Insight Magazine - November / December 2008

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Are You Recession Proof?

These are troubled times Can you defend your business, career and investment from the econom ic downturn?

38 The Business of Farming

Illinois farmers face a landscape that ’ s changing literally and figuratively

42 Bankrupt America

Over the course of two weeks, the financial industry watched helplessly as Merrill Lynch and Lehman Brothers collapsed

46

The Public Road

What does the Sarbanes - Oxley Act mean to today ’ s nonprofits?

10

Image Math Geek or Business

Guru?

The days of number- crunching in dimly lit backrooms are over; the green eyeshades are off!

14

World Economy Global Giants

No longer an arena only for small players, emerging markets are being redefined in a big way

16

Workplace Speak No Evil

You may not intend it to be harassment, but it ’ s the impact, not the intent, that matters

18

Investing 2009: A Space Odyssey

Pull your space boots on and grab your helmet You may be next in line for destination space

22

Financial Planning Family Redefined

Estate planning for the non-nuclear 21st century family

24

Technology

New Age PM

It ’ s the dawning of a new era for performance measurement technology

28 Career Take the Stand

Want to be an expert witness? Prepare to feel the pressure

30

Succession Family Reins

In succession planning, keeping it all in the family isn’t as easy as it sounds

32

Tax Into The Fire

Things keep heating up for tax preparers, which means penalties may be harder to avoid

4

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Most of us have a tendency to label things issues, people and events as if doing so simplifies life’s complexities and allows us to file them away in some orderly fashion and move on

So as much as we might want to wrap 2008 in a neat little box, label it and start fresh in 2009, finding a common label for the past year isn’t easy Was it a great year, a good one, or one we’d rather forget? Thinking about the past 12 months, did it meet our expectations or set us back a bit?

Much of what we’ve been talking about this year will probably still be on our agenda for 2009 and even beyond it International Financial Reporting Standards will undoubtedly change the business landscape and culture of the profession The shift to these standards is already taking place, and there will be widespread repercussions from the boardroom to the classroom Other matters we’re dealing with rapidly changing technology, creating a diverse workplace culture that works across generations, getting our offices more green and ourselves more environmentally conscious won’t be “wrapped up” in the foreseeable future They continue to need our time and attention

There are also, however, many reasons to feel a sense of accomplishment We can be proud of the work done by the Society’s Young Professionals Group with small businesses in Louisiana still suffering from the repercussions of Hurricane Katrina, as well as everyone who supported or trained them for this mission We can be proud of the Society members who quickly responded to a call for assistance from the IRS to staff Illinois FEMA disaster centers We can be proud of the more than 130 members who participated in the Center for Economic Progress’s Tax Counseling Project, which provides free federal and state tax return preparation to low-income families throughout the state

There shouldn’t be any frustration if the old year doesn’t have a clear ending and the new one a totally fresh start Seeing our careers, businesses and profession as an energized never-ending challenge that can’t be restrained by a calendar is a good way to start 2009

Good health and prosperity to you in the New Year

ICPAS President & CEO

I C P A S O F F I C E R

S

Chairperson, Sheldon P Holzman, CPA Virchow Krause & Company LLP

Senior Vice Chairperson, Lee A Gould, CPA Gould & Pakter Associates LLC

Vice Chairperson, James P Jones, CPA Edward Don & Company

Vice Chairperson, Michael J Pierce, CPA RSM McGladrey Inc

Vice Chairperson, Ray Whittington, CPA College of Commerce Depaul University

Secretary, Charles F G Kuyk III, CPA Crowe Horwath and Company LLP

Treasurer, Sara J Mikuta, CPA The Leaders Bank

Immediate Past Chairperson, Debra R Hopkins, CPA Northern Illinois University CPA Review

I C P A S B O A R D O F D I R E C T O R S

Brent A Baccus, CPA,Washington Pittman & McKeever

Therese M Bobek, CPA PricewaterhouseCoopers LLP

Robert E Cameron, CPA Cameron Smith & Company PC

William J. Cernugel, CPA Alberto-Culver Company (Retired)

Anthony Fuller Grant Thornton LLP

William P Graf, CPA Deloitte & Touche LLP

Cara C. Hoffman, Blackman Kallick LLP

Charlotte A Montgomery, Illinois State Museum

Gerald A Olsen, Illinois Wesleyan University

Annette M O’Connor, CPA RR Donnelley Logistics

Mary Lou Pier, CPA Pier & Associates Ltd

Marian Powers, PhD Northwestern University

Daniel F Rahill, KPMG LLP

Lawrence H Shanker, Shanker Valleau Accountants, Inc

Publisher

Elaine Weiss

Editor-in-Chief

Publications Director

Judy Giannetto

Creative Director

Gene Levitan

Design Manager

Rosa Garcia

Assistant Editor

Derrick Lilly

National Sales & Advertising

Janis L Mason

medrepcons@ aol com

Offi ce: 773- 325- 1804 Cel l : 312- 560- 3881

Advertising Sales Associate

Tito Apatira

apati rat@ i cpas org

Circulation

Jim Jarocki

j arocki j @ i cpas org

Editorial Office 550 W Jackson, Suite 900, Chicago, IL 60661

Advertising Sales Office 3711 N. Ravenswood Ave., Suite 146, Chicago, IL 60613

INSIGHT is the official magazine of the Illinois CPA Society, 550 W Jackson, Suite 900, Chicago, IL 60661, USA Its purpose is to serve as the primary news and information vehicle for some

23,000 CPA members and professional affiliates 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 (ISSN-1053-8542) is published bimonthly except monthly in July and August by the Illinois CPA Society, 550 W Jackson, Suite 900, Chicago, IL 60661, USA, 312-993-0393 or 800993-0393, fax 312-993-0307 Subscription price for nonmembers: $30 U S , $40 Canada and International addresses, $42 Mexico Copyright © 2008 No

upcoming events

November 10, 2008 - Chicago, Illinois

TECHNICAL WORKSHOP SERIES

FASB Review for Industry

Richard Gesseck, CPA - Partner, UHY LLP

November 20, 2008 - Chicago, Illinois

Developing and Executing Strategies for Growth and Profitability: The Return Driven StrategyTM

Mark L. Frigo, PhD, CPA, CMA - Director, The Center for Strategy, Execution and Valuation, Kellstadt Graduate School of Business, DePaul University

November 21, 2008 - Chicago, Illinois

Leadership: Becoming an Impact Player

Dennis L. Faurote, CPA - President, The Faurote Group and Adjunct Professor, Kelley School of Business, Indiana University

December 12, 2008 - Chicago, Illinois

Assessing the Ethical Dimensions of Strategy and Execution

Mark L. Frigo, PhD, CPA, CMA - Director, The Center for Strategy, Execution and Valuation, Kellstadt Graduate School of Business, DePaul University

December 18, 2008 - Chicago, Illinois

TECHNICAL WORKSHOP SERIES

Shaping Up Your Accounting Function: Trimming the Fat and Going Lean

John Cox, JD - President & CEO, The Rome Group

March 17, 2009 - Rosemont, Illinois

CONTROLLERS CONFERENCE: The Changing World of Corporate Finance. Are Your Ready?

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Separate yourself from the pack. Complete the five core classes and three electives to receive your certificate. For more information, visit www.CCFLinfo.org

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SEEN H E A R D

6Tips for Client Wealth

It ’ s a volatile market, which makes keeping clients’ investments on an even keel evermore challenging These tips, though, will keep you and your clients sailing smoothly

1.Don’t panic: Give your clients the objectivity to focus on longterm goals, not short-term crises

2.Rebalance portfolios: During economic downturns, it ’ s not unusual to see portfolios thrown off balance Review asset allocations and redistribute funds where necessary

3.Emphasize diversity: A mixed portfolio of bonds, cash and stocks provides added protection in volatile markets

4.Look for income: Consider dividend-paying stocks, focusing on sound companies that pay consistent dividends and have a strong history of increasing payouts.

5.Stick to the plan: Establish a monthly contribution schedule to the client ’ s brokerage or retirement account in order to build longterm wealth and reduce exposure to market swings

6.Watch taxes: Assess the tax implications of your clients’ shortterm and foreign holdings If feasible, liquidate losing positions to offset year-end capital gains taxes

$613 bil lion

Total debts listed by Lehman Brothers on their chapter 11 bankruptcy filing

New Creditrak R&D Tax Credit Software

CrediTrak is a new web -based research and development tax credit software that provides companies and CPA firms with a simplified and faster way to calculate tax credits and process documentation Its primary benefit is a real-time expense tracking feature that allows CPA firms to gather the support documentation for R&D credit claims necessary to withstand the toughest IRS inspection

CrediTrak pricing is determined by the number of employees, company locations and entities involved in the calculation, and the chosen level of software and services used In general, an R&D study using CrediTrak will range from $750 for a Silver-level study to less than $10,000 for a full- service Platinum-level study involving RCG’s tax and accounting professionals

What ’ s more, CrediTrak ’ s R&D Credit Estimator Module allows CPAs to input basic wage and gross receipt information to determine the estimated R&D credits of a particular client, and to analyze their cost to perform an R&D study

Visit www.creditrak.com for more information.

Uncle Sam’s Home Loan

when filing their tax returns this year and next.

The credit applies to primary home purchases in the United States made after April 8, 2008 and before July 1, 2009 The fully refundable credit reduces the taxpayer ’s tax bill or increases his or her refund, dollar for dollar, meaning that the credit will be paid out to eligible taxpayers even if they owe no tax or the credit is more than the tax that they owe The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly

The credit operates like an interest-free loan, and must be repaid o v e r a 1 5 - y e a r p e r i o d . F o r e x a m p l e , a n e l i g i b l e t a x p a y e r w h o bought a home after April 8, 2008, and claims the maximum available credit of $7,500 on their 2008 federal income tax return, must b e g i n r e p a y i n g t h e c r e d i t b y i n c l u d i n g o n e - f i f t e e n t h o f t h i s amount, or $500, as an additional tax on their 2010 return They must then continue the repayment on each return until the amount is fully repaid. The full credit is available to taxpayers with a modified adjusted gross income under $150,000 for married couples and $75,000 for single filers

Eligible taxpayers will claim the credit on new IRS Form 5405 This f o r m , a l o n g w i t h f u r t h e r i n s t r u c t i o n s o n c l a i m i n g t h e f i r s t - t i m e homebuyer credit, will be included in 2008 tax forms and instruct i o n s I n f o r m a t i o n a l s o w i l l b e a v a i l a b l e o n t h e I R S w e b s i t e [www.irs.gov].

CPA’s & Financial Professionals:

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Cycle of Success Institute is a comprehensive one year training class that is, for the fist time, being licensed to just 30 select Illinois CPA firms. Help your clients by teaching them how to find and solve costly problems, improve operations and implement improvements that impact growth, productivity and profit margins.

To attendan upcominglunch andlearnorientation, contact:

John Mautner, President and Founder CycleofSuccessInstitute(312)371-7929 orjmautner @ cycleofsuccess.net.

$1-1.5 tril lion

Estimated cost of the US government ’ s efforts to rescue failing financial institutions and the mortgage market

You on YouTube

If you ’ re looking for an inexpensive way to add video to your website complete with analytics on who’s viewing YouTube has an enticing offer: They ’ll do it for free.

In an effort to become the default web video platform, YouTube has rolled out a series of free tools that essentially enables any business to edit, post and analyze viewership of a video at absolutely no cost.

It ’ s an offer worthy of serious consideration, given that over 12 billion online videos were viewed in May 2008 alone, with Google, owner of YouTube, trafficking 34.8 percent of that number, according to web research firm Comscore

E qu al l y pers u as i v e i s t he f ac t t h at by 2 0 1 1 , ebus i ne s s m ar k eti n g researcher, eMarketer, estimates that 61 2 percent of the US population will be watching videos online

A number of financial and accounting firms are already using web video to reach out to web viewers KPMG has its own YouTube channel featuring a variety of promotional, recruitment and testimonial videos, and Ernst & Young, which is also using recruitment and promotional commercials, has expanded its offering with a speech CEO Jim Turley gave at USC Leventhal School of Accounting.

Whether you ’ re putting a face on your firm or touting your company to potential new recruits, the cost of admission to YouTube zero dollars is tough to ignore.

Visit www youtube com for more information

Office Tech Etiquette

New and exciting gadgets are making their way into suit pockets and corporate offices, thanks in part to the wave of Generation Y e m p l o y e e s s t e p p i n g i n t o t h e w o r k p l a c e . A s d e v i c e s l i k e s m a r tphones, iPods and iPhones make their presence known, make sure you have a handle on these etiquette dos and donts

1. Is that English? When it comes to emailing and texting, text-messaging shorthand such as C U L8R (see you later) is best left to social rather than business communications

2. It’s a way of life. Although devices like the BlackBerry and iPhone have been integrated into offices around the world, their expansive capabilities can often be distracting. Internet surfing, texting, gaming and emailing, although tempting, should be used with discretion in the workplace

3. Noises off! For the courtesy of others, devices should be turned off or silenced during meetings and presentations Also, though study results are conflicting, many employees say that listening to music helps them focus The permitted use of personal radios, iPods, or similar devices may be determined by company policy, but as a common courtesy, watch the noise level

YOU BECOME A PRIME TARGET?

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This is how CAMICO can help you minimize claims, unpaid fees and damage to your reputation. And if a claim should occur, you’re protected with our professional liability insurance and risk management program – the only program developed by CPAs for CPAs.

With CAMICO, you are primed for success.

Math Geek or Business Guru?

The days of number-crunching in dimly lit backrooms are over; the green eyeshades are off!

By Bridget McCrea

It may well have taken decades, but the n o w a rc h a i c i m a g e o f t h e m e e k a c co u n t a n t s i t t i n g a t h i s s o l i t a r y d e s k h a s given way to today’s dynamic globetrotting financial pro, steering multi-million dollar businesses to success, policing the ranks for m i s c r ea n ts a n d f ra u ds t er s , an d ta k i ng t he p o d i u m t o s o o t h t h e f e a r s o f a s k e p t i c a l investing nation. This truly is the dawning

o f a n e w e r a f o r f i n a n c e and accounting professionals, not only at home, but around the world.

