Insight Magazine - Spring 2022 by Illinois CPA Society /// Insight Magazine

Exploring the issues that shape today’s business world.

+ Planning for Your Last Busy Season Millennial CPAs Are Building Their Own Businesses The 2022 M&A Outlook The CPA’s Guide to NFTs Surfing the Turnover Tsunami

Spring 2022

Spring 2022 www.icpas.org/insight

THE HAND OF PRIVATE EQUITY IN ACCOUNTING FIRMS

GENERATION ENTREPRENEUR

spotlights

trends

14 Tax Taxing Tokens: The CPA’s Guide to NFTs

Chair’s View The Future of the Profession Is People! By Mary K. Fuller, CPA

Today’s CPA Are We Fulfilling Our Roles as Leaders? By Todd Shapiro

Capitol Report CPA License Renewal: Looking Back and Ahead By Marty Green, Esq.

46 Gen Next Four Ways to Level Up Your Fraud Detection Skills By Kate Burian, CPA, CFE

48 IN Play Maria Tabrizi, CPA, discusses the only women-founded, women-owned, and women-led U.S. commercial bank. By Hilary Collins

By Jeff Stimpson

16 Mergers & Acquisitions The 2022 M&A Outlook By Dan McMahon, CPA

insights 30 Director’s Cut The Board’s Responsibility for Post-Pandemic Succession Planning By Kristie P. Paskvan, CPA, MBA

32 Leadership Matters How Savvy Leaders Can Surf the Turnover Tsunami By Jon Lokhorst, CPA, PCC

34 Evolving Accountant Blockchain and CPAs: Imagining the Partnership of the Future By Andrea Wright, CPA

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36 Practice Perspectives Planning for Your Last Busy Season By Art Kuesel

38 Ethics Engaged How to Right Your Retention Efforts During the Great Resignation and Beyond By Elizabeth Pittelkow Kittner, CPA, CGMA, CITP, DTM

40 Financially Speaking Navigating the New Guidance on Qualified Plan Rollovers By Mark J. Gilbert, CPA/PFS, MBA

42 Corporate Insider Planning for Post-Pandemic Business Continuity By Shifra Kolsky, CPA

44 Tax Decoded Demystifying Motor Fuel Taxes By Keith Staats, JD

ILLINOIS CPA SOCIETY 550 W. Jackson Boulevard, Suite 900, Chicago, IL 60661 www.icpas.org Publisher/President & CEO Todd Shapiro Editor Derrick Lilly Assistant Editor Hilary Collins Creative Director Gene Levitan Copy Editors Mari Watts | Jennifer Schultz, CPA Photography Derrick Lilly | iStock Circulation John McQuillan

ICPAS OFFICERS Chairperson Mary K. Fuller, CPA | Shepard Schwartz & Harris LLP Vice Chairperson Jonathan W. Hauser, CPA | KPMG LLP Secretary Deborah K. Rood, CPA, MST | CNA Insurance Treasurer Mark W. Wolfgram, CPA, MST | Bel Brands USA Inc. Immediate Past Chairperson Thomas B. Murtagh, CPA, JD | BKD CPAs & Advisors

ICPAS BOARD OF DIRECTORS John C. Bird, CPA | RSM US LLP Brian J. Blaha, CPA | Wipfli LLP Jennifer L. Cavanaugh, CPA | Grant Thornton LLP Brian E. Daniell, CPA | West & Company LLC Pedro A. Diaz De Leon, CPA, CFE | Accume Partners Kimi L. Ellen, CPA | Benford Brown & Associates LLC Jennifer L. Goettler, CPA, CFE | Sikich LLP Monica N. Harrison, CPA | Fiducient Advisors Scott E. Hurwitz, CPA | Deloitte LLP Joshua D. Lance, CPA, CGMA | Lance CPA Group Enrique Lopez, CPA | Lopez & Company CPAs Ltd. Stella Marie Santos, CPA | Adelfia LLC Brian B. Stanko, Ph.D., CPA | Loyola University Richard C. Tarapchak, CPA | II-VI Inc. BACK ISSUES + REPRINTS Back issues may be available. Articles may be reproduced with permission. Please send requests to lillyd@icpas.org. ADVERTISING Want to reach 22,600+ accounting and finance professionals? Advertising in Insight and with the Illinois CPA Society gives you access to Illinois’ largest financial community. Contact Mike Walker at mike@rwwcompany.com. Insight is the magazine of the Illinois CPA Society. Statements or articles of opinion appearing in Insight are not necessarily the views of the Illinois CPA Society. The materials and information contained within Insight are offered as information only and not as practice, financial, accounting, legal or other professional advice. Readers are strongly encouraged to consult with an appropriate professional advisor before acting on the information contained in this publication. It is Insight’s policy not to knowingly accept advertising that discriminates on the basis of race, religion, sex, age or origin. The Illinois CPA Society reserves the right to reject paid advertising that does not meet Insight’s qualifications or that may detract from its professional and ethical standards. The Illinois CPA Society does not necessarily endorse the non-Society resources, services or products that may appear or be referenced within Insight, and makes no representation or warranties about the products or services they may provide or their accuracy or claims. The Illinois CPA Society does not guarantee delivery dates for Insight. The Society disclaims all warranties, express or implied, and assumes no responsibility whatsoever for damages incurred as a result of delays in delivering Insight. Insight (ISSN1053-8542) is published four times a year, in spring, summer, fall, and winter, by the Illinois CPA Society, 550 W. Jackson, Suite 900, Chicago, IL 60661, USA, 312.993.0407. Copyright © 2022. No part of the contents may be reproduced by any means without the written consent of Insight. Send requests to the address above. Periodicals postage paid at Chicago, IL and at additional mailing offices. POSTMASTER: Send address changes to: Insight, Illinois CPA Society, 550 W. Jackson, Suite 900, Chicago, IL 60661, USA.

