complexity and scrutiny to their taxation.

Here, I’ll be taking a closer look at this complicated relationship, specifically as it relates to taxable income and Section 280E of the Internal Revenue Code (IRC).

The general rule under the federal income tax law is that all income is subject to state and federal taxation, even when it results from illegal activity. As a result, taxpayers in the cannabis business space—including growers, distributors, and retailers—are subject to federal income taxation on their income.

Taxpayers involved in a cannabis business that earn income attributable to Illinois are also subject to Illinois income taxation. For example, in the case of an individual, federal adjusted gross income is the starting point for determining net income subject to Illinois income taxation. For corporations and partnerships, they begin with federal taxable income when determining their income subject to Illinois income taxation.

IRC Section 280E further complicates matters. In determining federal taxable income, Section 280E states that no deduction or credit is allowed for any amount paid or incurred during a taxable year in carrying on any trade or business if it consists of illegal trafficking in controlled substances (Schedules I and II) of the federal Controlled Substances Act (CSA).

Notably, under the federal CSA, marijuana is considered a controlled substance. Therefore, even though sales of recreational and medical marijuana are legal in Illinois, businesses in the legal marijuana trade in Illinois are denied these federal deductions. Such denied deductions include ordinary business expenses, such as wages paid to employees, rent payments, depreciation, charitable contributions, etc.

Although Section 280E denies these business expense deductions, it doesn’t deny the adjustment for the cost of goods sold. This is because the cost of goods sold is an exclusion from income—not a deduction. However, close attention should be paid to the requirements for the proper determination of cost of goods sold. For example, taxpayers in the cannabis space are required to determine costs using the applicable inventory cost regulations under IRC Section 471, as these regulations existed when Section 280E was enacted in 1982.

Under current Illinois law, the business expense deductions disallowed at the federal level may not be deducted at the state level for purposes of determining Illinois net income subject to Illinois income taxation. For example, Section 203(h) of the Illinois Income Tax Act provides that only the deductions set forth in Section 203 may be taken into account for purposes of determining income subject to Illinois income taxation.

Earlier this year, Rep. La Shawn K. Ford (D) introduced House Bill (HB) 998, which would amend the Illinois Income Tax Act to create an Illinois income tax deduction for taxpayers engaged in the legal marijuana business in Illinois in an amount equal to the amount of the deduction denied at the federal level by Section 280E. However, the legislation didn’t move forward during the 2023 spring legislative session.

From a tax policy standpoint, Section 280E was enacted when marijuana sales were illegal at both the state and federal level in an apparent attempt to limit the profitability of the drug trade. In addition to criminal penalties, those engaged in illegal marijuana

sales would be subject to income taxes on their profits (i.e., another way to punish those dealing in illegal drugs).

The tax policy calculus is a bit different, however, with respect to taxpayers in the legal marijuana trade (at the state level). By forbidding deductions allowed to every other legal business, Section 280E increases the costs of doing business in the marijuana trade. While this results in increased federal and state income taxes, those increased costs to the business in the form of higher income taxes are passed along to consumers in the form of higher prices. Therefore, it’s my estimation that the burden of the tax is borne by Illinois consumers who purchase legal marijuana.

As Illinois HB 998 was introduced in the 2023 spring legislative session, it would’ve amended the Illinois Income Tax Act to allow the deductions at the state level that are denied at the federal level. This would place the Illinois income tax obligations on Illinois companies in the legal marijuana trade where they would be if Section 280E wasn’t part of federal law. Since HB 998 didn’t gain any traction, Illinois cannabis businesses will maintain their relationship status with Section 280E as “it’s complicated.”

Elizabeth Pittelkow Kittner CPA, CGMA, CITP, DTM Vice President of Finance, GigaOm ethicscpa@gmail.com

The Ethics of Burnout

Both individuals and organizational leaders have an ethical role to play in preventing and addressing burnout—consider these tips.

In our profession, we are subject to times of burnout throughout several periods of the year due to challenges like deadlines, intense workloads, and regulatory changes, just to name a few. As individuals, we may experience burnout in our careers in different seasons based on what is going on with our roles and personal lives.

Ideally, we should block or prevent burnout from happening since it often leads to work paralysis where an individual cannot work any further due to symptoms such as fatigue, pain, sickness, decreased motivation, anxiety, depression, disillusionment, and strained interpersonal relationships.

Notably, our efforts to address burnout are closely tied to ethics because they highlight the values and principles that emphasize the rights of individuals. These rights are essential to preserving well-being and job satisfaction. When you think about the fraud diamond theory, people are more likely to cut corners and engage in unethical behavior when they are under pressure.