I t ’s b e e n a l o n g r o a d from math geek to business guru The advent of regulations like those contained in the Sarbanes-Oxley Act have sped things along by s h o w c a s i n g f i n a n c e a n d accounting pros as guiding lights for public firms that h a v e t o f o l l o w t h e r u l e s more closely than ever

“ T h e p u b l i c p e rc e p t i o n o f t h e a c c o u n t i n g p r o f e ss i o n h a s c h a n g e d q u i t e a bit over the last few years,” says Denny Reigle, director of academic and career development for the American Institute of Certified Public Accountants, or AICPA. “For example, where individuals working in this field were once called ‘accountants,’ they are now known as experts who are working in professional services firms

“ D r i v i n g t h a t c h a n g e , ” h e s a y s , “ i s t h e f a c t t h a t s u c h f i r m s n o w o f f e r a b r o a d e r r a n g e o f s e r v i c e t h e k i n d s o f s e r v i c e s t h a t g o b e y o n d t a x e - p r e p a r ation and auditing ”

A partner at Arthur Andersen in Chicago for 24 years before coming on board with the AICPA, Reigle is glad to see CPAs shed the image of the green eyeshade-wearing purveyor of debits and credits That image “wasn’t accurate to begin with , ” he says Even before the rest of the world realized t h e p r o f e s s i o n ’s e x p a n d i n g r o l e , m a n y accountants were already going far beyond j u s t r e v i e w i n g f i n a n c i a l o p e r a t i o n s a n d preparing financial statements.

“Even historically, accountants have been c o n d u c t i n g c a r e f u l a u d i t s a n d r e v i e w i n g prepared financial statements that the capital markets, in turn, use for any number of r e a s o n s , i n c l u d i n g i n v e s t m e n t p u r p o s e s , ” s a y s R e i g l e A n d w h e t h e r t h e c o m p a n i e s that hired them knew it or not, CPAs also have focused on internal controls and how a c c o u n t i n g w a s h a n d l e d i n a p a r t i c u l a r organization a concept that’s since morphed into “risk assessment.”

“CPAs have always analyzed which systems are at risk, which could break down a n d w h a t t y p e o f i n f o r m a t i o n w a s b e i n g fed into financial statements to ensure that i t w a s p r o p e r l y p r o c e s s e d a n d c l e a r e d , ” Reigle explains.

That role has expanded over the last decade or so, positioning the CPA as a “go to” person not only when problems come up, but also when firms are planning to grow and expand. A c a s e i n p o i n t : T h e r e w e r e three practice groups when Reigle started at Arthur Andersen: audit, tax and administrat i v e s e r v i c e s B y t h e t i m e h e r e t i r e d , t h a t number had grown to 46.

“In many cases, the expansion of services came because clients were looking to their audit firm as a one-stop shop for a growing n u m b e r o f f i n a n c i a l s e r v i c e o p t i o n s . T h e accounting firms then answered the call,” he explains

The Illinois CPA Society has made it easier than ever to identify the up and comers in the accounting profession. Just visit the Illinois CPA Society’s Career Center and search student resumes to fill your next internship.

All across the state, Illinois CPA Society student members have uploaded their resumes for you to view online. These students represent the future of the profession and your guidance as a seasoned member of the profession can put them on the right track. These students are available for summer, fall or spring internships.

You can search by various criteria, including:

Geographic Location

Timeframe

Paid or College

Credit Internships

Visit

The best and the brightest interns are at your fingertips.

While increased regulation has undeniably elevated the accountant’s role in corporate America, it has also brought attention to the negative side of the profession, where auditors “cook the books” to help their clients succeed Such strategies led to a very public backfire in the early 2000s, with big names like Enron and WorldCom at its center.

“It was a shock effect,” says Jeffrey Thomson, president and CEO of the Institute of Management Accountants (IMA) “We saw a very public display of accounting fraud and lack of ethics that wasn’t necessarily perpetrated by the accountants, but in some cases at the middle ranks it was clear that the management and financial accountants didn’t do as much as they could to stop fraud.”

The Arthur Andersen scandal followed shortly afterwards, bringing down a well-regarded institution thanks to a few “very highly visible acts of fraud,” says Thomson. “The management and financial accountant’s image took a shot to the head due to this scandal ”

Since then, says Thomson, regulations like Sarbanes-Oxley have helped to recover and restore credibility for accountants across the board “The bar has been raised significantly,” he explains, “and the profession as a whole now has to do an even better job of supporting CEOs, CFOs, shareholders and members ”

Interestingly enough, bad press is still press The cases of fraud and scandal splashed across the front pages of the nation’s newspapers had a dual effect: Raising public scrutiny of corporate finan-

cial practices, and increasing the appeal of the profession among future generations It’s not that fraud was attractive, but more that the idea of playing a key role in changing a tarnished image was sexy particularly to a generation for whom making a difference is as important as professional prestige

The passage of Sarbanes-Oxley in 2002 only highlighted this role. “ I t

H u m a n C a p i t a l P a r t n e r S a n d i G u y “ P e o p l e a r e s a y i n g , ‘ Wo w, accountants are really involved with these big clients,’” she says.

“Young professionals find it cool, and it’s attracting them to the industry It’s especially useful on college campuses, where a lot of students look at forensic accounting and, in a day and age of CSI and similar television shows, are very intrigued and attracted by it,” says Guy. “While it has been unfortunate for the firms and the organizations impacted, it’s given our industry some exposure and made them say, ‘Wow, accountants do far more than just accounting ’”

Sarbanes-Oxley also brought the auditor ’s primary responsibilities to light: To protect the public’s interest by auditing and opining on management financial statements, says Chuck Landes, vice president of professional standards and services for the AICPA.

“Too often during the 1990s, we saw auditors thinking that their allegiance was to management,” he explains “When SarbanesOxley was instituted, it forced the profession to again focus on the fact that our ultimate client is the public user of the financial statement, not the company management.”

Thomson says the bar will continue to be “raised significantly,” as the profession grows in a positive direction He points to the latest numbers from the Bureau of Labor Statistics (BLS) as proof of that expansion “The BLS says that growth for the accounting profession is higher than any other industry sector through 2016, which means there will be continued demand for accountants of different flavors, including internal auditors, exterior auditors, management accountants and fraud examiners ”

As companies of all sizes continue to struggle under the weight of Sarbanes-Oxley compliance, Thomson sees the role of the accountant becoming even more vital to overall business success.

“CEOs expect to achieve flawless transaction processing and a clean bill of health in terms of financial disclosures and internal controls,” Landes explains. “The question is, how can CPAs help those companies achieve those goals while also creating value?”

Looking at college campus recruits, Guy says the crop of new talent will continue to positively impact the profession’s image.

“They are definitely the future of the accounting profession, and they know that their jobs are less about counting inventory and handling debits and credits, and more about forensics, regulations and business strategy,” he explains “This trend will continue as

And as the green-eyeshade and bean-counter image fades farther from the public mind, expect the accountant’s role to be elevated even more

“The public perception of the accounting profession has changed quite a bit over the last few years...where individuals working in this field were once called ‘accountants,’ they are now known as experts who are working in professional services firms.”

Email: http://tax.cchgroup.com/members/icpas (Enter

Phone: Wanda Brooks: 708.969.5355

Email: wbrooks@warehousedirect.com

Phone: 800.328.1935

Web: www.alliantcreditunion.org/ilcpa

800.422.4661,

Phone: 800.835.0894

Phone: 800.323.2106 (liability) or 800.842.ICPA (medical & life plans)

800.325.7000

Global Giants

By Christine Bockelman

Historically, “the emerging market has always been the smaller market,” says George T Haley, PhD, d i r e c t o r o f t h e C e n t e r f o r I n t e r n a t i o n a l Industry Competitiveness and professor of marketing and international business at the University of New Haven in Connecticut

Ho w e v er, C h in a , a mo n g o th e r n a tio n s , is changing all that

“ C h i n a ’s p o p u l a t i o n i s l a rg e r t h a n t h e p o p u l a t i o n o f t h e d e v e l o p e d w o r l d , ” s a y s Haley And for that reason, it’s become the case study for global competition

A huge population in China means that there’s a wealth of people ready to fill manu f a c t u r i n g j o b s H o w e v e r, “ T h e j o b s a n d m a n u f a c t u r i n g m o v i n g i n h a v e a t r e m e ndous effect on the growth of the emerging m a r k e t , ” H a l e y e x p l a i n s “ T h e r e a r e s o m a n y p e o p l e i n C h i n a t h a t i t ’s l i k e l y t o c a u s e s e v e r e e c o n o m i c p r o b l e m s i n t h e d e v e l o p e d e c o n o m i e s , b e c a u s e t h e r e a r e just so many jobs you can send overseas. It’s like trying to fill a black hole ”

For the first time, China has a burgeoning m i d d l e c l a s s , w h i c h h a s a d i s p o s a b l e i ncome it’s willing to spend The problem is, it’s not spending it on goods made by US companies. “China has a much higher perc e n t a g e o f i m p o r t s f r o m J a p a n t h a n f r o m the United States,” says Haley

If the world’s largest population happens t o b e w h e r e t h e b u l k o f m a n u f a c t u r i n g occurs, and if that population isn’t buying your goods, then you have to ship to markets that do buy them And that’s becoming i n c r e a s i n g l y e x p e n s i v e g i v e n r i s i n g o i l prices, among other factors.

More importantly, no matter the acclaim of Chinese markets, they’re still just emerging. Their transportation systems aren’t the same as those in more developed countries Rail transportation in the Western provinces is limited, so even if it’s cheaper to make something there, it’s probably going to cost

more to transport it. Without a doubt, shipping has become a huge problem for industrial manufacturing companies that went to China chasing the promise of lower wages.

“ Te x t i l e s c h a s e d t h e w a g e t o o , b u t t h a t i n d u s t r y i s d o i n g b e t t e r Yo u c a n d e n s epack textiles, though. You can’t dense-pack a whole lot of automotive engines. Those take up a lot of room,” explains Lou Longo, a p a r t n e r w i t h P l a n t e & M o r a n ’s G l o b a l Services. “For industrial manufacturing, it’s b e e n p r o v i n g a m i s t a k e t o g o a f t e r l o w wages,” he says

Chinese workers, among others, are making higher salaries, especially in markets where there’s been a lot of foreign company investment. Shanghai, for example, has been enjoying 8 4 percent wage inflation, according to human resources consulting firm Hewitt Associates.

“Companies have been trying to get cheap prices from China, and have been pouring investment into the country. Now they’re facing higher wages and very high transportation costs, which completely destroy the real economic rationale for investing in China,” Haley explains

Rising salaries in China isn’t the only factor cutting into US profit margins; the rising dollar is also taking a bite “The politics of m a i n t a i n i n g a h i g h - p r i c e d d o l l a r m a y b e good for investors, but it’s not good for manufacturers and their exports,” says Haley

Wall Street demands a high and often unrealistic return on investment, which limits how much companies can charge customers, and limits the markets they can enter

“From colonial times to the 1960s, the average return on investment of a major company was about 2 5 percent If you had a company bringing that in now, the whole board would be fired and the shares would be in the tank As time has gone by, Wall Street increasingly has insisted on higher returns You find yourself getting priced out

No longer an arena only for smal l players, emerging markets are being redefined in a big way.

of markets worldwide,” Haley comments “The economic policy has ceased to address the needs of US manufacturers, and addresses the needs of investment banks instead ”

What should companies do? For one thing, consider the actual cost of doing business

Take metal stampings, for example A large percentage of the cost of the product is the steel, not the labor or overhead Keeping production in the United States is going to be cheaper than shipping it offshore However, if the raw materials are a relatively minor portion of the cost and the product has more involved labor, there’s a case for exporting manufacturing

“When a manufacturer is looking at the cost comparison to an offshore entity, the larger the amount of value added to the product, the more likely the foreign competitor is going to have a price advantage,” Longo explains.

Companies should focus on keeping their most advanced production technology on home soil, where capital costs are lower. “Many companies are doing the exact opposite, and are putting it in a market with relatively low labor costs and high capital costs. It doesn’t make sense,” says Haley.

There are two other reasons investing in China and other overs e a s m a r k e t s i s t r o u b l i n g f o r m a n u f a c t u r e r s F i r s t , n o o n e r e a l l y knows the size of the Chinese economy In the communist era, p a r t y p e r s o n n e l p r o v i d e d n u m b e r s o n g r o w t h r a t e s O b v i o u s l y, there was no way of telling whether those were accurate, and the numbers kept growing Even with the iron curtain lifted, the Inter-

national Trade Commission is required by law to use figures prov

which limits their ability to get an accurate read

“When the Soviet Union collapsed, it became clear that even our o

explains “Military investments were a much larger proportion of their economy than the United States realized Estimates can be very, very off ”

Second, emerging markets don’t usually have the same intellectual property (IP) laws as the United States, meaning that just about any product or process you introduce is up for grabs In fact, it’s economically beneficial for an emerging market to steal IP.

It’s something General Motors (GM) learned the hard way. The company shared some of its most high-tech processes with Shanghai Automotive, which it had hired to produce GM cars. Shanghai Automotive then acquired the product design and production technology and capabilities of Rover. Now they’re using the technologies GM taught them to manufacture Rover products for their own profit. “It’s a continuing mistake,” says Haley.

The bottom line is that, “Companies need to be globally aware, not globally active,” says Longo “They don’t necessarily need to have manufacturing abroad, but they need to know who their direct competition is overseas, what their suppliers and customers are doing in foreign markets, and what everyone’s plans are for those markets Many manufacturers, in my view, are not very globally aware, and they need to be ”

Speak No Evil

You may not intend it to be harassment, but it’s the impact, not the intent, that matters.

By Evelyn Beck

Wh a t d o e s “ w o r k p l a c e h a r a s sment” really mean? Most people would answer something along the lines of, “unwanted sexual advances ” And true enough, the most publicized and sensationalized cases of harassment have been of the sexual variety

However, “This is not always the case, and is something that needs to be commu-

n i c a t e d t o e m p l o y e e s , ” e x p l a i n s G e r a l y n McClure Franklin, PhD, dean of the University of South Florida St Petersburg College of Business “Harassment is much broader in nature than just sexual harassment.”