chair’sview FROM YOUR BOARD CHAIR MARY K. FULLER, CPA, MANAGING PARTNER, SHEPARD SCHWARTZ & HARRIS LLP

The Future of the Profession Is People! We must come together as people for our people if the accounting profession is to succeed as it heads into “The Next Frontier.” learned the importance of people, relationships, and connections early in my life. The personal connections I made while attending the University of Illinois Chicago led to meeting my husband Floyd and landing my first accounting job—a classmate introduced me to a Chicago law firm where I was hired for a part-time position while attending school full-time. A year later, I was recommended for a position with a large property management company, igniting my interests in real estate and accounting and inspiring me to become a CPA. To obtain my license, I knew I needed to pass the CPA exam and work one year for a CPA firm. My plan was to put in my year in public accounting, obtaining the necessary experience before moving on. So, I interviewed with one of Shepard Schwartz & Harris LLP’s founders and the managing partner, Mr. Harris, earning the job that unexpectedly launched my long-term career with the firm. I was good at math, problem solving, and helping people. I believe that’s part of what drew me deeper into a profession that I thought I’d stay in for just one year—a profession I’ve now proudly been a part of for the past 40 years. What kept me in public accounting is the ever-changing challenges, opportunities, and people I’ve met and worked with along the way. My commitment and passion for people are essential in my managing partner role at Shepard Schwartz & Harris. There’s never a dull moment when my days are spent developing and guiding our staff, planning for our clients, and problem solving and strategizing for the future of our firm alongside my partners and other colleagues. Our profession isn’t the same as it was when I started my career. Technology has played a critical role in how, where, and when we work. In many ways, it allowed me to get to where I am. And the past two years have only amplified and accelerated the strategic business decisions we all must make regarding the ways we work, how employees want to work, and what our clients expect of us. The Great Resignation is affecting us all. People are leaving their careers for all sorts of reasons. Some struggled to adjust (or not) to remote work; others had trouble dealing with the pressures of a seemingly never-ending busy season; others couldn’t juggle family 4

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and work with limited resources. The pandemic has changed people. The stresses influencing people’s personal and professional lives has led to the reprioritizing of what’s truly important to them. Now, many staff no longer want to work the way I remember working during the start of my career, where long hours were expected and learning, development, and making connections were all face-to-face. As a business leader, I recognize our most important asset is our people. As we navigate the post-pandemic workplace, I encourage balance and the search for solutions that keep our bright, talented people in the accounting profession. Providing challenging and interesting work is no longer enough; I could argue that their wellbeing and mental health are just as important. Flexibility, hybrid work arrangements, and seasonal employment aren’t going away. We need to embrace change and value our new ways of doing things. There is, however, the importance of in-person meetings, overhearing conversations in the office that often lead to new learning experiences or opportunities, and being able to read and understand body language cues—all things that contribute to our well-being, development, and feeling of connectedness that can’t be entirely overlooked. I encourage accounting leaders to come together to find ways to make an impact and inspire young people to join us in becoming CPAs and remain in our profession. Are you up for the challenge? I am! I’m deeply honored and excited to be the Illinois CPA Society’s chairperson for the next year. I look forward to meeting members and hearing what’s important to them, serving with my fellow board members, and working closer with the society’s staff and CEO, Todd Shapiro, who’s in his final year before retirement. Together, we’ll embrace new opportunities as we head into “The Next Frontier.”

today’sCPA INSIGHTS FROM TODD SHAPIRO, ICPAS PRESIDENT & CEO @Todd_ICPAS

Are We Fulfilling Our Roles as Leaders? Leadership is hard—that’s not a reason for a lack of proactive leadership.

any of us are still reeling from or trying to navigate COVID-19’s impact on our workplaces and lives. It’s impossible to walk through downtown Chicago (like many cities) ignoring the shuttered restaurants and still sparsely populated streets. Sometimes the vibe on a weekday feels more like a weekend. And, how often have you asked or been asked, “What’s your office doing?” As we grapple with leading in-person, hybrid, and remote workforces, I’ve said before—and truly believe—that we’re living through the most significant unplanned management experiment of our lives. And what of the Great Resignation we’re hearing so much about? Is it real? In 2021, according to the U.S. Bureau of Labor Statistics, about 33 percent of nonfarm workers quit their jobs. While that sounds high, 28 percent quit their jobs in 2019. That’s a lot of turnover, but people changing jobs is nothing new. I think the real question we should be asking is, why do people leave? There are many factors that play into one’s decision to stay with or leave an employer: compensation, flexibility, type of work, how one is treated, etc. Some of these factors can be summarized in one word: culture. The “work environment” (in-person, hybrid, or remote) also has a tremendous impact on the culture of an organization. Work environment can significantly impact ongoing staff training and development, onboarding of new staff, employee commitment to the organization, collaboration, and succession planning. I think it’s important to discuss how we decide which type of work environment to implement within our organizations. That said, it’s more important than ever that you proactively lead in the decisionmaking process. What I’m talking about is a proactive intentionality to develop the culture you believe is best for your organization. Because of rapid pandemic shifts, it seems many business leaders have become more reactive. I’ve heard many in senior management say that they’d like their staff to be in-person at least part-time, but they feel they can’t tell them to do that. Instead, they’re hoping people just 6