Here are some ways individuals and organizational leaders can prevent and address burnout. BLOCKING BURNOUT

As an individual:

• Communicate with colleagues about your workload. You may be able to share some of the work or engage in faster problem-solving if you are able to discuss what you are working on with others.

• Implement priority management processes. Create to-do lists, set up one-on-one meetings with team members, and schedule time on your calendar to focus on tasks.

• Practice stress management techniques. Consider meditating, exercising, or listening to music.

• Prioritize wellness. Know and communicate your limits, take breaks, and address your health, as necessary. During this time, identify if one or more of the characteristics of burnout starts to appear (even in a small way) and then address it. For example, if you are feeling overly fatigued, determine how you can build more intentional downtime into your schedule.

• Celebrate your achievements. Recognizing the progress you make on tasks along the way will help you savor success and help you reflect positively on your work.

As an organizational leader:

• Limit overtime hours. Consider hiring contractors and interns during busy periods to help alleviate workloads and provide flexibility for people to be able to take time off during these times; ethical organizations care about fair work distribution, which means examining resources available to do the work.

• Offer professional development and growth opportunities. When people are excited about the work they are performing, they will be more engaged and less susceptible to burnout.

• Adopt technology solutions that will save time on tasks. Ensure the technology solutions are the right ones for the organization and are implemented before busy times to avoid adding extra stress from the new processes it brings. Additionally, apply proper security measures and backups to avoid the stress of compromised data or lost data.

• Review your clients. Charge clients based on the value you provide them versus the cost it takes to perform tasks. Also, strategically transition clients out of your business who are difficult to work with or who make the tasks difficult to complete.

• Promote positivity and celebrate achievements (even the small ones). Individual and team recognition helps maintain morale and excitement for the work.

BEATING BURNOUT

As much attention as we may give to blocking burnout, it may still occur. We may prioritize work over wellness, or we may be in a period of hustle to help meet a deadline or goal. Once you are in a period of burnout, consider these tips to address and resolve it.

As an individual:

• Accept that you are going through burnout. You are not a failure because you reached a period of burnout—it is simply a normal reaction to stress. Recognize you have worked hard and will continue to work hard, and you may need to make some changes for your own health.

• Consider your food and beverage intake. Make dietary changes to help you have more energy and feel better throughout your day, like reducing sugar and increasing water consumption.

• Reduce screen time. We blink fewer times per minute when looking at a screen (computer, tablet, phone, etc.), which may lead to drier eyes and overall fatigue. You can set a timer to remind you to look away from your screen during the day, and you may want to invest in glasses that block some of the screen light effects.

• Take more breaks. You may be more effective and efficient if you spend some time away from work and then come back to it with freshness.

• Seek guidance and support. Talk to colleagues or members of your personal network, such as family, friends, coaches, and counselors. Your organization may also have an employee assistance program (EAP) that can help.

As an organizational leader:

• Offer support. Spread out the workload for staff throughout the year and provide additional support as it relates to talent, technology, flexibility, etc.

• Arrange an EAP for employees to use at their discretion. Let your organization know it is okay for people to reach out for help when they need it.

• Provide regular check-ins with people. Check in with people— even via regular surveys—to see how they are doing, what well-being resources they may need, and if your well-being initiatives are effective.

If you pay attention, you can identify, prevent, and address burnout and prioritize ethical well-being for yourself and your organization. When we successfully know how to solve the burnout issue, we can inspire more motivated, productive, and ethical individuals and teams.

Art Kuesel President, Kuesel Consulting art@kueselconsulting.com

In Succession Planning, What Constitutes Success?

Here are three succession planning choices for firms to consider—each with its own definition of success.

According to a straw poll, nine out of 10 managing partners of independent firms define success for succession planning as an internal succession. That is, the firm remains independent and doesn’t merge into another firm. The client base and revenue stream of the senior retiring partner is “bought” by younger partners, which creates deferred compensation for the retiring partner.

But couldn’t there be another definition of success? What if the senior partners run a lean firm, work past traditional retirement ages to maximize earnings, and then wind down the firm when they’re no longer interested in continuing?

The truth is, both paths constitute success but to different degrees and preferences, depending on the firm. So, if all these paths define success, what defines failure?

In business today, you usually have choices. Of course, you may not like the choices, but they’re always there. It’s my view that succession planning failure is most often the result of not making a choice or waiting so long that there are no better choices left.