By 2000, sexual harassment policies in o rg a n i z a t i o n s w e r e b e i n g p h a s e d o u t i n favor of more general harassment policies. To d a y, “ w o r k p l a c e h a r a s s m e n t ” r e f e r s t o t h e w i d e r a n g e o f u n w e l c o m e v e r b a l o r physical conduct that falls under Title VII of the Civil Rights Act of 1964

T h i s a c t c o v e r s h a r a s s m e n t t h a t c a n t a rg e t n o t o n l y s e x a n d g e n d e r, b u t a l s o r a c e , c o l o r, r e l i g i o n , n a t i o n a l o r i g i n , a g e a n d d i s a b i l i t y. ( W h e t h e r Ti t l e V I I o f t h e C i v i l R i g h t s A c t o f 1 9 6 4 a l s o a p p l i e s t o h a r a s sm e n t b a s e d o n s e x u a l o r i e n t a t i o n h a s n o t y e t b e e n a d d r e s s e d b y t h e U S S u p r e m e C o u r t a n d i s c u r r e n t l y a m a t t e r o f d e b a t e )

While easily blurred, the distinction between harassment and sexual harassment is an area of intense focus for the US Equal Employment Opportunity Commission, or EEOC Since fiscal year 1997, the EEOC has been charting harassment and sexual harassment charges separately, and has compiled guidelines to help to distinguish what falls under each offense heading

A c c o r d i n g t o t h e E E O C , i t r e c e i v e d 12,510 charges of sexual harassment in fisc a l y e a r 2 0 0 7 , w i t h 8 4 p e rc e n t o f t h o s e charges filed by women. During the same p e r i o d , t h e c o m m i s s i o n r e s o l v e d 11 , 5 9 2 sexual harassment charges, and recovered $ 4 9 9 m i l l i o n i n m o n e t a r y b e n e f i t s f o r plaintiffs and other aggrieved individuals However, since Title VII only applies to organizations with 15 or more employees,

these numbers don’t necessarily reflect all c h a rg e s . A n d a l t h o u g h v e r y s m a l l f i r m s h a v e b e e n s u e d u n d e r c o m m o n l a w o n r e l a t e d c h a rg e s , t h e r e a r e l i k e l y s o m e harassment victims who aren’t reaching out for help in the first place

Kim Rice, CPA, has spent the majority of her 18-year career working for large firms i n t h e p u b l i c a c c o u n t i n g f i e l d A l t h o u g h she left public accounting in 1999 and now heads her own consulting firm, she rememb e r s e x p e r i e n c i n g h a r a s s m e n t f r o m b o t h colleagues and clients

“Somebody would say or do something t h a t w o u l d m a k e m e u n c o m f o r t a b l e , o r m a k e i n a p p r o p r i a t e j o k e s , ” s h e e x p l a i n s , adding that, “Back then, there was a lack of sensitivity towards harassment Most of the time I and other women would keep quiet because we didn’t want to be considered difficult or be singled out as not being ‘one of the guys.’”

When the guilty party is a client rather than a co-worker or supervisor, things can feel even more desperate. However, “The same rules apply when working at a client site,” says Julie Pesce-Marcus, Grant Thornt o n ’s n a t i o n a l d i r e c t o r o f e m p l o y e e r e l at i o n s “ T h e f a c t t h a t t h i s b e h a v i o r c o m e s from a client adds a level of complexity in the employee’s mind, but that doesn’t mean he or she shouldn’t bring it forward People may think they can take it or just want to ignore it But if they’ve noticed it, they’ve b e e n a f f e c t e d I t ’s i m p o r t a n t t o s p e a k u p because they might not be the only person experiencing it ”

A 1999 article by Brian B Stanko and Mark Schneider, “Sexual Harassment in the Public Accounting Profession?” stated that, “Most women CPAs employed in the practice of public accounting believe that they and/or their female colleagues have been the victims of sexual harassment and genderbased discrimination in their workplaces.”

W h a t ’s m o r e , a s u r v e y o f 4 8 9 f e m a l e AICPA members identified sexually vulgar

language, remarks about physical anatomy and derogatory gender comments as the most prevalent behaviors experienced

A profession that is primarily male dominated, like accounting, r e m a i n s p a r t i c u l a r l y s u s c e p t i b l e t o h a r a s s m e n t t o w a r d s w o m e n

Although that has changed over the last three years with the number of males who file claims increasing, current statistics show that sexual harassment towards women is still the most significant form of harassment faced in the workplace

H o w d o y o u k n o w w h e t h e r a b e h a v i o r i s d e f i n i t i v e l y h a r a s sment? Determinations are based on the “reasonable person” standard; in other words, the extent to which the average person would consider the behavior inappropriate.

What you may find surprising is that the “intent” of the behavior has no bearing on the harassment definition What matters is the “effect.” Even something as seemingly innocent as repeating a joke that refers disparagingly to a particular religion can be considered harassment if the behavior occurs more than once, and especially if the teller has been asked to stop and ignores the request. Repeate d l y s p e a k i n g o r a c t i n g i n a p p r o p r i a t e l y e v e n i f n o i l l w i l l i s meant can certainly fall under the heading of harassment

Industry leader Grant Thornton is committed to offering harassment training to its employees (According to the AICPA Work/Life and Women’s Initiatives Executive Committee, Grant Thornton is one of only 14 percent of accounting firms that offer such training.) A l l n e w h i r e s a r e i s s u e d t h e f i r m ’s h a r a s s m e n t p o l i c y a n d a r e required to attend workplace harassment workshops Some of the firm’s training uses polling technology to survey participants anonym o u s l y a b o u t h o w t h e y w o u l d r e a c t t o v a r i o u s s c e n a r i o s O n e question asks employees whether it is appropriate to repeat a joke

heard on the radio “People wonder if that might be appropriate since the joke was out in the public,” says Pesce-Marcus “We tell them that even though the joke was broadcast, when they bring it into the workplace, it may be inappropriate ”

Margaret Stockdale, director of the Applied Psychology Program at Southern Illinois University in Carbondale, shares Pesce-Marcus’s views “Harassment occurs in a climate,” she says “It’s likely t h a t i f o n e p e r s o n i s h a r a s s e d , t h e n o t h e r s a r e , a n d h a r a s s m e n t doesn’t just have consequences on the victim, but spreads out and affects others If my coworker is being harassed, I’m going to feel the effects, and it will affect my attitudes about the workplace I might consider quitting.”

Stockdale’s research indicates differences in perceptions about harassment based on age and race Young women, for example, who demographically are the group most likely to be the target of harassment, tend to treat it less seriously than older women Stockdale thinks this may be because they didn’t face the sexism that their mothers and grandmothers did. Regardless, the result is that “they may be putting up with stuff that’s harmful to them and to others ”

In the event of harassing behavior, make sure you have strong reporting procedures in place, such as anonymous hotlines and non-retaliation policies. “Harassment reporting is typically to the immediate supervisor, but this may be the person doing the harassing, so all organizations need dual-reporting mechanisms,” says Franklin “Alleged victims must feel that they will be free from retaliation but that an investigation will happen ”

Most importantly, though, educate your employees. Make sure they know when they’re crossing the line.

2009: A Space Odyssey

Pul

l your space boots on and grab your helmet You could be next in line for destination space

By Judy Giannetto

Space tourism a decade ago was more a glint in the eye of futurologists than a reality for middle-class America But a lot can change in 10 years

Pioneered by Russian space adventurers, w e c a n c r e d i t t h e R u s s i a n S p a c e A g e n c y with providing today’s only bona fide tourist space transport however elite its clientele The price for a flight brokered by Russia’s Space Adventures is now $20 million

I n s p i t e o f t h e a s t r o n o m i c a l p r i c e t a g , f l i g h t s a r e f u l l y b o o k e d u n t i l 2 0 0 9 T h e i r destination is the International Space Station (ISS), a low-orbit research facility constructed at an altitude of 217 miles above the Earth’s surface

T h e f i r s t f e e - p a y i n g s p a c e t o u r i s t o r

“ s p a c e f l i g h t p a r t i c i p a n t ” w a s A m e r i c a n businessman and former JPL scientist Dennis Tito, who traveled to the ISS in 2001.

F i v e m o r e s p a c e f l i g h t p a r t i c i p a n t s h a v e s i n c e t a k e n a g i a n t s t e p f o r t o u r i s m . T h e l a t e s t , R i c h a r d G a r r i o t t , a v i d e o g a m e

developer and son of former NASA astronaut Owen Garriott, took his space trip in October 2008

While these early explorations have threatened to label space tourism as the playground of the rich and famous, a number of progressive entrepreneurs have been working hard to make space travel a reality for everyman. They’re still light years away from an affordable price tag, but they’re whittling it down as quickly as humanly possible.

At the forefront is Sir Richard Branson, mastermind behind the Virgin empire. Branson’s Virgin Galactic [www virgingalacticcom], the world’s first commercial spaceline, started selling tickets in mid-2005, and has already presold hundreds of seats for its suborbital space flights (Suborbital flights reach an altitude of approximately 60-100 miles, allowing passengers to experience three to six minutes of weightlessness.) Projected costs are expected to run about $200,000 per passenger

Since the venture is privately funded (by Branson and the Virgin Group), strict deadlines are not being published Instead, states Virgin, “We will launch as soon as possible, but only when we are happy with the results of the exhaustive test flight programme ”

O t h e r e n t r e p r e n e u r i a l v e n t u r e s i n c l u d e EADS Astrium, which announced its space tourism project in 2007; SpaceX, which has a l r e a d y c o n d u c t e d t e s t f l i g h t s ; C o n s t e l l ation Services International, which is working on a commercial circumlunar project; and Excalibur Almaz, which is concentrati n g o n o r b i t a l s p a c e f l i g h t s f o r t o u r i s t s Some companies, Excalibur Almaz included, are also looking into “space hotels” and satellite resorts.

NASA’s interest in space tourism as a means to further US solar system exploration is one factor spurring companies on Another is a growing list of lucrative awards, including the Ansari X, a $10 million prize awarded in 2004 for the first non-government organization to launch a reusable manned spacecraft into space twice within

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two weeks. The Google Lunar X Prize, which was announced in 2007, now offers $20 million to the first team that successfully launches, lands and operates a rover on the lunar surface

Even with the help of NASA and cash-rich sponsors, these private commercial developers face major barriers For one, space travel’s elitism has always counted against it from an investment point of view, although, says Alex Howerton, head of business

Advisors, Inc., ”Just like cars, planes, computers and any other industry you can think of, the early adopters are mostly the wellheeled with disposable income But as the systems get develo ped, economies of scale increasingly come to play, and the technol-

take about 20 to 30 years for this to happen in the commercial space industry ”

And yet, investors are taking notice As Virgin Galactic explains, “Commercial manned space travel has been constrained historically due to a lack of funding, safety, and a reliance on antiquated government programs. However…the era of commercial space travel has finally begun ”

“We are just at the ramp-up phase of the sigmoid wave of commercial space applications; we are positioned just before the upturn of the ‘hockey stick,’” says Howerton “It may still be a little bit, but within 5 years, that take-off point will arrive Now is the time to research and get positioned.

“An adjunct to tourism in space is virtual tourism on Earth There are many simulation centers being planned in New Mexico, Florida, the United Arab Emirates and Singapore,” Howerton adds “Again,

Information & Research Center

an investor will have to be patient, and be prepared to wait 5 to 10 years for a beginning of a return on investment, but now (the next 2 to 3 years) is the time to get positioned for maximum returns ”

Perhaps quite fittingly, it’s mainly angel investors or “space angels” who have kept space tourism aloft so far

In June 2007, space tourism got a major boost when Boston Harbor Angels forged a deal with XCOR Aerospace, a commercial launch company the first time an angel investor group invested in this type of venture In October 2007, the Space Angels Network, LLC [www spaceangelsnetwork com] was launched in the United States and Canada This virtual network consists of accredited investors who focus on seed and early-stage investments for aerospace-related opportunities.

The Network’s creation is particularly significant since, while big name companies such as Virgin can rely on their own financial resources for R&D, smaller companies striving to introduce the next big innovation tend to lack the billionaire backing they need

As the Space Angels Network puts it, “There is a powerful economic engine that drives most giant leaps in human progress In the early stages of each era, a certain amount of ‘visionary capital’ is necessary to ‘prime the pump’ until a critical mass is attained and more mainstream mechanisms take hold As visionary entrepreneurs create new innovative technologies, mold exciting business models, and craft entirely novel industries, they need the support of business-savvy, returns-focused, and equally visionary investors ”

Visionary entrepreneurs and private investors, in fact, are making the industry flush with cash. According to a June 2008 Popul ar Mechani cs article, “Space tourism has attracted over $1.2 bill i o n i n i n v e s t m e n t , m o s t l y f r o m i n d i v i d u a l ‘ a n g e l i n v e s t o r s , ’ o f which only about 25 percent has been spent Revenues last year were $268 million, up from $175 million the year before ”

T h e n u m b e r s a r e i m p r e s s i v e g i v e n t h e f a c t t h a t c o m m e rc i a l space flights haven’t even left the ground yet, and the lure of more established and less risky investments in biotech, medical-device and software start-ups, to name a few, have a pretty firm grip on investor purse strings

S o , w h a t ’s f u e l i n g p r i v a t e i n v e s t o r i n t e r e s t ? S i m p l y t h i s : A s k t o d a y ’s J o h n D o e w h e t h e r h e w o u l d l i k e t o t a k e a v a c a t i o n i n s p a c e , a n d o d d s a r e h e ’ l l s a y, “ Ye s p l e a s e ! W h e n d o I l e a v e ? ”

According to a 2006 Futron space tourism marketing study, space tourists will reach nearly 14,000 by 2021. Top lures include the chance to view Earth from space, being a part of the rocket launch experience, and experiencing weightlessness

“Including the ground-based simulation experiences, the business model and margins (but probably not the total market volume) can be expected to mirror the cruise industry,” says Howerton.

>Research Assistance by Professional Librarians

Growing public interest, however, is contingent on a number of factors, from ticket price to the level of fitness and extent of preflight training required of passengers Also, the industry will need to address public perceptions of space travel as highly specialized, p o t e

and beyond their means Even the European Space Agency (ESA) recommends “a position of cautious interest and informed support,“ citing “Exclusiveness of an activity aimed initially at a very small and wealthy minority” as a major stumbling block

Simply, the potential annual market for space tourism makes talk of investment a given but high risks and the need for millions and even billions in investment makes benefiting from the industry a precarious endeavor at least for now

A benefit of your Illinois CPA Society membership.

Congratulations to the 2008 Women to Watch Award Recipients

The Illinois CPA Society’s Women’s Executive Committee and the American Institute of CPAs Work/Life and Women’s Initiatives Executive Committee are pleased to honor these women who have made significant contributions to the accounting profession, their organizations, and to the development of women as leaders.

These deserving women will be presented with their awards at the Illinois CPA Society “Women’s Leadership Breakfast” on November 20, 2008 at the Standard Club in Chicago. To register to attend this breakfast, please call the Society at 800-993-0393.

Ann Marie Goddard, CPA

Partner, KPMG LLP

Experienced Leader

Dot Proux, CPA

Partner, Ernst & Young LLP

Experienced Leader

Trudie Duan, CPA

Manager, Crowe Horwath LLP

Emerging Leader

SanDee Priser, CPA

Partner, Ernst & Young LLP

Emerging Leader

The mission of the Women's Executive Committee is to enhance the recruitment, volunteerism, retention and leadership of women CPAs in the Illinois CPA Society and the profession through various programs and networking events. This program is one in an ongoing series designed to help women CPAs learn more about important professional issues, expand business networks and foster career advancement.