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start coming back to the office. Hoping isn’t intentional leadership— it’s an abdication of leadership responsibilities. A managing partner recently told me that his staff will only come in if there’s a reason to, like an office lunch or happy hour. Similarly, other business leaders have told me that their people will all quit if they have to work in-person at least part-time. Will they? Let’s be honest, many businesses are experiencing higher than historical turnover rates. Is that really because business leaders are requesting their people to return to in-person work? I argue it’s not—many businesses offering voluntary in-person office policies are experiencing high turnover. I’m not advocating for a fully inperson, hybrid, or remote work environment. In fact, I don’t think there’s a “right” answer. What I’m advocating for is that we, the leaders of our organizations and the profession, be proactive and intentional about shaping the cultures of our organizations. If you think your organization’s culture is best served by staff being in the office at least part time, then intentionally move in that direction. The same applies to those who believe in having a fully voluntary or fully remote workforce. Regardless of the direction you go, some staff may threaten to or, in fact, quit. The question remains: What’s best for your organization? Remember, leaders lead. The decisions we make won’t always be popular with everyone. In fact, rarely are decisions popular with everyone. However, that doesn’t mean we should decide what to do out of fear. Rather, we must make decisions based on what’s best for the long-term culture—and success—of our organizations as we move forward from here.

capitolreport LEGISLATIVE INSIGHTS FROM MARTY GREEN, ESQ., ICPAS VP OF GOVERNMENT RELATIONS @GreenMarty

CPA License Renewal: Looking Back and Ahead At the close of a challenging CPA license renewal cycle, new developments and ongoing improvement efforts aim to make the 2024 renewal process smoother.

ow that the 2021 CPA license renewal is behind us, it’s time to address some continuing education changes set to impact your 2024 renewal. Don’t panic: The changes are mostly positive. As you already know, this past renewal cycle was protracted due to the IT issues with the Illinois Department of Financial and Professional Regulation’s (IDFPR) new online portal. The IDFPR’s director issued the first variance extending CPA license expiration from Sept. 30, 2021, to Dec. 30, 2021, and then again to Jan. 31, 2022, but advised that continuing professional education (CPE) for 2021 renewals would still have to be completed by September 30. Subsequently, the IDFPR pivoted and informed the Illinois CPA Society (ICPAS) that CPE had to be completed by the time of renewal—that is, it could’ve been completed up until January 31. Legally speaking, when you renew your license, you’re attesting that you’ve completed 120 hours of CPE at the time you renew. For the 2024 license renewal, CPAs will still need to complete 120 hours of CPE within the three-year renewal window. Typically, CPA licenses expire on September 30 of a renewal year and the CPE window resets on that day. But for this next renewal cycle, any CPE hours accrued beyond Sept. 30, 2021, can be used for either the 2021 renewal or the 2024 renewal, but they cannot be used for both. Ensure your CPE records and documentation are in order for your 2021 renewal and keep careful track of new hours earned moving forward for audit purposes. The second CPE item of interest relates to sexual harassment prevention training. Previously, CPAs had a CPE sexual harassment prevention training requirement and an annual requirement to receive training from your employer in accordance with the Illinois Human Rights Act. In the first instance, Public Act 100-762 required occupational and professional license holders to complete one hour of CPE on sexual harassment prevention training provided by a licensed CPE provider repeated each renewal cycle. In the second, Public Act 101-0221 required employers to provide sexual harassment prevention training annually to employees. 8

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In 2021, the General Assembly passed Public Act 102-308, which expanded approved training options for these CPE requirements to include sexual harassment prevention training developed or offered by the Illinois Department of Human Rights. The practical effect of this expansion allows CPAs to satisfy two separate requirements (CPE and employer-provided training) imposed by two different public acts with two separate standards with one training as long as that training conforms to the standards of the Illinois Human Rights Act. Licensees will still have the option to complete CPE provided by a licensed CPE provider or an IDFPR-approved continuing education provider. According to Section 1130.400(b)(1) of Administrative Procedures for General Professional Regulation Under the Administrative Code, approved providers include an entity recognized under any licensing act; a state, federal, or local government agency; an accredited community college or university; or a licensed health care institution. If you have multiple IDFPR-issued licenses, you don’t have to repeat the course for each license—the one course can be applied to any licenses you hold. Registered CPAs don’t have a CPE requirement and therefore don’t have to complete sexual harassment prevention training as a part of the license renewal process. However, registered CPAs may still be required to complete employer-provided annual sexual harassment prevention training. I understand this is a deep dive into licensure compliance issues on the close of a particularly challenging and protracted license renewal process. For citation on the CPE convergence issues, you can reference a technical regulatory bulletin on our ICPAS Government Relations webpage. With regards to the upcoming 2024 CPA license renewal period, we continue to work with the IDFPR’s staff and leadership to identify and alleviate the cascading effects of the new renewal process. While there were many hurdles and frustrations this past renewal cycle, the IT systems continue to be improved and technical issues remedied, laying the groundwork for a smoother 2024 renewal cycle.