As a consultant, I often come across firms that have three high-level choices when it comes to succession planning:

1. INVEST IN BUILDING A BENCH OF FUTURE PARTNERS, REMAIN INDEPENDENT

Investing in developing future partners usually translates into stronger recruiting efforts, talent retention programs, better technology, alternative staffing resources to maintain and build capacity, a sound partner buy-in program, and an attractive partner buy-out program.

According to my straw poll, this is the preferred path for most firms. However, it comes with significant effort and considerable investment. With this option, you need a vision, a plan, and accountability. Additionally, firm leaders need to make a commitment to work on the firm as well as in the firm. Many firms that go this route utilize outside resources and consultants to help. It’s been my experience that while many firms start out on this path, they can ultimately become fatigued and opt for another choice at some point. Either the investment proved too large, or the effort needed proved to be unrealistic. But, after a firm embarks on this path, it’s usually better positioned for the future.

2. MERGE WITH ANOTHER FIRM

This choice is usually the best option when you have a limited appetite for choice No. 1—either in terms of the financial investments or the effort involved. You may also have an aging partner group with a light bench of young or future partners; therefore, merging with another firm is often the best way to preserve deferred compensation for the retiring partners while also providing a bright future for the up-and-coming talent at the firm.

Notably, this option generally preserves staff employment and client relationships, as most, if not all, transition to the new entity.

Of course, there are some undesirable aspects of this choice: loss of control, loss of independence, fear of more accountability, and fear of the buying firm not valuing your clients or staff as much as you did. Though, in my experience, many of these are emotional concerns that don’t pan out to be quite as acute as once feared.

3. MAINTAINING THE STATUS QUO

While it’s easy to understand why a firm may not have the appetite for choice No. 1, some may find it harder to reconcile why they choose to avoid choice No. 2. In some cases, the fear of losing

control is front and center, or the firm isn’t attractive to a buyer. It could also be that the firm has few (if any) staff, low rates, no niches, smaller clients, or isn’t particularly profitable. In this case, the best choice (or only choice, depending on how you look at it) is to keep the firm running as is until the partners are ready to close shop.

With this option, the partners can work as long as they want and preserve their annual income to the greatest extent possible. They’re also giving up access to deferred compensation. While that may be seen as a negative, one must remember that the value of deferred compensation ranges greatly based upon the merits of the asset (client base). For example, a practice of mostly 1040s unattached to a business that’s priced below market and heavily concentrated on tax season may only yield deferred compensation equal to or less than one year of income.

In any case, the partner is essentially walking away from the practice, the clients, the team (if there is one), and everything they built with this option—they’re just ready for the next phase in life.

The bottom line—there are pros and cons to each of these succession options. If you want to have the best chance of marking this box as a success, I suggest making sure you understand your options, make a choice, and then follow through with it.

e’d love for you to be a doctor. But if you’re not smart enough to be a doctor, at least become a lawyer. But if you’re not smart enough or ambitious enough to be a lawyer, at least become an accountant because you’ll always have a job.”

These were the marching orders Allan Koltin, CPA, CGMA, received from his parents back in high school—and luckily for the profession, he chose the latter.

Since 1998, Koltin has served as the CEO of Koltin Consulting Group, and his expertise and extensive experience are well known across the accounting industry. Notably, for the past 22 years, he’s been on Accounting Today’s “Top 100 Most Influential People in Accounting” list, among many other industry accolades.

In college, Koltin enjoyed the challenges of accounting, but he found his real passion was in marketing. Knowing this, he majored in both, and as luck would have it, a major piece of legislation would bring both industries together, creating the perfect career storm for Koltin.

“In 1980, legislation was passed that basically took accountants from ‘bean counters’ to businesspeople—they could think about growth, profitability, people, and building a business,” he recalls, noting that two key mentors helped him see how to use both his love for accounting and marketing to capitalize on this change.

“These mentors took me under their wings and basically said, ‘We’re not going to use you for debits and credits, we’re going to use you to help us grow the business.’ So, at an early age I was thrust into this new area, developing the skills needed to consult accounting firms on how to grow their business, better manage it, make more money, recruit and retain people, and create new products and services—I was getting my MBA in how to build a successful accounting firm,” he says.

Allan Koltin, CPA, CGMA

As one of the nation’s top accounting consulting experts, longtime Illinois CPA Society member Allan Koltin, CPA, CGMA, shares his advice for firms exploring growth via private equity.