Vanessa Salinas, CPA

Manager, PricewaterhouseCoopers LLP

Emerging Leader

Family Redefined

Estate planning for the “non-nuclear” 21st century family.

By Margaret Schroeder

Co n s i d e r a r r a n g i n g a n e s t a t e p l a n f o r t h i s c o u p l e : A t w i c e - m a r r i e d father of three expecting a fourth c h i l d w i t h h i s l i v e - i n g i r l f r i e n d , w h o h a s two children from a previous marriage

It’s not a rare request in the 21st century, where the definition of “family” has increasingly evolved and expanded

For “traditional” nuclear families, even if a will isn’t made, the laws governing who inherits what and when are pretty straightforward spouse, children, grandchildren, on down. But when it comes to nonnuclear families, a lack of estate planning can create problems

“Th e re sh oul d b e more e x pe rtise,” says Mark Gilbert, CPA/PFS, principal and financial planner at Reason Financial Advisors, Inc in N o r t h b r o o k , I l l “ N o n t r a d i t i o n a l f i n a n c i a l a n d e s t a t e p l a n n i n g i s likely to become more necessary as the number of nontraditional couples increases Certain state statutes p r o t e c t l e g a l l y m a r r i e d s p o u s e s when there is no written instruction from the deceased or disabled person; often these statutes do not protect the ‘significant other ’ in a nontraditional relationship ”

“A nontraditional family must understand how the laws (or lack thereof) impact them, and what they need to do to carry out their objectives,” says Barry Siegal, an attorney and CPA with Chicago-based Stahl Cowen Crowley Addis LLC

“ O n e b a s i c e x a m p l e i s t h a t u n l e s s a n i n d i v i d u a l h a s a w e l l thought-out estate plan, the intest a t e l a w s o f t h e s t a t e o f d o m i c i l e dictate who gets a person’s assets at death, and in almost every case

the recipient must be a relative Similarly, the estate and gift tax laws provide that transfers between spouses are free of estate and gift tax implications Finally, employee benefit plans, such as pension and profit-sharing plans, provide that without a properly executed beneficiary designation, benefits at the participant’s death are paid to certain designated persons in a certain order usually spouse, children, etc In most cases, domestic partners are not included ”

It’s not all bad news, however. There are certain advantages out there, if you know where to find them

For instance, the Grantor Retained Income Trust allows an individual to transfer property, but retain the income for a period of time, which essentially reduces the value for gift tax purposes "This technique was e l i m i n a t e d a n d r e p l a c e d w i t h a m o r e restricted technique for certain lineal relatives (parents, children, grandchildren, etc), but is still valid for non-related individuals," says Siegal

“As a planner, you have to be aware of solutions to be able to direct assets to surv i v o r s , ” s a y s M i c h a e l A r m o u r, C PA / C F P, managing member of consulting firm Bird Armour LLC. And, of course, it’s important to be up-to-date with any changes in the l a w “ A g o o d e x a m p l e a r e c h a n g e s t h a t have taken place over the past few years that allow for retirement plans to be rolled into inherited IRAs to eliminate some of the t a x h i t t h a t p r e v i o u s l y o c c u r r e d w h e n a non-spouse was named as a beneficiary,” says Armour

M o s t i m p o r t a n t l y, y o u h a v e t o h a v e a strong understanding of the basics “A great example is merely the titling of things like b a n k a c c o u n t s a n d i n v e s t m e n t a c c o u n t s (joint, pay on death, etc ),” says Armour “It n e v e r s u r p r i s e s m e w h e n a b a n k o r a n i n v e s t m e n t r e p r e s e n t a t i v e g i v e s o u t t h e

wrong information in this area; there seems to be a lot of wrong stuff out there ”

This is a burgeoning area of the law that requires more than a passing knowledge of tax laws. “The State of Illinois is considering legislation that will require estate planners to be certified, and this is a good example of why this is so necessary,” says Siegal

Consulting with other professionals is one way to gain the expertise necessary to put together nontraditional arrangements. In cases w h e r e t h e r e a r e m a n y c o n s i d e r a t i o n s o u t s i d e o f t h e t r a d i t i o n a l planning framework, Armour recommends a team effort, including a financial planner, accountant, attorney, insurance professional, etc. all working together, because some nontraditional situations may require specialized knowledge

“A great example is insurance,” says Armour, explaining that in order to buy life insurance, a person must have an “insurable interest” to prevent someone from just buying insurance on someone or something on the speculation that they will collect a benefit.

“In the case of unmarried partners,” he says, “it’s important that the professionals work together to make sure that policy ownership and beneficiary designations are such to obtain the desired results (i.e. the partner collects the benefit), and at the same time meet the standards set by the insurance company of an insurable interest The obvious solution is for each partner to own his/her own life insurance policy and name the other as beneficiary However, in higher net-worth individuals, owning your own life insurance can create additional estate tax considerations This is when you need the attorneys, CPAs, planners and insurance professionals working together to reach a solution ”

Pointing to contributing factors like the higher rates of divorce, couples living together without gettin g married, unwed couples having children together, and same-sex couples, Siegal says the need for such planning is absolutely growing

“ U n f o r t u n a t e l y, o u r s o c i e t y t y p i c a l l y t a k e s m a n y y e a r s , i f n o t generations, to keep up with the realities of these situations. As a r e s u l t , m a n y l a w s ( e s p e c i a l l y t a x l a w s ) d o n o t t a k e t h i s i n t o account,” he explains

“Furthermore, nontraditional couples have become more generally accepted in society and therefore estate planning for nontraditional couples is more generally accepted,” says Gilbert Certainly, the subject of same-sex marriage has been in the national spotlight enough to generate considerable talk about what happens under current law, and has likely caused many more people to consider the need to make a plan

The growing demand for nontraditional estate planning also may be a reflection of a general trend toward more planning across the b o a r d . “ T h e r e a r e a f e w r e a s o n s f o r t h i s : t h e a g i n g p o p u l a t i o n ; greater absolute levels of wealth generated during the 1980s and 1990s, especially as more people are aware of the need for estate planning; the aggressive marketing of ‘loving trusts’ and other living trusts that the legal community embarked upon about 20 years ago or so,” Gilbert explains.

B e c o m i n g k n o w l e d g e a b l e a b o u t t a x r a m i f i c a t i o n s a n d l e g a l considerations associated with financial and estate planning for t h e n o n - n u c l e a r 2 1 s t c e n t u r y f a m i l y i s a t o p p r i o r i t y f o r t h o s e financial advisors who have their fingers on the pulse of our everevolving culture

TheIllinoisCPASocietyisseekingnominationsforits prestigious2009PublicServiceAward,whichispresented eachyeartoaSocietymemberinrecognitionofhisorherlifetime ofpublicservicecontributionsandforpresentingapositiveimage ofCPAsandtheaccountingprofession.

Criteriatobeconsideredinclude:

>Impactonacommunity

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>IllinoisCPASociety membership

2008

DanG.Loescher,CPA

CherylS.Wilson,CPA

2007

MichaelA.Cullen,CPA

2006

GregoryS.Dowell,CPA

2005

DavidA.Hirsch,CPA

2004

JohnF.May,CPA

2003

JeromeH.Lipman,CPA

2002

WalterF.Nolan,CPA

2001

HowardG.Kaplan,CPA

KennethR.Diel,CPA

2000

ErnestG.Potter,CPA

New Age PM

It’s the dawning of a new era for performance measurement technology

By Selena Chavis

With the explosion of robust enterp r i s e r e s o u rc e p l a n n i n g ( E R P ) s y s t e m s o n t h e m a r k e t , b u s in e s s e s a r e i n c r e a s i n g l y a b l e t o m a n a g e , segment and use data in a meaningful way.

A c c e s s t o r e a l - t i m e d a t a h a s n e v e r b e e n e a s i e r, a n d c o m p a n i e s a r e e v o l v i n g t h e i r performance measurement (PM) approach as a result.

“There’s a greater awareness within CFO c i rc l e s o f h o w o p e r a t i o n a l p e r f o r m a n c e impacts financial results,” says Chris Denver, senior manager with SolomonEdwardsGroup LLC, Chicago. He explains that technology has been a driving force behind this evolution, allowing the field of statistics to enhance PM’s scope and management.

“The importance of technology in terms o f P M i s t h a t i t h a s r e a l l y e n a b l e d e v e n s m a l l c o m p a n i e s t o c o n d u c t r o b u s t a n d r e a l - t i m e t r a c k i n g C F O s h a v e a m u c h great er ability to get information in more timely and cost-effective ways,” he says

I n f a c t , a 2 0 0 8 s t u d y i s s u e d b y g l o b a l m a n a g e m e n t c o n s u l t i n g f i r m A c c e n t u r e found that top-performing organizations or “finance masters” were nearly twice as l i k e l y t o h a v e i m p l e m e n t e d a d v a n c e d enterprise performance management capab i l i t i e s , s u c h a s p r e d i c t i v e o r a d v a n c e d analytic tools or executive dashboards that help them monitor corporate performance against management metrics

The PM function has become much more than just the monthly process of financial reporting, where accountants analyze basic P & L m e a s u r e s , s a y s D e n v e r H e s u g g e s t s that the key to making the most of the data explosion is deciphering what data is truly relevant to the management team’s overall strategic objectives

He points to a retail client who was able to use PM data to determine why one store performed well, while another didn’t By peeling away irrelevant pieces of the data puzzle, the company was able to find a cor-

relation between success and staff tenure the longer the staff ’s tenure, the better the store’s performance. Strategic decisions were then made to transfer experienced staff to stores with low performance numbers to mentor new staff and improve outcomes

In an era where increasing global competition is a reality, the ability to leverage company data in creative ways will be a d i f f e r e n t i a t o r f o r m a n y b u s i n e s s e s , s a y s Dan Bulos, president of consulting group Symmetry Corporation

“ D u r i n g t h e b o o m y e a r s ( 1 9 9 0 s ) , w h o measu red an ything ? Sinc e the bu st (early 2000s), we’ve seen a lot more interest in measuring performance,” he notes, adding that some industries are only just dipping t h e i r t o e s i n t o P M w a t e r s “ P e o p l e a r e scrambling for what the right metrics are They aren’t always good, but you have to start somewhere,” he says

And new technology makes getting started easier than ever

According to Saeed Uddin, a consultant with Accenture’s Finance & Performance Management group, recent generations of PM technology allow for the automated integration of key data elements into delivery platforms that simplify the management of operational objectives. Tools and graphical presentations may include scorecarding, analytical insight into why a company is performing in a particular way, dashboard technology, near real-time performance monitoring, and other data offerings for improving strategic planning and budgeting

“A good PM system has strong linkages between shareholder goals and what’s happening on the front line,” he explains “It's about making profitable, value-added decisions at every level of the organization ”

The ability to capture, segment and communicate actionable data that aligns an organization’s goals will only get easier as technology continues to improve, he adds

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Dr Howard A Kanter, CPA/CITP, an associate professor in the School of Accountancy and Management Information Systems at DePaul University, Chicago, contends that making this link isn’t the only key; you also have to leverage real-time access to data Take, f o r e x a m p l e , Wa l - M a r t ’s r a p i d d e t e r m i n a t i o n t h a t a n e w l y d i scounted product wasn’t selling at the volume expected, because it was mispriced.

“In older systems, when a transaction occurred, it was keyed into the computer and processed into a report It could be two to six weeks from the time of the transaction, though,” Kanter explains, suggesting that the ability to monitor transactions or occurrences at the source makes the decision-making function very different. “The fact is that you can catch the transactions more quickly now, so you can do something about them Information provided too long after the transaction occurs makes it unusable ”

D a s h b o a r d t e c h n o l o g y o f f e r s u s e r s a g r a p h i c a l s n a p s h o t o f important goals and performance indicators by means of red and green lights, alerts, drill-downs, summaries, charts, graphs, and the like. The information is usually set in a portal-like environment that i s r o l e - d r i v e n a n d c u s t o m i z a b l e t o s p e c i f i c c o r p o r a t e f u n c t i o n s such as human resources, sales, operations, information technology and customer relationship management.

“On the face of it, dashboards can be a critical tool for management to use,” says Denver, explaining that the technology can provide a real-time snapshot of what an organization has agreed is important to monitor “That’s what an effective dashboard does,

and that’s the result of an organization doing its homework correctly,” he explains

As technology becomes more robust and performance metrics are pre-built into the system, making sure that the correct measures a

process and the success of the organization

“The basis of PM is that you train the technology about how you do things,” Kanter stresses “You have to know what impacts the business upfront before putting in PM ”

“It’s not just a technology question; it’s a business process question,” says Bulos He suggests that building a metric into the system that measures sales on an hourly basis, for example, is probably not very productive That same metric, though, would make a lot of sense if it were targeted towards manufacturing defects “It has to be the right metric in the right place,” he explains

Organizations should work to centralize PM efforts by identifying a set of fundamental metrics, says Uddin. “You develop a set of simplified metrics instead of having reams and reams of data,” he explains, adding that organizations can identify a particular goal and align company operations around one or two metrics to achieve it

Moving forward, Denver believes that PM reporting will take on an increasingly formal role in business as shareholders become accustomed to seeing these functions built into the strategic layout of an organization. “Shareholders will demand it. They will want to compare the information across organizations, especially as the business becomes more global,” he contends “They will want to

look beyond the financial information to see if an organization is strategically positioned for growth ”

K a n t e r p r e d i c t s t h a t t h e C F O ’s r o l e w i l l continue to expand along with the technology “The role of the accounting system that is managed by the CFO is now within the system itself,” he explains “The accounting p r o f e s s i o n a l ’s r o l e w i l l h a v e t o m o v e t o a m o r e s t r a t e g i c p a r t o f t h e o p e r a t i o n T h e expectation from top-level management and shareholders now becomes, ’Tell me something about the business I don’t know ’”

Denver adds that, while CFOs have often f o u n d t h e m s e l v e s l e a d i n g t h e c h a r g e f o r PM, the ability to meld the analytical with the communicative will become the differentiator “The CFO is naturally the person t o k n o w w h e t h e r t h e d a t a i s c o m p l e t e , t i m e l y, a c c u r a t e a n d d i s t r i b u t a b l e , ” h e emphasizes “Those who have established themselves as leaders are those who have learned to communicate and present data effectively and clearly ”

Bridging the gap between analyst and storyteller that will be the CFO’s challenge in the new age of PM

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Highlights Include:

Take the Stand

Want to be an expert witness? Prepare to feel the pressure

By Derrick Lilly

As the current turmoil in global finance, credit and mortgage markets unfolds, accounts of corporate fraud, rogue securities trading, manipulated auction rates, and flat out financial malpractice seem to be increasing. When these offenses come to litigation, financial experts CPAs among them are relied upon to assess damages and resolve complex matters. Justice and retribution may fall in the balance of their testimonies.