TAX

Taxing Tokens: The CPA’s Guide to NFTs A new digital asset is making waves. Here’s what CPAs need to know— and teach their clients—as regulation catches up to NFTs. BY JEFF STIMPSON

hree new letters have burst onto the scene: NFTs, or nonfungible tokens. And as confusing as that is as a concept, it’s even more confusing when taxes come into play. NFTs are digital assets, essentially unique, with a growing multibillion-dollar market. At least for the moment, the NFT market still revolves around such collectibles as digital artwork, sports cards, novelty sneakers, celebrity self-portraits, and tweets. NFTs use the same technology and have many of the same tax challenges as cryptocurrency, and like cryptocurrency are virtual assets that the IRS and state tax authorities are only beginning to build compliance standards around. According to a 2021 Security.org survey, over 4 million people in the United States have bought or sold NFTs and 20 percent of survey respondents were familiar with NFTs—not bad for a somewhat esoteric and relatively new asset class. “NFTs are growing in popularity and are here to stay, but most practitioners aren’t familiar with the technology or the tax rules,” 14

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says Andrew Gordon, a CPA and attorney with the Northfield, Ill.based Gordon Law Group Ltd., and a founding director of The Blockchain Institute. (He’s also participated in creating an NFT Tax Guide as an NFT.) Because of this surge in popularity and consequent rise in regulatory attention, CPAs should wrap their heads around both NFTs as a concept and the way they should be taxed.

NFTs VS. CRYPTOCURRENCY What’s most confusing right now about taxing NFTs? “Classification,” says Mark Eckerle, CPA, senior manager of technology and emerging growth and team leader of digital currency and blockchain technology with Withum. “The classification can go many different ways and I’m sure there are gray areas where users can receive some tax advantages since the IRS hasn’t explicitly released guidance yet on NFTs. Accountants are using the current accounting guidance by analogy.”

A recent search for “non-fungible tokens” on the IRS and the Illinois Department of Revenue websites, for instance, returned no results. A broader search on the taxability of NFTs turns up conflicting information and interpretations, though consensus is that NFTs, which are digital, will be taxed as a physical asset. Despite the lack of formal guidance on NFTs, the IRS has told news outlets that both NFTs and cryptocurrencies have the potential for “mountains of fraud.” NFTs, like cryptocurrencies, use blockchain technology and are generally encoded with the same underlying software. But NFTs differ from cryptocurrencies in that the former contains specific and unique information. “An NFT cannot be exchanged for another NFT, unlike how cryptocurrencies are exchanged,” says Jim Brandenburg, CPA, tax partner at Sikich. “The lack of IRS guidance is somewhat similar to the uncertainty that existed when cryptocurrency was first rolled out.” “If you exchange one cryptocurrency for another, it’s taxable. If you exchange or sell one NFT for another, it’s also taxable,” Gordon says, adding that some NFTs also entitle the holder to rewards or “airdrops.” “These are typically taxable as income at the fair-market value at the time received,” he notes. “This means the taxpayer may owe tax on an unsolicited airdrop even if they don’t sell for cash.” “Buying NFTs with cryptocurrency is also a taxable event since you have a new basis in a new asset. You’ll pay tax on any realized capital gains on your cryptocurrency sale. You can also leverage any losses incurred from transactions to offset gains,” Eckerle explains. Clients are often shocked to learn of the tax implications of buying and selling NFTs. “For instance, NFTs are almost always purchased with cryptocurrency,” Gordon says. “When you convert the cryptocurrency to an NFT, it’s treated as if you sold the original cryptocurrency, generating a taxable gain or loss. Additionally, when you later sell the NFT, you have another capital gain or loss to account for.”

UNTANGLING TAX TREATMENT While NFTs are currently being framed as collectibles, it’s unclear whether the tax law on collectibles will apply to NFTs for a couple of reasons. “First, are NFTs actually similar to art or collectibles? For some NFTs, the answer is certainly yes, especially unique art NFTs,” Gordon says. “Second, the tax law on collectibles refers to ‘other tangible property,’ but NFTs aren’t tangible. Therefore, a strict reading of the tax law would make it seem that a collectible must be tangible. However, a looser reading while considering Congress’ intent would likely be that NFTs can be collectibles. I expect that we’ll get clarity from the IRS or Congress on whether NFTs are collectibles soon.” Gordon notes that NFTs currently follow the general tax rules on property, so sales or exchanges of NFTs would be subject to shortterm or long-term capital gains tax depending on the holding period. If they’re deemed collectibles, NFTs would carry a 28 percent top federal tax rate on long-term capital gains, according to tax experts. That’s opposed to the 20 percent top federal rate that applies to long-term capital gains on stocks, bonds, and cryptocurrencies such as bitcoin. Under “rare circumstances,” Eckerle says, NFTs can be classified as “inventory” subject to income tax rates. Additionally, NFT transactions come in what Brandenburg calls “many formats.” Some offer full transfer of all rights of the underlying digital assets linked to the NFT, while others offer limited transfer