BY AMY SANCHEZ

Little did Koltin know that he’d make this his career. For more than two decades, Koltin’s firm has consulted more than half of the top 100 firms in America on issues relating to strategic planning, firm governance, partner retreats, compensation, succession planning, and more.

Of course, another area that Koltin’s firm has been focused on is mergers and acquisitions (M&As), and even more recently, private equity (PE) deals. And with rising deal activity in recent years, Koltin has kept busy.

THE RISE OF M&A, PRIVATE EQUITY

“M&A really came about 10 years ago. Up until 2012, you could maybe count on one hand the number of firm mergers that went on in the year,” Koltin says.

However, Koltin adds that within the past decade, non-Big Four accounting firms started to realize that growth through M&A was a great strategy, allowing firms to expand into new geographies, bring in new services, and add additional talent into their organization.

Then, in 2020, PE came storming in. “Because of our M&A expertise, we started getting calls from PE firms all over the country. In 2020, we had zero PE clients. Today, we have 65 of them—and all of them want to come into the profession.”

The reason for the growing interest from PE firms? The three Ts: talent, technology, and transformation. Mergers used to happen because of succession problems, but Koltin says today they’re happening more now because of strategic opportunities surrounding these three components.

“What we’re seeing is, many best-in-class firms that don’t have a succession problem—and don’t really have any problems—see the headwinds of being a compliance provider. They’re investing more

deeply in consulting services, advisory services, outsourcing, wealth management, and really transforming their firms into firms of the future,” Koltin says. “Private equity has found a way in because they’re the capital provider to do these things.”

Though Koltin adds that it’s not just about capital anymore: “It’s about looking into the future, thinking about what could be, and saying, ‘OK, let’s go build this.’”

A SOLUTION TO THE TALENT CRISIS?

Ultimately, PE serves as a lightning rod to accelerate growth. With access to more capital, firms are able to channel resources to their current and new talent.

“The way top talent advances in an accounting firm is through promotions from staff, to manager, to senior manager, to partner— but to achieve that, you have to have firm growth,” Koltin says. Of course, additional resources also allow firms to invest more deeply in technological needs, freeing up staff time from tedious, mundane work (i.e., work that might have once taken a staff person 200 hours can now be done by a bot).

“Younger generations want more challenging work. They don’t want to do mindless work—and because of that, we lose people in this profession,” Koltin suggests. “PE helps push these younger workers into the fire—more client contact, more consulting, and more advisory skill development.”

PREDICTIONS AND ADVICE FOR FIRMS

If not for the economic uncertainty that’s loomed in the wake of rapidly rising interest rates, Koltin believes even more PE deals would’ve taken place in 2023. “Because of the cost of debt being doubled with what it’s recently been, a lot of PE deals have been put on hold—my bold prediction is that it’s going to be game on again in 2024.”

Yet, despite his predictions for an uptick in PE activity, Koltin stresses it’s not for every firm: “Not all PE deals are going to be home runs. Some will be grand slams, singles, and doubles, and some will unfortunately fail.”

Koltin says that it all needs to start with a firm’s “why” (i.e., what the partners and stakeholders want to build).

“If you take a great CPA firm that has a vision for what they want to build, and partner it with a great PE firm that understands, embraces, and invests in that vision, those are the firms that’ll produce tremendous results,” Koltin says. “For firms that are maybe average and have some challenges, just partnering with a PE firm won’t fix those foundational problems.”

In Koltin’s experience, there are three different types of firms:

1. Those that’ll keep grinding and grinding with an older playbook.

2. Those that want to transform, but struggle to make decisions.

3. Those that’ll invest deeply in transforming, creating a firm of the future.

“Ultimately, if you don’t want to build and just stay like you are, you have to accept that you’re not going to grow in this business, and finding, keeping, and growing talent is going to be difficult,” Koltin stresses. “The talent today wants to be part of a fast-growing firm. They want rapid career advancement, exceptional training, a lot of money, and they want to have a life. Firms that listen to this call are more likely to stick around and grow.”

Buy or Sell an Illinois Accounting or Tax Practice

ILLINOIS PRACTICES FOR SALE (gross revenues shown)

$175K Lincoln/Logan County CPA; $694K Lincolnwood EA Practice; $376K Westmont CPA; $567K Kane County CPA; $1.5M Orland Park CPA Firm; $540K Joliet CPA Practice; $610K Henry County CPA Practice; $850K Southern Chicago Suburb CPA; $362K Mount Vernon CPA Practice; $834K Elk Grove Village CPA

For practice details call 1.800.397.0249.