Headline-making financial scandals over t h e l a s t f e w y e a r s h a v e r e s u l t e d i n C PA e x p e r t w i t n e s s i n g a n d f o r e n s i c accounting playing a larger role in financial education curriculums

And in May 2008, a new certification was created to better differentiate the specialization.

The American Institute of Certified Public Accountants’ (AICPA)

CFF credential is awarded to professionals who complete the Certified in Financial Forensics prog r a m A l t h o u g h n o t r e q u i r e d t o b e c o m e a f i n a n c i a l e x p e r t w i tn e s s , t h e c r e d e n t i a l w a s e s t a blished to enhance a professional’s f o r e n s i c s e r v i c e s , a n d t o d i s t i nguish certification holders as prem i e r f o r e n s i c s e r v i c e p r o v i d e r s proficient in accounting, finance, e c o n o m i c s , s t a t i s t i c s , v a l u a t i o n and legal processes

S t e v e n B a b i t s k y, p r e s i d e n t o f SEAK Inc., a leading provider of expert witness training, feels that forensic accounting introduces a u n i q u e a n d e x c i t i n g d i m e n s i o n to the accounting profession, but ultimately credits money as the driving force behind the field’s rising popularity “Forensic accountants are a high-powered, well-paid group,” he says. “It’s lucrative.”

B e c o m i n g a c e r t i f i e d e x p e r t , however, requires years of multi-

disciplinary education, intense training and active experience-gathering

“ Being an expert witness is not glamorous,” argues Michael Pakter, CPA/CFF, a forensic accountant and managing member of Gould & Pakter Associates LLC, Chicago “Serving as an expert witness is a lot of hard work. You do hundreds, even thousands of hours of reading and research leading up to maybe as little as 10 minutes on the stand ”

“From my perspective, there is a long distance between day one and stepping into court or providing a deposition,” explains Andrea Katzenstein, CFE, a financial litigation consultant with Gould & Pakter “But I have a career, not a job When a court certifies you as an expert witness, you are at the top of your field. As far as accounting goes, that’s pretty sexy stuff ”

For those interested in pursuing the ultimate goal of expert witnessing, Pakter reco m m e n d s a p p r e n t i c i n g w i t h e s t a b l i s h e d experts or assisting professors in their work. “For young professionals, assisting professors who testify can be one of the most bene f i c i a l s t e p s t o w a r d s b e c o m i n g a n e x p e r t witness,” he says.

Academics are highly sought after among e x p e r t w i t n e s s e s a n d e x p e r t c o n s u l t a n t s “You never know when a professor you are a s s i s t i n g m i g h t b e t o o b u s y t o t e st i f y, b ut knows you are knowledgeable of the case and suggests to the client that you stand in,” Pakter explains

Direct interaction with an expert develops crucial research and preparatory skills, along with ethical standards and professional etiquette that are keys to success

Serving as an expert consultant or as a testifying expert witness requires high levels of maturity, integrity, composure, technical and communication skill, specialized knowledge and dedication Also high on the list of essential skills is the ability to present complex financial concepts in layman’s terms, and to defend your professional credentials and testimony under heavy scrutiny

I n a s s e s s i n g t h e r e l i a b i l i t y a n d admissability of expert testimony, the courts look to the “Daubert Standard,” w h i c h l a y s o u t f i v e f a c t o r s f o r t r i a l judges to use as guidance:

1. The theory or technique has been or can be tested.

2. The theory has been subject to peer review or published.

3. There is an acceptable known or potential error rate of the technique or theory.

4. The theory is generally accepted b y t h e r e l e v a n t s c i e n t i f i c c o mmunity

5 The expert’s theory existed before litigation began

F u r t h e r m o r e , b e c a u s e o f t h e S u preme Court’s ruling in Kumho Tire Co v C a r m i c h a e l ( 1 9 9 9 ) , t h e D a u b e r t Standard now applies to experts in all fields, whether scientific or nonscientific, and assigns trial judges with the gatekeepers’ responsibility to protect their courts from unreliable or irrelevant testimony.

While the Daubert factors are nonexclusive and may not apply wholly t o e v e r y c a s e , s e v e r e c o m p l i c a t i o n s may occur if a testimony flat out fails a Daubert challenge during a motion in limine, or if the judge dismisses the expert based on irrelevance of his or her expertise to the case. Mistakes are costly, and in some instances the loss of an expert’s testimony can collapse an entire case

The majority of CPAs may only get o n e s h o t a s a n e x p e r t w i t n e s s , a n d failing can severely damage their professional credibility

“It is possible to be disqualified as an expert witness, and it is more permanent than any tattoo,” Katzenstein explains candidly “Your presentation is as important as your preparation If y o u d o n ’t h a v e a l l y o u r t ’s c r o s s e d and i’s dotted, you run a risk ”

F a i l i n g a s a n e x p e r t

November

Not-for-Profit

Not-for-Profit

Employee

Not-for-Profit

Family Reins

In succession planning, keeping it all in the family isn’t as easy as it sounds.

By Bradley K . Walton, CPA/CFP/CLU

Family owned companies comprise more than 75 percent of the total number of businesses in the United States Numbering over 15 million, these companies produce more than 50 percent o f t h e g r o s s n a t i o n a l p r o d u c t ( G N P ) , p a y t w o - t h i r d s o f a l l w a g e s a n d a c c o u n t f o r more than one-third of the total personal net worth of the country.

In spite of the fact that approximately 75 p e rc e n t o f f a m i l y b u s i n e s s o w n e r s w a n t their companies to remain family owned, only about one-third successfully pass the company into the hands of a second generation Less than 10 percent of family enterprises ever make it to the third generation

Often, business owners find it difficult to relinquish control of the company Maybe they feel that no one can handle things better, or maybe they don’t want to face postretirement life, or the inevitability of their o w n m o r t a l i t y I f a s u c c e s s i o n p l a n i s n ’t implemented, however, and the heirs are left to decide for themselves who will run the company, severe conflicts may arise including the division of family ties.

H a v i n g t h e o b j e c t i v i t y t o e v a l u a t e t h e abilities and education of potential successors is vital If passing the business on to offspring, consider the personal goals of each child is this something they really want?

Then again, what if more than one child feels he or she is the best fit for successor, a n d i s u n w i l l i n g t o a c c e p t a s i b l i n g a s leader? If the owner publicly names the successor, then the other heirs are more likely to accept the decision. In situations where the working relationship between the heirs is very good, it may be possible to split the management duties between two or more children, with each having clearly defined r e s p o n s i b i l i t i e s a n d a u t h o r i t y. H o w e v e r, one child will have to have final authority in case of tie breakers

If the business owner ’s son or daughter is indeed to be the successor, then that person’s education in the company’s management should start as soon as they enter the

b u s i n e s s Tr e a t t h i s p e r s o n a s y o u w o u l d any other employee you’re priming for promotion The training process should be well defined and should include regular feedb a c k . A l s o , t a k e a w i d e - a n g l e v i e w o f t h i n g s t h e s u c c e s s o r s h o u l d b e r o t a t e d through various job functions with increasing levels of responsibility to enable him or her to become familiar with all aspects of the business

N o o n e i s p e r f e c t , h o w e v e r. O w n e r s s h o u l d e x p e c t s o m e m i s t a k e s a l o n g t h e w a y h o w e l s e d o y o u l e a r n t h e i n t r i c acies of leading a successful business? And t h e y s h o u l d e x p e c t t h e p r o c e s s t o t a k e s o m e t i m e A s t h e p o t e n t i a l s u c c e s s o r gains the respect and confidence of his or her employees, that person can grow into t h e n e w r o l e t h a t ’s b e e n f o rg e d . B y t h e same token, the training process gives the o w n e r t i m e t o g e t u s e d t o t h e i d e a o f a re duce d rol e in the comp any and a ne w lifestyle as a retiree.

A c a u t i o n , t h o u g h , w h e n i t c o m e s t o keeping things in the family: The involvement of a son-in-law or daughter-in-law can be a significant asset to the business, until a riff occurs These problems are magnified w h e n t h e f o r m e r i n - l a w i s a s t o c k ho l d e r. One way to avoid this problem is to limit s t o c k o w n e r s h i p t o n a t u r a l d e s c e n d a n t s However, in situations where the company stock has been the subject of an annual gifting program, limiting stock ownership may n o t b e a n o p t i o n I n s t e a d , a r e d e m p t i o n agreement may be entered into where the stock of any non-blood relative is redeemed by the company in case of divorce

What if no family member fits the bill?

Then consider hiring a professional manager The family can still retain ownership, a n d t h e l o n g - t e r m v a l u e o f t h e c o m p a n y w i l l b e e n h a n c e d i f t h e m o s t q u a l i f i e d manager is selected

Bradl ey K W al ton, CPA/CFP/CL U i s a sharehol der i n Si gnature Advi sers Group, L td , a graduate of the Uni versi ty of Il l i noi s and former El i j ah W atts Sel l s Award reci pi ent

Illinois CPA Society member

town hall forums

Glenview

January 21, 2009

8:00AM - Networking and Breakfast

8:30AM - 9:30AM - Program and Q&A

Wyndham Glenview Suites 1400 Milwaukee Avenue, Glenview, IL

Oak Brook

January 26, 2009

8:00AM - Networking and Breakfast

8:30AM - 9:30AM - Program and Q&A

The Wyndham Drake 2301 York Road, Oak Brook, IL

Downtown Chicago

January 27, 2009

8:00AM - Networking and Breakfast

8:30AM - 9:30AM - Program and Q&A

The Crowne Plaza 733 West Madison, Chicago, IL

Please be our guest.

Come for complimentary breakfast and hear the latest international, national and Illinois trends impacting your day-to-day practice:

>International Financial Reporting Standards (IFRS) They ARE coming and WILL impact you.

>Ethics Standards

Know the current rules. Avoid seeing your name in the press!

>Merging Generations in the Work Place Skills to develop tomorrow’s leaders.

Don’t miss this opportunity to share your thoughts and ideas with Elaine Weiss, ICPAS President & CEO, and Sheldon Holzman, Chair of the ICPAS Board of Directors.

Bring a Young Professional Colleague

Help develop the future of our profession. This is an excellent opportunity for young professionals to network with colleagues and hear first-hand the latest developments within the profession.

1 CPE Credit Hour. COST IS FREE.

To REGISTER for this complimentary program in your area, call 800-993-0393.

Into the Fire

Things keep heating up for tax preparers, which means penalties may be harder to avoid.

By Harvey Coustan, CPA

According to a July report prepared by the Treasury Inspector General f o r Ta x A d m i n i s t r a t i o n ( T I G TA ) , there were penalties assessed on only 529 i n d i v i d u a l t a x r e t u r n p r e p a r e r s b e t w e e n January 1, 2004 and February 17, 2007, a period of more than 3 years This number represented less than 1 percent of the return p r e p a r e r s i d e n t i f i e d o n i n d i v i d u a l t a x returns during that period

T h o s e s t a t i s t i c s m i g h t l u l l s o m e i n t o a belief that the audit lottery (for return prep a r e r s ) i s s t i l l a l i v e a n d w e l l B u t b e warned: Several IRS initiatives apparently aimed at significantly increasing the number of preparer penalties are now in place

T h e T I G TA r e p o r t f o u n d m a n y a r e a s where the IRS had not followed the process established for assessing preparer penalties These findings included poor documentation and lack of management involvement

In each case, the TIGTA report made reco m m e n d a t i o n s ( e x c e p t w h e r e I R S a c t i o n had already taken place between the covered period and the report’s preparation)

The IRS swung into action after the passage of the 2007 Small Business and Work Opportunity Act (JOBS Act) The JOBS Act substantially revised the preparer penalties, most notably by increasing thresholds for p r e p a r e r s u n d e r I n t e r n a l R e v e n u e C o d e section 6694, and expanding the types of tax returns for which preparers can be subjected to penalties

The Internal Revenue Manual (IRM) sect i o n s c o v e r i n g r e t u r n p r e p a r e r p e n a l t i e s were amended in February 2008, but didn’t include changes that would result from t h e 2 0 0 7 J O B S A c t , s i n c e t h e p r e p a r e r p e n a l t y r e g u l a t i o n s h a d n o t b e e n i s s u e d S u b s e q u e n t l y, t h e p r o p o s e d r e g u l a t i o n s have been issued, and perhaps by the time you read this column, final regulations also will have been issued

On April 13, 2008, the Large and Midsize Business Division of the IRS issued a memorandum to its industry directors; the p r o v i s i o n s i t c o n t a i n e d w e r e q u i c k l y

a d o p t e d b y t h e S m a l l B u s i n e s s a n d S e l fe m p l o y e d D i v i s i o n T h e m e m o r a n d u m (which is identified as LMSB-04-0308-009) mentions penalties imposed under the following Internal Revenue Code sections:

• 6694 Understatement of taxpayer ’s liability by the tax return preparer

• 6695 Other assessable penalties with respect to the preparation of tax r e t u r n s f o r o t h e r p e r s o n s ( w h i c h includes infractions such as failure to furnish the taxpayer with a copy of the return)

• 6700 Promoting abusive tax shelters, etc.

• 6701 Aiding and abetting the understatement of tax liability

• 7407 Actions to enjoin tax return preparers • 7 4 0 8 A c t i o n s to e n j o i n s p e c i f i e d conduct related to tax shelters and reportable transactions

H o w e v e r, i t ’s l i k e l y t h a t t h e m e m o r a nd u m w a s i s s u e d b e c a u s e o f t h e n e e d f o r g u i d a n c e r e l a t i n g t o t h e c h a n g e i n t h e §6694(a) standard from realistic possibility o f s u c c e s s t o m o r e l i k e l y t h a n n o t . E v e n before the February 2008 amendments, the IRM contained some instructions that were repeated in the memorandum, including:

(1) The team manager ’s approval must be approved to begin the return preparer examination

(2) The LMSB Return Preparer Coordinator (RPC) must be contacted at the start of the preparer penalty examination.

(3) If the preparer ’s conduct appears to be pervasive and widespread, consideration will be given to opening a Program Action Case (PAC) preparer investigations where clients’ tax returns are prepared by questionable preparers are examined to determine whether preparer penalties and/or injunctive actions against the preparer are warranted

(4) D u r i n g e v e r y f i e l d e x a m i n a t i o n , examiners should determine if return

preparer violations exist If a decision is made that a penalty is not warranted, a “simple statement to that effect in the workpapers…is sufficient.”