of rights. “There are separate platforms, each with unique features and provisions, and varied processes for NFTs that are ‘minted,’ a process where the NFT is connected to a digital asset, which is often warehoused separately,” Brandenburg explains. “Each of these steps and processes, each on different platforms, creates questions on the appropriate federal tax treatments,” he says. “Might the NFT transaction be treated like a leasing arrangement, a royalty, or might it qualify as a sale or exchange? If it’s a sale or exchange, does it qualify for favorable capital gain treatment? If it’s a capital gain, could some of the NFT transactions be treated as collectibles and subject to the higher capital gains rate? How should the NFTs that are minted be handled for tax purposes? What other federal tax rules might be applied for NFTs that are now in place for computers, software, and digital assets?” Complex international and foreign tax issues can also apply, and state tax consequences of NFTs will need to be dealt with, especially as the IRS unveils new guidance. “For instance, where should NFT transactions be sourced for state tax purposes? This can be a complex matter, and again could vary depending on the specific terms in an NFT contract, its platform, and other factors,” Brandenburg says. “Hopefully, states will work together to have a consistent set of rules from one to another, but it may take a while to sort out all these issues.”

EDUCATING CLIENTS Count on it: Clients are going to start arriving with questions. Brandenburg says CPAs and other tax practitioners should understand and educate clients on: • NFTs’ functions, basic features, and underlying terms. • Major players in the NFT space. • Existing NFT platforms and how they differ, as well as alternative ways to create NFTs. • How one can invest in NFTs. • How one can distinguish themselves in the NFT marketplace. Brandenburg expects more continuing professional education opportunities on the topic of NFTs will start to crop up. Congress recently expanded the reporting requirements on cryptocurrencies in the Infrastructure Investment and Jobs Act and the IRS is expected to provide additional guidance on implementing this new law later this year, which could include some insights on taxing NFTs. “Even once IRS guidance is issued, impacted parties and tax practitioners may have different views on the guidance and suggest changes,” Brandenburg cautions. “They may also look at new features in NFTs to develop better tax treatments.” Above all, don’t expect this new technology to just vanish into the ether: “The metaverse and NFTs are growing in popularity and are here to stay,” Gordon says. “CPAs that stay ahead of the curve will be able to deliver high-value advice and stake a claim to a nascent market.”

Jeff Stimpson is a New York-based writer covering tax concerns for more than 20 years for various industry publications, including Accounting Today and Financial Advisor. www.icpas.org/insight | Spring 2022

MERGERS & ACQUISITIONS

The 2022 M&A Outlook After a record-breaking volume of global deals in 2021, what’s the forecast for mergers and acquisitions this year? Our expert says it’s likely to stay brisk. BY DAN McMAHON, CPA

s we emerge from a busy tax season, it’s clear that the dealmakers have been working hard behind the scenes to get a leg up on this year’s mergers and acquisitions (M&A) opportunities. This should come as no surprise—global M&A activity hit record highs in 2021, reaching almost $6 trillion in deals. Are we poised to see a continuation of this level of activity in 2022? Or was 2021 simply a rebound year after the COVID-19 impacts of 2020? What unique opportunities lie ahead for CPA firms advising on a deal or looking for one themselves? Let’s take a look, both from within the accounting and finance industry and from the broader view.

STAFFING AND SUCCESSION CHALLENGES Many market conditions, risks, and challenges are driving M&A, making it likely that activity will remain high this year, but perhaps none more than staffing and succession challenges. Staffing shortages are stunting growth at many organizations. Smaller organizations are losing staff to higher-paying competitors, and baby boomers are clinging on beyond normal retirement age, absorbing payroll budgets with their salaries while having fewer staff to delegate work to. At the same time, many small and 16

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midsize companies are continuing to overlook the importance of robust succession planning, leaving holes when aging leaders do finally retire. The accounting industry itself is an interesting study of how succession planning has dropped off to-do lists since COVID-19 rearranged priorities. As recently as 2019, the biennial PCPS CPA Firm Top Issues survey found that developing and executing a succession plan was a top issue facing the profession. However, in their 2021 survey commentary, the researchers wrote, “While developing and executing a succession plan has appeared on every firm size’s top five list in the past, it slipped to the top 10 and beyond in this survey.” They advised firms to keep succession planning on their agendas despite the pandemic pressure. It seems that COVID-19 challenges have pushed succession planning aside temporarily within our industry, but it’s clear that staffing struggles are a constant across industries. As baby boomers retire in waves, many leaving their organizations without a successor, I believe that 2022 will mark a return to succession planning as organizations seek solutions to holes in the leadership chart and high employee turnover.

For some organizations, M&A will be that solution, as merging two teams that complement each other, create cross-selling opportunities, and enhance margins will be a desirable option. Take note: It’s important for sellers to be seen as synergistic and unique.