Or, visit us at www.APS.net to inquire about available opportunities and register for free email updates.

THINKING OF SELLING YOUR PRACTICE?

Accounting Practice Sales is the leading marketer of accounting and tax practices in North America. We have a large pool of buyers, both individuals and firms, looking for practices now. We also have the experience to help you find the right fit for your firm, negotiate the best price and terms and get the deal done.

To learn about our risk-free and confidential services, call Trent Holmes at 1.800.397.0249 or email Trent@APS.net.

Valuation of Your Client’s Business or Practice

Crandall & Brackett, Ltd.

630.344.2355

robert@crandall-brackett.com | www.crandall-brackett.com

Our only service is performed on your behalf in a mutual engagement setting. From basic research to a full valuation, we tailor our services to your needs. We author, teach and participate on policy setting committees and boards within the valuation profession.

Jonathan C. Acevedo, CPA Manager, Client Advisory Services | Wipfli LLP

Paying It Forward: Inspiring the Next Generation of CPAs

Here are three pieces of advice for the next generation of diverse, thought-provoking CPAs entering the profession.

So far in my career, I’ve become very passionate about paying it forward. Here are three pieces of advice, all of which have helped me on my professional journey, that’ll hopefully help those who come next.

1. NEVER SELL YOURSELF SHORT

Remember to believe in yourself. You’re more powerful than you think you are—never sell yourself short. Of course, failure happens along the way, and that’s OK. As the saying goes, “If at first you don’t succeed, try, try again.”

Ten years ago, I was in college juggling both academics and athletics. One day, my accounting club had a presenter come in to speak about the CPA exam process and a new scholarship opportunity for minority students. Of course, the presenter was from the Illinois CPA Society, and the scholarship opportunity was tied to the Mary T. Washington Wylie Internship Preparation Program. I found myself feeling inspired and had belief in myself that I could succeed in this program. Once they left, I immediately started working on my application. Thankfully, I was selected to participate in the program. After attending the three-day workshop, I felt more prepared for the workforce and gained valuable relationships with my peers. The program provided me the opportunity to secure an internship, which then led to a full-time position after my graduation—a huge relief.

2. SPEAK UP, USE YOUR VOICE

As I was working my way up the corporate ladder and studying for the CPA exam, the greatest pieces of advice I was given were to use my voice, raise my hand, and have a questioning mind. No one truly knows what you want except for you. Therefore, you must speak up and share your insights with others for them to understand and be able to assist you in achieving your goals.

Upon entering the workforce as an audit staff member, the firm I worked for provided me with the tools to succeed and afforded me the opportunity to get involved with diversity, equity, and inclusion (DEI) initiatives that are important to me. Fortunately, this opportunity leant itself to me finding my “mini familia” within the firm’s Hispanic business resource group (BRG), which has had a positive and continuous impact on my career.

My time in audit came to an end during the pandemic, but another door opened at a different firm in the client advisory services (CAS) space. Joining the CAS team brought on new challenges and opportunities for me to develop and grow in my career. My first accomplishment: passing the CPA exam. I then continued my involvement with DEI initiatives by helping lead the firm’s BRG to promote multiculturism and grow a community among associates of similar backgrounds.

Most recently, I was appointed to the CPA Endowment Fund of Illinois Board of Directors. By never selling myself short and speaking up on the topics I’m passionate about, I’ve come full circle to now sit on the board of the very organization that hosts the Mary T. Washington Wylie Internship Preparation Program—the program that ultimately kick-started my accounting career. Joining this board is an honor and a privilege. My hope is to share my perspectives and experiences so that we can work on more initiatives that’ll have lasting and positive impacts on future generations of accounting professionals.

3. BREATHE, TAKE TIME FOR YOURSELF

Lastly, remember to take a moment to breathe and take it all in. I know—easier said than done. Life can definitely get in the way. For example, when I was promoted to manager, I also welcomed my son into the world—talk about a whirlwind. With all the changes going on, I had to remind myself to take a moment for myself. Yes, things can be chaotic at times being a new parent and juggling work, but I’m fortunate to work for a firm that allows me the flexibility to be with my son and wife during the day and get my work done at night.

If you would’ve told me 10 years ago that I’d be in this position— offering advice to the next generation of CPAs—I would’ve laughed. Yes, I had big aspirations, but I never imagined so many opportunities would come from attending that three-day internship preparation program.

Hopefully, the lessons I’ve learned and shared so far help motivate and inspire the next generation of diverse, thoughtprovoking CPAs.