(5) The examiner must gather pertinent information from the audit

(6) The imposition of a tax preparer penalty invokes a mandatory referral to the Office of Professional Responsibility. (The preamble to the proposed §6694 regulations indicates that the IRM will be amended to eliminate this instruction )

The memorandum indicates that the income tax examination is to be “separate and distinct” from the return preparer violation case, and “ex ami ners wi l l not propose or di scuss conduct penal ti es per se i n the presence of the tax payer” (emphasis provided). This is the same direction contained in the IRM

But here’s where things get a bit sticky The memorandum indicates that the taxpayer interview serves a dual purpose: First, to further the examination, and second, to identify tax return preparer violations. The memorandum goes on to give examples of questions taxpayers may find appropriate to ask in a given situation No doubt, when they hear the questions, a thoughtful taxpayer will suspect that the IRS is considering some sort of action against the preparer:

• Did you meet with the preparer?

• What documentation was provided to the preparer?

• Did you receive a copy of the return or claim?

• How was the preparer compensated?

• Was there any discussion regarding whether the transaction is subject to disclosure under Revenue Procedure 94-69 (qualified amended return disclosure procedures for taxpayers subject to the Coordinated Examination Program)?

• Are you aware of any errors, omissions or mistakes on the

return under examination?

• Did you disclose this transaction on your tax return? Why? Why not?

• Were there any concerns about how the transaction was reported?

The last three questions are particularly problematic, especially in light of the italicized phrase which forbids discussion of preparer conduct penalties in front of the taxpayer Many practitioners representing taxpayers in IRS examinations try to avoid direct conversations between the taxpayer and the examining agent, requesting the agent to deal only with the practitioner Where the agent insists on a conversation with the taxpayer, the preparer may be justifiably concerned that the agent is considering a preparer penalty.

These questions also might lead a taxpayer to think that his or her preparer will lose objectivity in representing them a clear conflict of interest. The TIGTA review covered by its report found preparer penalty workpapers in the taxpayer examination file IRS policy forbids this, but that file can be made available to taxpayers in certain circumstances.

Wi t h T I G TA’s i n c r e a s e d f o c u s o n p r e p a r e r p e n a l t y f a i l u r e s , a strengthened IRS Office of Professional Responsibility, and a continuing administrative and judicial process targeting errant preparers, I feel quite certain that tax return preparers will see more penalty cases than ever before

Harvey Coustan i s an Ernst & Y oung reti red partner He i s presentl y c o n s u l ti n g o n s ubs ta n ti v e te c h n i c a l a n d pr o f e ss i o n a l s ta n da r ds i ssues and has been an ex pert wi tness i n a number of cases

LifetimeAchievement 2009

Award Recommendations Now Being Accepted

The Illinois CPA Society is seeking recommendations for the 2009 Lifetime Achievement Award, which is presented each year to an individual(s) who has provided distinguished service to the profession in Illinois and/or nationally Candidates are selected based on a lifetime of service to the profession

Factors to be considered include:

> Contribution to the profession

> Professional position attained

> Length of service

> Illinois professional involvement

Letters of recommendation with information supporting the individual’s qualifications (resume, biography, etc.) can be sent to:

Eileen Robbs, Lifetime Achievement Award Illinois CPA Society

550 W Jackson Blvd , Suite 900 Chicago, IL 60661

Or by email to: robbse@icpas org D

Recent Award Honorees:

2008 Belverd E . Needles, Jr.

2007 Edwin Cohen

2006 Richard T Sullivan

2005 Vincent E Villinski

Richard E Ziegler

2004 Lawrence M Gill

Jerome A. Harris

Cheryl S Wilson

2003 Daniel W. Cadigan

Lester H McKeever Jr

2002 Robert E Brooks Sr

Margaret A Cartier

RECESSION ARE YOU PROOF?

S and investments from the trials of an economic downturn.

By Selena Chavis

Times are tough. Bankruptcies, falling property values, rising gas prices, growing unemployment the list goes on The forecast and prediction game has been making headlines for well over a year now, invoking concern in the average consumer and business professional alike.

Talk of recession is rife As of June 30, 2008, in fact, the recession probability forecast provided on Moody’s Economy.com, found that of the 11 statistical areas covered in Illinois, 10 were either at risk or in a recession

In layman’s terms, a recession indicates that the economy is shrinking instead of growing, and while economists continue to argue over whether we have actually landed in such an economic downturn, most consumers are experiencing the strain

Subsequently, experts are urging businesses and consumers to pursue proactive strategies to keep their heads above water Here’s advice from the pros on how to recession-proof your life.

Protect Your Business Interests

Innovation. That’s what business analysts and consultants say will keep a business afloat when the competition is sinking.

“Recessions are a time when you can differentiate yourself from the competition You can emerge with a very positive prospect for future growth,” explains Ken Esch, partner with PricewaterhouseCoopers Private Company Services in Chicago “You just want to make sure you understand that there are cycles in business, and there are plenty of things a company can do to maintain profitability and improve its long-term outlook.”

Elizabeth Binning, director of the Illinois Small Business Development Center, agrees, noting that companies need a differentiator or value-added service. Think of home-cleaning services that use eco-friendly products to reach a certain market segment, for example She also points out that the accounting firms that seem to be doing the best are those that help their clients help themselves, by offering extras such as training in QuickBooks.

“If you can innovate, you’re the first mover,” she stresses “You’ll get and maintain those customers rather than playing catch up in tougher economic times ”

Esch cautions companies against knee-jerk reactions that lead to aggressive cost-cutting, since too much cost-cutting in the wrong areas can impair rather than improve a company’s long-term outlook. “We think best-performing companies will spend more money on research and development as well as innovation in times of economic downturn,” he explains “One of the best things you can do is to get closer to your customers; find out how you can improve products and services for the long-term.” Then, when the economy begins to grow, you’ll emerge as the leader in its industry

Besides, says Esch, the trend for most companies since the turn of the century has been to operate very lean, meaning that there

a r e p r o b a b l y a l i m i t e d n u m b e r o f c o s t - c u t t i n g m e a s u r e s l e f t a s options anyway “I think that many companies over the past five y e a r s t h o s e t h a t h a v e e x p e r i e n c e d g r o w t h b u t n o t o u t l a n d i s h growth have tried to manage cost structure,” he explains, adding that from an operational perspective, they are probably better prepared than companies were during the late 90s bust “Companies have been much slower to make large investments in people and capital,” he says

Investments in people may not be a bad idea during a recession, though, since you tend to find more talent on the streets, looking for opportunities. “There’s been a disruption in the labor market. It’s a good opportunity to find and recruit new talent that will help to move a company forward,” he explains.

While cutting costs may not be the best action to take, a slower economy means it’s a good time to renegotiate contracts and costs with vendors, suppliers and customers. “Everyone understands costs are up. It’s worth a conversation,” Esch notes. “I’ve seen a fair amount of that in the distribution business as companies add a fuel surcharge to the price.”

B

e s r e d u c e d

Globalization has been a key factor in protecting the interests of many businesses Esch advises a long-term strategy of working in more than one market “Companies tied to only the domestic market are feeling more pain than those with international clients,” he says “We are seeing a lot of small businesses trying to access international markets We think that’s a good opportunity and something all companies ought to be considering ”

S a f e g u a r d Y o u r C a r e e r

Whether in a recession or not, statistics have pointed to instability in the unemployment rate for more than a year now In August 2008, the unemployment rate reached 5 7 percent, the highest since 2003

What can accounting and finance professionals do to dodge the unemployment bullet?

According to Binning, the key to job security is to ask yourself, “How much business am I bringing in, and how much value am I adding to the firm?” “That’s what’s going to make them want to keep you. You’re not easily replaced,” she says.

To b y C o f f e y, d i v i s i o n d i r e c t o r w i t h R o b e r t H a l f F i n a n c e a n d Accounting’s Permanent Placement Group in Chicago, says that accounting professionals tend to have the upper hand during times of economic slowdown because their functions are in such high demand. “No matter how the economy fairs, there’s going to be certain positions that companies can’t do without,” he explains, adding that statistics reveal only a 2-percent unemployment rate f

i n g p r o f e s s i o n a l s “ I t ’s n o t t h e w o r s t t i m e t o b e a n

accountant.” In fact, a recent JobFox Top 20 Most Recessi on- Proof Professi ons study found that accounting and finance jobs ranked in the top five.

That’s no reason to let your guard down, though, cautions Coffey, who notes that competition for positions still will be greater during a recession Echoing Binning's sentiments, he asserts that, “In any job, a lot of maintaining a position over the long-term comes with your work ethic are you expendable or not?”

Taking it a step further, Coffey explains that, “The very best accountants in this world are consulting with and advising executive-level people. What we are finding is that not only do they know the numbers, but they also are able to communicate the impact on the business.”

For that entry-level accountant trying to land a f irst job during competitive times, Coffey notes that communication is still a key i n g r e d i e n t a n d d i f f e r e n t i a t o r “ I t ’s t h e i n d i v i d u a l w h o h a s t h e ability to display passion for t he field that becomes a desirable commodity,” he says, adding that when a company has several good resumes, it has to look outside of basic skil l sets to make the best choice “Much of that is derived from how you communicate,” he says.

Consumer Report’s Money Advi ser offers additional advice to improve your employment outlook.

• Get additional training, since employers are less likely to lay off people with specialized skills

• D i v e r s i f y y o u r s k i l l s I f y o u a r e a s a l e s p e r s o n , g e t s o m e t e c h n i c a l s k i l l s I f y o u a r e a n a c c o u n t a n t , g e t s o m e c o m mu n i c a t i o n s k i l l s

• Update your resume so that if the worst does happen, you’re ready to hit the road running.

• Build a solid network of contacts, and don’t stop there. Keep in regular contact with them

• Set up an emergency fund from three to six months living expenses if possible.

M a k e t h e M o s t o f Y o u r I n v e s t m e n t s

Often, the way consumers approach their investments during a recession has a lot to do with whether their investment goals are long or short-term However, the best advice might be to “do nothing,” says Greg Johnston, president of Johnston Investment Council. In fact, he says, if you’ve waited until a full-fledged recession is in play, you may have waited too long anyway.

Explaining that the stock market will show signs of trouble six months to a year ahead of an actual recession, he notes that “forecasting that a recession is coming is a very difficult activity Whether we are in a recession or not is a debatable point,” he says

While some may panic and consider lowering their stock allocations, Johnston advises avoiding major shifts in the mix, opting instead to make changes in stock classes

“Investors should look at the sectors in their portfolios There are some that are more recession resistant than others,” he explains, pointing to industries such as healthcare, consumer staples and utilities “Buy an exchange-traded fund that focuses on one, two or three of those sectors ”

If an investor has mutual funds, then it’s important to understand the fund manager ’s strategy Is it a growth or a value strategy? For the average investor, the question becomes whether the fund is investing in industries and companies that are “undervalued” or whether it is investing where growth is expected based on historical data and forecasts

“ M a n a g e r s w h o s e e k v a l u e l o o k f o r o p p o r t u n i t i e s w h e r e t h e price isn’t reflective of the true fundamentals of the company,” says Johnston “They are undervalued ” He notes that large banks like Citigroup and Bank of America hit lows that were 75 to 80 p e rc e n t d o w n f r o m t h e i r h i g h s “ T h a t ’s a p r e t t y b i g d e c l i n e i n value, but does that reflect their long-term fundamentals?” he asks.

A l t e r n a t i v e l y, f u n d m a n a g e r s u s i n g a g r o w t h s t r a t e g y m i g h t say, “I want companies I believe are going to grow 10 to 15 percent over the next few years,” looking more to individual stocks than industries. “Academic research suggests that value tends to outperform growth over the long-term growing strategies,” says J o h n s t o n . H e c a u t i o n s t h a t t h e r e s t i l l w i l l b e t i m e s t h a t a n investor will want to consider a growth fund

Consumer Report’s Money Advi ser recommends maintaining stock holdings by dollar-cost averaging, so that a set amount of money is invested at regular intervals, regardless of price movement. Investors will get fewer shares when prices are rising but more when they're falling, resulting in a lower overall average price. This strategy also helps investors to maintain a long-term perspective

F u r t h e r m o r e , t h e r e p o r t a d v i s e s l o o k i n g f o r l o w - r i s k s t o c k s . Beta is a measure of how a stock reacts to movements within the o v e r a l l m a r k e t s . T h e h i g h e r t h e b e t a , t h e g r e a t e r t h e s t o c k ' s volatility To limit losses during a down market, consider stocks with a low beta ideally 1 or less such as utility stocks Managed-volatility funds ones that invest heavily in low-beta stocks a n d o t h e r e q u i t i e s t h a t h o l d u p w e l l i n d o w n m a r k e t s a r e another option

The best advice, whether evaluating your business, career or i n v e s t m e n t s i n t h i s e c o n o m i c a l l y c h a l l e n g i n g t i m e , i s t o k e e p

your perspective Yes, a recession may be our reality for now, but all things are cyclical Where there is a bust, there will always be a boom You just have to keep your head above water long enough to see it and reap the rewards of it

THE OF BUSINESS FARMING

L I T E R A L L Y A N D F I G U R A T I V E L Y .

By Kristine Blenkhorn Rodriguez

When we’re working 14-hour days, or the boss is on our backs, or the bonus check doesn’t come in, we dream of a different place, far from the land of desks, copiers and printers a land of rolling meadows, babbling brooks and bucolic peace

Go ahead and dream, but don’t tell Joe Pope about that fantasy He’s liable to laugh himself silly Pope, a 64-year-old farmer with 3,000 acres south of Springfield, Ill., knows that the reality is far different. “Oh, I love what I do,” he says, “but running a farm is not easy work. Days are long and the business has really changed over the past few years.”

Mike Armour, CPA/CFP, a managing member of Bird Armour LLC in Springfield, Ill , can attest to that He counts farmers among his clients, grew up in a farming community, and still lives in one t

today It’s not the stereotypical Green Acres, ” he explains

While Armour can advise his clients on the financial end of the business, he says they’re really the ones jumping through all the financial hoops. “They’re looking ahead not just to this year but to next year and the one following. You can’t farm today without a long-term plan and perspective ”

N A P S H O T : I L L I N O I S F A R M I N G

Illinois still counts itself among the farming powerhouse states, with approximatel y 72,500 farms as o f 2007 (source: Natio nal Agricultural Statistics Service). While nowhere near Texas’ 230,000 farms, Illinois still runs head to head with California, Ohio and Wisconsin in total number In fact, farming accounts for 27 million acres of Illinois land (about 77 percent of the state), and state farmers rank second in the United States for corn and soybean production, producing 17 percent of the nation’s total for each crop

The average Illinois farm operator is 55.1 years old (2002 Census of Agriculture) and farms 377 acres He or she has seen the v a l u e p e r a c r e o f f a r m l a n d a n d b u i l d i n g s a l m o s t d o u b l e s i n c e 2000, going from $2,260 to $4,330 in 2007 About 61 percent of these farm operators use computers to help with the business, but only 10 percent use the Internet to purchase agricultural inputs such as seed, machinery, fertilizer, etc

What’s more, the total value of Illinois farm exports in 2006 was approximately $3.8 billion. Feed grains accounted for approximately $1 4 billion, while soybeans accounted for approximately $1 3 billion (Source: Economic Research Service, U S Department of Agriculture.)