SCALING AND INNOVATION OPPORTUNITIES Technological innovations won’t ever slow down, and thus the trend of being able to produce more with less will continue. Organizations who invested in technology have reaped the rewards in agility and efficiency. The current staffing crisis will only drive organizations to make more out-of-the-box decisions. Leaders who scale their operations by deploying innovative processes and technological solutions will maintain the quality of their final product and find ways to accomplish more with less labor. However, innovative technological solutions come with a price and many businesses will be looking for a partner who already has those solutions or at least can share the costs. According to Bain and Company’s 2022 State of the M&A Market report, strategic M&A accounted for $3.8 trillion of last year’s deals as technological assets have become incredibly important to buyers. Additionally, supply chain issues and inflation will continue to impact organizational sustainability. Last year’s M&A activity was driven in part by abundant capital, low interest rates, and a strong economy, but even if interest rates rise and markets waver, organizations will only feel increased pressure to achieve economies of scale. Buyers will be eagerly looking for strategic alliances that transform how they deliver products and services, expand their talent pool, and lower costs. M&A dealmakers will be seeking ways to pool resources and invest in innovative technologies and recruiting, while trimming down administrative budgets to reallocate that money to more strategic initiatives.

their medical servicing as well as back-office management and medical billing in-house. This was highly inefficient. Doctors don’t do billing and collecting. Doctors treat patients. The recent trend is that most have transitioned from largely individual practices to specialty groups owned by investors and operated by professional management teams. Doctors are allowed to do what they do best while business management is handled by operational teams. It's easy to imagine something similar happening to accounting firms. Some firms will move to the private equity model so their partners and staff can focus on client matters while investors create value and hire professional management teams to run the business side of their accounting firm investments.

OUTLOOK: SUNNY Overall, the market is poised for continued M&A activity. There’s never been a more vibrant time for CPAs to mitigate risks, overcome challenges, and capitalize on opportunities—both for their own firms and as a trusted advisor to clients seeking a deal. Small and midsize organizations will continue to pair up to adapt quickly to technological advances and gain economies of scale. Larger organizations will seek targets that gain them an advantage in a highly competitive marketplace. And baby boomer retirements will continue to drive CPA firm deals. All indications point to increased deal levels in 2022 and beyond, so now’s the time to proactively prepare for your succession. Likewise, it’s a great time to shore up on skill sets and knowledge to help your clients complete M&A deals.

Dan McMahon, CPA, is the founder and managing partner of Integrated Growth Advisors.

WITHIN THE ACCOUNTING INDUSTRY If much of this sounds like what you’re facing within your own CPA firm, you’re not alone. As seasonal peaks and valleys become less common for CPAs, firms no longer have the luxury of waiting to address concerns. Many firms will need to reevaluate their immediate and longer-term succession planning needs and become more forward-looking. Above all, current market conditions demand that CPA firms innovate to survive and thrive. Without innovation and change, there may not be enough accountants in supply to fulfill the business community’s current and growing demand for strategic financial advice. To this end, technology and process improvements will help overcome staffing shortfalls. Firms that have a strong emerging leadership group should take meaningful steps to transition ownership internally to the next generation of partners. These firms will see the opportunities on the horizon and begin to invest in succession planning, their staff, infrastructure, and governance models that allow them to be agile and responsive. For many, the buyers are already on payroll. Sell-side firms should plan for a sale and complete the tougher tasks of fixing internal problems and creating firm value by tightening up processes, retaining staff and clients, expanding current offerings, and approaching the sale of their firm just like they would manage a client project. All of this is more or less business as usual, but a new potential partner has emerged: private equity. To see more about how deals with private equity firms could work, the medical services industry offers a visual example. Twenty years ago, many doctors shared offices or managed their own practices. They would handle all of www.icpas.org/insight | Spring 2022

Private equity is reaching into the accounting world, but why—and what’s the trade-off for CPA ﬁrms? BY NATALIE ROONEY

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www.icpas.org/insight | Spring 2022

ergers and acquisitions are nothing new to the accounting profession, but 2021 brought a fresh face to the negotiating table: private equity (PE) ﬁrms.

Koltin sees accounting ﬁrms using PE capital in four ways:

In August, TowerBrook Capital Partners purchased an ownership interest in EisnerAmper LLP. In September, Lightyear Capital bought into Schellman & Co. LLC. October brought an investment by New Mountain Capital (NMC) in Citrin Cooperman and Company LLP. And in January, Parthenon Capital entered into an agreement to acquire RSM US Wealth Management LLC from RSM US LLP.

2. To acquire like-minded accounting ﬁrms. “Firms will merge up if they get substantial cash,” Koltin says. “Remember, the unfunded chain letter model doesn’t appeal much anymore.”

“This is transformation happening right before our eyes,” says Allan Koltin, CPA, CGMA, CEO of Koltin Consulting Group in Chicago. He consulted with both EisnerAmper LLP and Citrin Cooperman during their negotiations with PE firms. “These deals are strategic investments in the future,” he says. “Investment from PE is about having a strategic and capital partner.” When PE firms first expressed interest in accounting firms, Koltin says about a half dozen “mega PE firms” were solely interested in the top 20 to 25 accounting firms. Now, he’s getting calls from PE firms about accounting firms as small as $10 million in revenue to as large as $1 billion.

WHAT’S IN IT FOR ACCOUNTING FIRMS? Koltin says one way PE firms have created a brilliant business plan is by showing how their investments help recruit, retain, and grow accounting firms’ young talent—always a top concern of firm leaders. Koltin describes PE’s investment in an accounting firm as offering associates three bites from the apple: at closing, three to five years later, and then when the PE firm eventually sells the firm to a bigger group. These “three bites” give young talent rollover equity in the new company, something they’d normally wait decades to unlock. “Today’s young leaders are much more astute from a financial and business perspective,” Koltin says. “They know if they do things the old-fashioned way, they’re going to sit at the firm for 30 years until they vest. Then, if the firm is still there, they’ll get 2 times their compensation spread out over the next 10 years. In today’s dollars, that’s nothing, and they know it. PE is exposing this unfunded chain letter for what it is and showing that there’s a newer, better model entering the profession.” Even though 2021 marked the closure of the first official deals between accounting firms and PE firms, the first discussions began back in 2007 before being scuttled by the Great Recession. Then audit and tax began using technology solutions like artificial intelligence and bots and lower-level compliance work was moved offshore. Now, there’s the added stress of a war for talent as firms’ young stars push back and say they won’t do mundane work anymore. “This talent war comes back to how technology transformed the accounting business literally overnight,” Koltin says. “Today, talent has so many other options. A young tax senior told me, ‘I only have to prepare a tax return 15 times to know how to do it. I don’t need to do it 15,000 times.’ That was an ‘aha’ moment for me. If your model is about recruiting, building, and retaining your stars, you need to give them challenging work.” 20

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1. To buy out or retire the ﬁrm’s deferred compensation or retirement obligation.

3 To add nontraditional accounting services, such as consulting, advisory, outsourcing, or wealth management. “To buy those businesses, you’re competing against cash buyers that are primarily PE firms,” Koltin explains. 4. To invest in the fourth industrial revolution: the build-out of technology, AI, new ways of getting work done—whether that means outsourcing to India or stepping into the war for talent. On talent, Koltin says, “It’s about having the gunpowder to compete for superstar talent sitting at competing firms and being able to offer lucrative packages that encourage great talent to leave where they are.” Koltin says these four buckets didn’t really exist when PE firms originally tried to enter the accounting realm. “Until 2012, the profession pretty much ran itself. It was a low capital outlay. But in the last decade, this has become a whole new world. It was just a matter of time before firms would thirst for capital,” he says.

WHAT’S IN IT FOR PE FIRMS? Accounting is attractive to PE firms for several reasons, but they’ve historically been on the outside looking in, says Christopher Geier, CEO and managing partner of Sikich LLP in Chicago. “That’s partly because of the traditional accounting firm partnership structure and the fact that accounting firms doing attest work have to be majority-owned—or even entirely owned—by CPAs and can’t have outside investors.” Now, with a PE investment, the resulting spinoff company operates under an alternative practice structure, breaking the business into a legal entity for attest and audit on one side while the other side becomes the advisory business that doesn’t have the same restrictions for ownership. This structure allows PE firms to invest in these professional services businesses, which Geier says they like for a couple reasons: First, accounting revenue is recurring, and PE firms prefer recurring revenue streams. Second, with the amount of consolidation happening in the accounting industry, there’s a need for capital and the ability to put that capital to work by partnering with strong management teams that have solid M&A strategies. Accounting has all of that. “Much of the work we do across all of our service lines is recessionproof,” Geier says. “If you have established client relationships, you can deliver value to them through a variety of services. That’s an intriguing thing for PE firms, as well. When you separate attest from advisory and talk about the advisory services, it’s a huge, relatively untapped market—both sides of the equation make it a good time and opportunity for PE investments. That’s what we’re seeing, and what we’ll continue to see.” The end game comes after five to seven years when the PE firm exits its investment by selling the firm or spinning it off into a public market offering.

IS PE MONEY RIGHT FOR YOU?

A STRATEGIC INVESTMENT IN THE FUTURE

If you’re wondering if a PE investment is right for your ﬁrm, Koltin suggests taking the time to understand it ﬁrst. “This is new, and it’s different,” he says. “Understand that the accounting business is changing and ask if this is a better way to achieve your goals.”

At the end of the day, Koltin says all roads lead to increased proﬁtability: “The partnership model is ﬂawed for all professions. We struggle to make decisions because everyone has a seat at the table. Decisions are watered down.”

Of course, ﬁnding the right ﬁt is also key. Both Citrin Cooperman and Company LLP and EisnerAmper LLP walked away from initial deals that weren’t right for them.

Consider Goldman Sachs and other investment banks that used to be partnerships. “They went public, growth and proﬁtability soared, and they never looked back,” Koltin says. “Moving and unlocking allowed them to achieve growth and proﬁtability beyond the partnership model. PE offers a more corporate model. It’s not for all, but it is for some.”

Joel Cooperman, former chief executive and current executive chairman of Citrin Cooperman Advisors LLC, says Citrin Cooperman was originally negotiating a deal with another PE firm in early 2021 but ultimately didn’t feel like it was the right fit. He was put back in touch with NMC, an alternative investment management company he first met with in 2012. Collegial negotiations took place over five months before closing their deal on September 30. Cooperman describes their capital infusion as providing “dry powder” Citrin Cooperman will now use to acquire accounting firms and other advisory businesses in technology and consulting. “Before the investment, we were successful and had significant capital, but nothing close to what New Mountain has made available. There’s a much greater opportunity to grow our business,” he says. Cooperman also says the firm can now give deserving staff an interest in the firm’s profits and growth, which is particularly important in a world where “people are quitting every five minutes. There are liquidity events for those ages 25 and up that were never available in a traditional model until partners retired,” he explains.

In addition, Koltin emphasizes that clients aren’t going to pay higher fees for compliance, but they will for consulting and value-added services. “Transformation is taking place,” he says. “But we need the capital to succeed.” For his part, Cooperman says after founding his ﬁrm and serving as CEO for more than 40 years, to be able to provide this opportunity to his partners, retired partners, and staff not only creates a legacy for him, but is a tremendous event for the individuals, many of whom received signiﬁcant money, rollover equity, and management incentives: “I’m very proud to have been involved. We have a great partner in NMC, and I’m looking toward the future of working collaboratively and building a much better business.”