On a national scale, one acre of US land (about the size of a football field) can produce 42,000 lbs of strawberries, 11,000 heads of lettuce, 25,400 lbs. of potatoes or 8,900 lbs. of corn. The agricultural industry employs 20 percent of the US workforce, or 21 million people. One-fourth of the world’s beef and nearly onefifth of the world’s grain, milk and eggs are produced in the United States (Source: U S Farm Bureau )

W H A T ’ S C H A N G I N G ?

No business stays stagnant for long, but some industries are forced into fast, hard changes Farming counts itself among those industries at least if you talk to anyone in the business

“When you think of economic drivers, you might think technology or manufacturing,” says John Ikerd, professor emeritus of agric u l t u r a l e c o n o m i c s a t t h e U n i v e r s i t y o f M i s s o u r i “ F a r m i n g , though, is a huge driver and, on the other side of that equation, is more affected by economic changes than many people think ” While a myriad of issues affects farmers, rising prices, increasingly volatile weather patterns, the trend toward organic farming, biofuels and international farming are taking a particular toll

Here’s a closer look.

Rising Prices

Brian Brown, a CPA with the Illinois Agricultural Auditing Association, says recent economic uncertainty has made managing risk a huge area of change for most farmers

“The end consumer sees high prices in the grocery store and assumes that’s good for farmers,” he explains. “What they don’t see is that the prices farmers are paying for machinery, fertilizer and all the things that go into building their business have also soared ”

Despite the high prices we pay at the cash register for our food, financing stress for farmers is just as strong as it was when prices were low “They now need to commit a lot earlier than they’d like to before they even put a seed in the ground,” says Brown.

“My fertilizer supplier called yesterday and told me if I wanted to save 15 percent on fertilizer for next year, I needed to place an order and lock in the price by tomorrow night. So I’m ordering for 2009 in August of 2008, which means I’m going to take a tax loss on the $400,000 it’ll cost me in fertilizer,” says Pope I save money, but was hoping to have that purchase on next year ’s financials I’m

also looking at steel costs going up That’s not good if you need a new grain bin or machine shed Five years ago, I paid $200 per ton for feed Now, I have to spend $1,000 per ton And a big, high-end tractor will run me around $300,000

“I’ve been in this business a long time. I understand the costs and risks But, you now see farmers getting larger That means you require more capital and planning per unit, and you become more productive per unit A young person without good, heavy financial backing can’t get into the agriculture business anymore,” says Pope His sentiments are common in a futures market that American Farm Bureau Federation President Bob Stallman called “bent” in May of this year at a Capitol Hill hearing. According to the American Farm Bureau’s The Voice of Agriculture report, Stallman cautioned that because of the disparity between futures contracts and c a s h o r s p o t p r i c e s , f a r m e r s c o u l d f i n d t h e m s e l v e s e x p o s e d t o more risk as time goes on He also said that the role of speculative and commodity index-related trading in agricultural futures markets, while growing for some time, has reached historic levels and contributes to market uncertainty

L

“price discovery ” Stallman said that one of the roles of the Comm o

n s u r e t h a t m a r k e t s o f f e r i n g c o m m o d i t y f u t u r e s a n d o p t i o n s h e l p f a r m e r s m a n a g e price risks and assist in the discovery process for cash prices.

“The futures market mechanism is, at least, bent at this point in time, and the fact that several major grain and oilseed marketers are only offering firm crop-price bids 60 days into the future is a r a t h e r o m i n o u s s i g n t h a t t h e b r e a k i n g p o i n t m i g h t n o t b e f a r away,” said Stallman.

“There’s a big difference in farmers’ investments in their crops and their financial exposure than there was just a year or two ago, says Ikerd. “Soybeans are up to $16 a bushel now, instead of $7. Corn used to be $3 a bushel Now it’s $7 It makes us more vulnerable to the farm financial crisis we had in the 1980s with bankruptcies, foreclosures and a falling export market ”

Changing Weather Patterns

Farmers always have had to find ways around insects, poor soil, drought and flooding In recent years, however, with an increase in sudden and volatile weather patterns drought that spurs wildfires, flooding that damages fields and erodes soil, tornados that destroy huge amounts of acreage farmers are faced with challenges of biblical proportions.

As of the end of June, US crops had sustained more than $8 billion in weather-related damage for the year (source: American Farm Bureau Federation) Illinois was expected to take a $1 3 billion loss due to excessive wetness and flooding

Organic Farming

“Organic farming is growing at about 20 percent per year It’s doubled every three to four years since the early ‘90s,” says Ikerd, adding that it’s all about the trend of finding food closer to home.

“The movement towards grass-fed beef there’s a lot of money to be made there. And I see the trend as good for agriculture overall,” he explains

Pope is not surprised at the slow progress of organic farming in Illinois, however. “We’re in a pretty aggressive corn and soybean area Row crops Lots of them Organic is hard to do on a large scale because, with no insecticides or herbicides, your risk is so much higher I’m not saying it’s bad, just that it’s hard to produce enough per acre We’d have to have 10 times the number of farms we do now to accomplish that organically ”

With 25 to 35 percent of consumers saying they’re looking for organic options, Ikerd thinks organic farming has the potential to account for one-third of our total food crops It’s currently at 4 to 5 percent. “It’ll happen as we get smarter about realizing that what we put on the land can come back to haunt us,” he says.

Biofuels

W h i l e b i o f u e l s a r e a h i g h l y c h a rg e d p o l i t i c a l t o p i c , t h e r e ‘s n o denying that the increase in demand for grains to make biofuels has caused prices to rise dramatically

Many farmers have opted not to renew conservation contracts with the US government in order to take advantage of these prices Basically, conservation contracts allowed the government to pay farmers not to grow crops on a certain amount of land (usually land that is less than ideal for optimum crop growth). The goal was reduction of soil erosion, carbon-dioxide and runoff from chemicals and fertilizers

Although foregoing the contract payments may seem a smart move in a market where prices are so high, the biofuels debate is far from over. Many farmers are risking a small but sure payout for what could be an iffy one in the years ahead

“You don’t always get what you expect,” says Pope “It’s not a sure thing, like making a car on an assembly line When it’s done, it’s always a car When we’re done, we hope it’s a good crop But a lot in between seed and final product can go wrong ”

International Farming

The fact that farming is becoming a prohibitively expensive business to get into is changing the profile of the US farmer. Some prospective agricultural operators are purchasing land in South America to get started or to enlarge their operations. What could run a farmer $5,000 per acre in the United States might sell for a few thousand dollars less south of the border.

Armour says that although he hasn’t seen a lot of movement yet, it’s definitely starting. “There’s a large farming family at my church. They’ve been looking into South American expansion. As family farms become larger here, it’s only natural that people will start to look somewhere else if they can’t get what they want at an affordable price near home.”

Fortunately, members of the agricultural community are a tough breed. As long as the land has been farmed, hard-working farmers have had challenges to overcome Come rain and high water, they manage to survive and thrive

BankruptAmerica

By Carolyn Tang

Over the course of two weeks, the financial industry w a t c h e d h e l p l e s s l y a s M e r r i l l Ly n c h a n d L e h m a n Brothers collapsed under a load of poor investment decisions and overexposure to a soft real-estate market. In true soap opera form, Merrill Lynch survived via a rapid $50 billion a c q u i s i t i o n b y B a n k o f A m e r i c a , y e t t h e 1 5 8 - y e a r- o l d L e h m a n Brothers remained undesirable, forcing an end to its long and storied history by filing for Chapter 11 Post-filing, a defeated Lehman sold itself off in piecemeal fashion to private equity firms and overs e a s c o n c e r n s s

The US financial crisis is no longer a study in speculation. It is a harsh reality Congress and the Treasury Department have worked out terms for an unprecedented bailout, earmarking $700 billion to purchase distressed assets, thus removing them from bank books and placing them on government ledgers The presumption is that this will inject a large amount of equity capital into the nation’s credit markets, and restore confidence in the marketplace

“The purpose of the fund is to stabilize the system,” says Dr. A. G Malliaris, professor of economics and finance at Loyola University, Chicago “As with any rescue plan, the execution is more important than the initial motivation There are many details yet to be worked out ”

According to Malliaris, although there are some disadvantages associated with a government bailout, they may not outweigh the overall necessity of a rescue. “Bailouts are asymmetric. Many persons benefit during the prosperous phase of operations, while taxpayers assume costs during deleveraging,” he explains “However, a government cannot afford to allow a financial collapse because it impacts the real economy ”

Additionally, some analysts suggest that the establishment of a b a i l o u t f u n d i s

w o u l d a l l o w t h e Tr e a s u r y t o b u y, s e l l a n d h o l d a n y a s s e t s i t chooses. Yet, despite the government’s good faith deux es machi na effort, the last two stand-alone US investment banks, Morgan Stanley and Goldman Sachs, abandoned their short-term funding business model and resorted to accepting customer deposits

Still, the drama continues to unfold. According to one seasoned h e d g e f u n d m a n a g e r, M o rg a n S t a n l e y i s c o n s i d e r i n g a m e rg e r with a bank to get access to more short-term funding If Morgan S t a n l e y h a d m e rg e d w i t h Wa c h o v i a , a s i t h a d c o n s i d e r e d , t h e company potentially could have increased its credit risk, since Wachovia was viewed as the weakest of the five major US banks, with the most credit risk relative to its tangible capital Instead, Wa c h o v i a h a s e n t e r e d i n t o a c q u i s i t i o n t a l k s w i t h We l l s F a rg o , who offered $15 1 billion for the struggling bank in an all-stock deal that would free it from government assistance and a partial take over by Citigroup

“While Morgan Stanley’s issue in the markets is dire concern o v e r i t s s h o r t - t e r m f u n d i n g , t h e m e rg e r w o u l d n o t c r e a t e n e w deposits, and the majority of the combined company would still require market-based funding,” said one source familiar with the matter “Our modern financial system has broken, and trying to repair it is a very complicated and difficult process.”

So what triggered the unraveling of the US banking industry? Most experts say it was a confluence of multiple factors, including record oil prices, a depressed real-estate market and a declining dollar. However, another critical element was the widespread use of complex derivatives and other financial instruments that tied the fates of many financial institutions to one another. A quick glance at Lehman’s bankruptcy petition clearly illustrates this interconnectivity Citigroup is listed among its biggest unsecured creditors, with

about $138 billion in bonds, and the Bank of New York Mellon Corp is listed as holding approximately $17 billion in debt

How was this crisis not anticipated? Malliaris explains “Economic cycles have been around for hundreds of years However, p r e d i c t i n g t u r n i n g p o i n t s , b o t h t o p a n d b o t t o m , i s n o t e a s y Numerous Wall Street CEOs obviously failed to see the turning point this time ”

To fully understand the scope of the Lehman collapse, as of May 31, the investment firm had approximately $639 billion in assets. In contrast, WorldCom had about $104 billion in assets when it filed in 2002. The Lehman bankruptcy was the largest US bankruptcy filing to date, eclipsing WorldCom by almost 500 percent.

Like WorldCom, Lehman filed Chapter 11 as opposed to Chapt e r 7 , m o s t l i k e l y t o r e t a i n c o n t r o l o f i t s a s s e t l i q u i d a t i o n T h i s e n a b l e d L e h m a n t o s e l l a p o r t i o n o f i t s o p e r a t i o n s t o B a rc l a y s within a day of filing for bankruptcy And even though, according to the Bankruptcy Code, Chapter 11 is filed with the intention that t h e b u s i n e s s w i l l r e o rg a n i z e a s a g o i n g c o n c e r n , a c o m e b a c k would not have been possible for Lehman

“Chapter 11 is of limited utility inasmuch as there is no way to undo the damage to a financial firm’s reputation caused by a bankruptcy filing,” explains Professor Stephen J Lubben of Seton Hall University School of Law “Financial firms can’t trade if they lose their reputation ”

Given the potential repercussions, the Associated Press reports t h a t a g r o u p o f t h e w o r l d ’s t o p 1 0 m a j o r b a n k s a g r e e d t o p o o l resources and establish a $70 billion emergency fund that financial institutions could tap into in order to protect themselves from the Lehman aftermath. Each participating bank contributed $7 billion, with the understanding that up to a third of the pooled funds would be available to each individual bank should an immediate cash

infusion be needed Participating banks include JPMorgan Chase, Goldman Sachs, Bank of America, Credit Suisse, Deutsche Bank and UBS Leeway was left for additional entities to participate

Other industry insiders suggest that credit rating agencies cont r i b u t e d t o m a r k e t d i s a r r a y b y i r r e s p o n s i b l y d o w n g r a d i n g f i r m s without taking the timing of their issuances into account To illustrate, the Friday before Lehman filed for bankruptcy, Standard & P o o r ’s w a r n e d i n s u r a n c e g i a n t A m e r i c a n I n t e r n a t i o n a l G r o u p (AIG) that if it wasn’t able to demonstrate adequate access to shortterm capital, the firm would see up to a three-notch cut in its ratings Then, on the following Monday, Moody’s Investors Service and Fitch Rating issued a similar warning. “And when a credit agency reduces your rating,” says one New York-based investment analyst, “it increases your cost of borrowing.”

Lubben says that part of the problem in the financial industry was a lack of focus on counter-party risk “Nobody really paid attention to the problem that credit derivatives only work to reduce risk if you’ve contracted with a party that is less of a default risk than the entity you are seeking to diversify against. Once the first bank failed, the interlocking nature of the derivatives markets meant that a whole series of derivative trades was at risk,” explains Lubben

Fearing the potential impact of both a Lehman bankruptcy and an AIG collapse hitting the market simultaneously, the Federal Reserve extended an $85 billion lifeline to AIG, collateralized by all of AIG’s assets According to a Federal Reserve press release, “This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy ” And perhaps the Fed will even have a say in that process, since the way it stands now, the US government holds a 79 9-percent equity interest in an insurance company

Bankruptcy by the Numbers

According to the American Bankruptcy Institute, business bankruptcy filings for the six-month period ending on June 30, 2008 totaled 18,456, which represents a 42-percent increase over the same period a year ago

Businesses primarily file for two types of bankruptcy under the United States Bankruptcy Code Chapter 7 is a basic liquidation, and is intended to achieve a fair distribution to creditors of the debtor’s available non-exempt property via a court-appointed trustee Unsecured debts not reaffirmed are discharged, providing a fresh financial start. Chapter 11 is filed with the intention that the business will reorganize as a going concern via a court-approved plan Chapter 7 business liquidations rose 54 7 percent, while Chapter 11 reorganizations increased by 27 9 percent

It would seem as though the US government is inadvertently in the position of deciding which banks to rescue and which to leave to fend for themselves In the past few months, the Federal Reserve and the Treasury Department assumed control of Fannie Mae and F

, b a c k e d $ 2 9 b i l l i o n w o r t h o f r i s k y a s s e t s s o t h a t JPMorgan Chase would purchase Bear Stearns, and bailed out AIG, presumably because the failure of these institutions would threaten the global financial system Yet, when Lehman was on the verge of collapse, direct government intervention was not an option. In a s

“So what triggered the unraveling of the US banking industry?

Most experts say it was a confluence of multiple factors, including record oil prices, a depressed real estate market and declining dollar.”

The Public Road

W H A T D O E S T H E S A R B A N E S - O X L E Y A C T M E A N T O T O D A Y ’ S N O N P R O F I T S ?

By Kristine Blenkhorn Rodriguez

The Sarbanes-Oxley Act (SOX) may have been chiefly designed for public corporations, but its winds of change have blown over to the nonprofit sector as well

“There has been a ‘trickle down’ impact on nonprofits,” says Kirsten Lescher, a CPA with Plante & Moran in Elgin, Ill. “Because many nonprofits have board members that come from the for-profit arena, as well as large donors both corporate and individuals with corporate backgrounds these constituents have played a significant role in imposing some of the principles underlying SOX as ‘ b e s t pra c t i c es ’ o n t he n on p ro f it c ommu n i t y, p a rt i c u l a rl y i n t he areas of improving governance ”

SOX directly impacts nonprofits in two ways: First, in requiring no retaliation against whistleblowers, and second, in prohibiting document destruction in certain circumstances “As a result, many organizations consider it a best practice to have both a whistleblower policy and a document retention and destruction policy,” says Janice Rodgers, partner and chair of tax exempt organizations in the Chicago office of law firm Quarles & Brady

While other SOX requirements may not speak directly to nonprofits, this new era of stepped-up corporate governance has not failed to touch them SOX calls for independent directors, an audit c o m m i t t e e t o o v e r s e e t h e a u d i t o r s , t h e p r e s e n c e o f a f i n a n c i a l expert on audit committees, CEO and CFO sign off on financial statements, and increased focus on internal controls, etc

W h a t ’s m o r e , s o m e s t a t e s h a v e a d o p t e d l e g i s l a t i o n r e q u i r i n g nonprofits to comply with certain aspects of SOX And, in order to maintain public trust and to satisfy and attract donors, says Lescher, many nonprofits have voluntarily chosen to adopt many SOX provisions, particularly those relating to corporate governance reform

“In today’s environment in which there is increased competition for limited donor resources, many organizations feel that improving governance and financial transparency and accountability will help them to ensure continued financial support,” she explains

Ta k e t h e A l z h e i m e r ’s A s s o c i a t i o n . I t h a s i n s t i t u t e d a r e c o r d sr e t e n t i o n p o l i c y, a h o t l i n e f o r c o n f i d e n t i a l r e p o r t i n g o f u n e t h i c a l o r i n a p p r o p r i a t e p r a c t i c e s , a n i n d e p e n d e n t a u d i t c o m m i t t e e , a n d m o r e “We are committed to adopting best practices because of the value we believe it provides It sends a message to staff and donors that we believe in transparency and are good stewards of their donated dollars by ensuring that we are doing all we can to provide solid leadership for the organization and the cause,” says Richard Hovland, chief administrative and financial officer of the Chicago-based association

T h e A m e r i c a n I n s t i t u t e o f C e r t i f i e d P u b l i c A c c o u n t a n t s h a s been very busy over the last two years fine-tuning auditing stand a r d s t h a t i m p a c t n o n p r o f i t s , c l e a r l y i n r e a c t i o n t o S O X , s a y s James Hill, founder of the Institute of Compliance & Learning in Chicago The demand for safety and soundness for nonprofits is growing Proactive nonprofit organizations are realizing that management control environments and board governance models are under public scrutiny.

For example, “Much of the gray has been taken out of determining what an internal control finding is Nonprofit management is pretty scared of this one, as they are more likely to be written up for poor controls in ‘SOX-like’ ways In the past they have been a b l e t o s o m e t i m e s s q u a s h b e i n g w r i t t e n u p b y r e l y i n g o n t h e strength of the relationship and maybe even bullying their auditors Not so easy to do anymore!” says Hill

“There is now a ‘two-way’ communication that audit firms and their nonprofit boards must follow. This will have a powerful effect, as nonprofit management can no longer ‘filter the relationship’ between auditors and the board of directors,” he says

S m a l l N o n p r o f i t s , B i g H i t

“This past June was the end of the first fiscal year where these new standards will come into play,” Hill explains “If (nonprofits) lack documentation, if they are not prepared for audits, they w i l l b e w r i t t e n u p T h i s i s a l l t r i c k l i n g d o w n f r o m S O X T h e smaller organizations don’t have the staff to prepare the internal control documentation and some don’t have detailed corporate policies and procedures. It’s likely to be a tough auditing season for some organizations.”

W h a t ’s m o r e , s a y s R o b e r t C a m e r o n , a C PA w i t h t h e f i r m o f C a m e r o n , S m i t h & C o m p a n y i n S p r i n g f i e l d , I l l , “ S o m e s m a l l o rg a n i z a t i o n s a r e u n a b l e t o s e g r e g a t e d u t i e s a n d i m p l e m e n t a sound internal control system in the manner that SOX envisioned ”

“On a scale of 1 to 10, the overall impact of the indirect and direct changes is about seven, with large organizations suffering a much lower impact,” Hill explains.

T h e n o n p r o f i t s e c t o r i s e x t r e m e l y l a rg e a n d d i v e r s e , a n d f o r many governance matters and best practices there is no one-sizefits-all “Often, those in government and sometimes even membership organizations lose sight of that fact,” says Rodgers “If organizations focus on what will help them accomplish their missions, that is generally time (and money) well spent But if they focus on SOX itself or what may suit a much larger or very different organization, the time and money invested may be out of proportion to the benefit achieved, and the result could even be detrimental to the accomplishment of the organization’s mission.”

Although the fact that the IRS is now paying more attention to nonprofit governance isn’t a direct result of SOX, it does flow out of the climate created by the legislation, says Rodgers “The IRS position is that a well-governed organization is more likely to be a tax-compliant organization, and this is probably true,” she says

The IRS has gone further by including a host of questions relating to policies and other governance practices on its new 2008 Form 990, the annual tax return filed by most nonprofit organizations. “The IRS freely admits that most of the policies and practices it inquires about are not required by the tax laws, but nonprofits will naturally feel compelled to take steps to be able to answer the way the IRS would like, whether or not the specific policies and practices would otherwise make the most sense for them As more and more nonprofits become aware of these questions, this will result in a tremendous expenditure of time and money, much of which may not be necessary for good governance of particular organizations,” says Rodgers.

R i s e t o M e e t N e w C h a l l e n g e s

For the United Cerebral Palsy Land of Lincoln in Springfield, Ill , SOX hasn’t proved to be an operational headache. “Our auditors changed the recognition of administrative costs in the audit report, including maybe $10,000 additional costs, and also included our fundraising costs under administrative costs in the Statement of Functional Expenses. We disclosed funders who donated more than $5,000 in the 990 report We make certain that any conflict of interest on the board of directors is acknowledged, and that board members may not vote on related issues. We have policies and procedures to cover this issue,” explains CFO Char Fanning, CPA.

W h a t ’s F a n n i n g ’s a d v i c e f o r n o n p r o f i t s ? “ A c c r e d i t a t i o n , p r og r a m s o f e x c e l l e n c e , t r a n s p a r e n c y, e x c e l l e n t i n t e r n a l c o n t r o l s , strong leadership, an active and superb board of directors, and excellent auditors are the recipe for no SOX problems. Also, use a good accounting system, one that is the best for tracking costs and leaving audit trails ”

Jean Houston Shore, CPA, director and audit committee member for the National Speakers Association, says the focus on SOXlike governance has helped her organization identify policies that need to be created or strengthened “Not only did we set up a separate audit committee, we updated our conflicts of interest policy a n d i m p l e m e n t e d a w h i s t l e b l o w e r p o l i c y S t r e n g t h e n i n g g o v e rnance helps our members trust that their board members and staff are acting in reasoned ways with a strong understanding of our fiduciary responsibilities,” she explains.

I t ’s b e e n a c h a l l e n g e “ I n v o l u n t e e r o rg a n i z a t i o n s , p r o g r e s s toward the mission comes from harnessing the spirit and energy of volunteers, but asking these volunteers to focus on controls, financ i a l r e p o r t s a n d a u d i t s d a m p e n s t h e i r e n t h u s i a s m . W h i l e t h e y u n d e r s t a n d f i n a n c i a l o v e r s i g h t i s i m p o r t a n t , t h e y ’ d r a t h e r b e spending their time on programs that help us achieve our mission,” says Shore

She sees three important factors on the horizon: “First, well-run nonprofits will take SOX-like governance requirements in stride However, the importance of employing financially savvy staff will drive costs up at a time when revenues are stagnating. This will necessitate stricter cost control, which may not please volunteer leaders Second, smaller or more loosely controlled nonprofits will struggle to comply, unless they can find assistance in their communities. Third, with the increased scrutiny, some nonprofit misdeeds will come to light and this may hurt donations for all nonprofits.”

Don’t wait until you’re forced to do something “Organizations that take their time to address best practices and attempt to implement practices meant to satisfy the overall intent of SOX will find themselves ahead of the curve,” says Lescher

Irwin Lyons, principal for Miller Cooper & Co. in Northbrook, Ill., says some small organizations are setting up committees to address the pressure, essentially trying to play the game the way a big corporation would “Yet they have eight people in the office They are spending a

lot of resources and not getting much return

Most of the smaller organizations are happy to have active board members, let alone trying to find board members with financial expertise,” he says

Get your arms around the changes, know what’s coming down the pike, and make a conscious decision about what you will and won’t do. Form a task force to address all the changes, since this is likely to be too much for one person to handle And consult knowledgeable counsel and auditors to assist in the process

Rodgers offers a final piece of advice: “Keep the focus on what’s best for accomplishing the mission, rather than going through the motions because someone says it’s a good idea ”

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Standing Ovation

Everyday, Illinois CPA Society members provide countless volunteer contributions that deserve applause Whether it’s speaking to college students, providing pro-bono tax preparation, or lending technical expertise, their volunteer activities support a strong accounting profession and make us proud to be CPAs

CPAs Provide Free Tax Counseling Assistance

During 2008, CPAs for the Public Interest (CPAsPI) recruited more than 130 members to par ticipate in the Center for Economic Progress’ Tax Counseling Project. Through this program, they provided pro-bono federal and state tax-return assistance to low-income families throughout Illinois

A Standing Ovation to our Center for Economic Progress’ Tax Counseling Project volunteers:

Ebonee Adams

Angelica Alday

Ioana Ardelean

Carla Ashby

Maria Luisa Aviles

Richard Bail

Denise Bauch

Kevin Beatty

Dolores Benavente

Daisy Bentley

Katerina Bolbas

Antonio Bondi

Helen Budziak

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Alva Butenaite

Lucy Calderon

Gina Chang

Brenda Cheuvront

Shelly Christensen

Nancy Ciolkosz

Keesha Craig

Jacklyn Cullinan

Benjamin Davidson

Jason DeVoss

Jerr y Dillenburg

Lei Ding

Tram Doan

Kathleen Donahue

Melody Driver

Donald Duszynski

Bill Eagan

Marina Edwards

Daniel Epstein

Margie Fabro

Gregg Ferlin

Emmanuel Gahoua

Mar y Geoghegan

Jospeh Gerharz

Mar y Gharrity

Kelly Gibson

Ewelina Giera

Lawson Giles

Margaret Glynn

Larr y Goldstein

Chad Grosam

Allison Gruender

Myrna Guadarrama

Catherine Haener

Brian Hain

Kenneth Harris

Pam Hays

Cur tis Helwig

Alan Hemminger

Paldo Herrejon

Lai Chun Ho

Russell Holmgren

Larsenia Hor ton

Shiann Hotopp

Haekyung Hwang

Gerard Inguagiato

Philippe Jean-Louis

Anthony Jones

Sylvia Kellogg

Carol Kelly

Gerald Kerns

Igor Kholodenko

John Kintner

Cynthia E Kirk

Brenda Kirkpatrick

Tom Kotlarczyk

Rober t Kuehnau, Jr.

Bruce Larson

Heidi Lau

Nancie Li

David Lilek

Marcia Lott

Marnell Love

Phil Lovell

Winnie Luk

Bonnie Ma

Rose Marie Mack

Leslie Malz

Anderson Manuel

Danielle Mar tin

Ghadir McCauley

Kevin McGee

Bonnie McLeod

Keva McNeal

Trisha Miller

Sandra Minard

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ICPAS Members’Staf f FEMA Flood Disaster Relief Centers

John O'Hara

William O'Hara

James O'Keefe

Fangxiao Ouyang

Larr y Owens

Leann Papineau

Stephen Paul

Maria Daisy Paule

Amelia Petersdorf

Carla Peterson

Luis Plascencia

Constance Pocock

Elizabeth Pritchard

Arzan Raimalwala

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Roger Randolph

Thomas Redler

Jessica Reed

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Jean Rober ts

Joseph Rose

Brett Rovey

Victoria Rupper t

Philip Shrake

George Sterling

Ellen Stutz

Scott Styck

Sarah Subak

Bettie Sullivan

Graziella Umlauf

Natalie Waskowski

Theodore Weitzel

Mar y White

Maoris Whittaker

Angela Wilkes

Leslie Williams

Koji Yamamae

Jihyun Yoo

Maria Zarubina

Alex Zavin

Mar tin Zeidman

GaoXiang Zhang

As a result of floods early this summer, several counties in Illinois were declared disaster areas When the Internal Revenue Ser vice needed assistance at Illinois FEMA Disaster Recover y Centers, there was an overwhelming response from Illinois CPA Society members In a shor t period, more than 80 people asked how they could help

A Standing Ovation to all of our volunteers, and particularly these individuals who directly assisted flood victims at the Centers:

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Kristin Flicker

Dharna Naimesh Shah

Joseph Rose

Larr y Feldman

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