Natalie Rooney is a freelance writer based in Eagle, Colo. A former vice president of communications for the Ohio Society of CPAs, she has been writing for state CPA societies for more than 20 years.

At Eisner Advisory Group LLC, CEO Charly Weinstein says the PE investment received is an opportunity to accelerate the growth of the firm. Leaders had been discussing PE as an option since 2012, but a proposed structure at that time just wasn’t right. “At a 2016 partner meeting, we really began to think about how we could raise capital to compete on a long-term, sustainable basis,” Weinstein says. “We asked how we would get ahead of disruption and be a disruptor ourselves.” After unsolicited conversations with three different PE firms, EisnerAmper narrowed the choice to TowerBrook Capital Partners and then spent a year structuring the investment. Weinstein describes TowerBrook as a great cultural fit: “They truly understand the professional responsibility side, the alternative practice structure, the value of technology and innovation, the opportunities to accelerate growth in the profession, and the importance of creating opportunities for the next generation.” But Weinstein also notes that it’s a long and challenging process. “You really have to be committed to seeing the benefits if you’re going to go down this path,” he advises. “It may not be right for every firm, but if you’re a forward-thinking, highly successful firm that’s comfortable with change, it’s a great option. Every firm must figure out for themselves how to be sustainable, relevant, and important. Not everyone in the profession is on board, and that’s OK.” But even with its challenges, Koltin predicts that at least two or three more top 100 firms will receive PE investments by the end of 2022—and the trend will likely continue. www.icpas.org/insight | Spring 2022

Generation Entrepreneur: How Millennial CPAs Are Building Their Own Businesses Millennials are turning their backs on the 9-to-5 corporate grind to become their own bosses in record numbers. Here, four young CPAs share how they did it and what it takes to make it as an entrepreneur today. BY KASIA WHITE

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www.icpas.org/insight | Spring 2022

he road to entrepreneurship can be rocky, but research shows that millennials are rising to the challenge at an unprecedented pace. Nearly one in three millennials reported having a small business or a side hustle in 2020, and almost one in ﬁve say it’s their main source of income, according to a GoDaddy survey.

“Early on, a lot of this stuff was in my head, and I was less organized and less detailed,” Lance says. How did he ﬁx this problem? By documenting everything in Basecamp, such as the scope of services for each client and how he wanted tax returns completed.

This new wave of millennial leaders is fueled by accessible technology, the cultural acceptance of startups and virtual workspaces, and most importantly, the desire for more ﬂexibility and freedom.

“Getting all that information out of my head and into a system accessible to me, and now my team, really helped because they were on the same page as I was,” he says. “I didn’t have to explain things over and over again because it was now in a place where they could see it and understand it.”

“There’s a lot of people who started their businesses during COVID19 because they saw it as an opportunity to change their careers and reevaluate where they’re going,” says Joshua Lance, CPA, CGMA, managing director of the Lance CPA Group and an Illinois CPA Society board member.

Like Lance, Andrew Coombs, CPA, CEO and founder of Newark, N.J.based Coombs CPA and a recipient of the Black CPA Centennial’s 40 Under 40 Black CPA Award, agrees that building a sustainable infrastructure is a key step to ensuring long-term success.

Lance’s observations are spot on. In 2020, startup business activity grew by 24 percent in the United States, according to the Peterson Institute for International Economics. Recent ﬁgures released by the U.S. Census Bureau revealed 5.4 million new business applications were ﬁled in 2021, surpassing the record set in 2020 of 4.4 million.

“The issue isn’t clients. The issue is building a strong infrastructure so that you’re able to manage the work and perform, because the better you perform, the more clients you get. Without an infrastructure, you have no business,” explains Coombs, whose four-year-old company specializes in real estate and nonproﬁt accounting services.

“For a lot of people, the pandemic reset things in terms of what they wanted to do for work and how they wanted their career to look,” Lance notes. “It opened up room for change, and there’s still that room for change. And while it’s hard work building your own practice from the ground up, it’s completely rewarding.”

Achieving Work-Life Balance Before starting his virtual firm in Chicago, Lance worked 80-plus hours a week as an auditor. In 2015, he decided it was time to begin a new chapter of his life. “When I first started, it was a little nerve-racking because I was worried this was going to set my career back,” Lance recalls, adding that he questioned if he could even run a firm by himself and if he had the support and the resources to do it. “It’s a bit of a risk to start your own practice, especially if you’re coming to it from scratch and you don’t have a book of business you’re bringing on. I found, through the process of building my firm and taking that risk, that it’s doable.” Fast-forward to today and Lance is the managing director of Lance CPA Group, a Chicago-based boutique virtual accounting firm that mainly works with craft breweries and digital agencies across the country. He now works 40-hour workweeks on a consistent basis from the comfort of his own home. “I get to see my family and kids, and I’m not on the road constantly,” Lance says. “I’m able to find that balance of doing what I want and enjoying the work without getting burnt out by 80-hour weeks and traveling all the time like at a big firm.” Lance encourages other CPAs to take that leap of faith and reinvigorate their careers: “Start something new—especially now. I’ve talked to a lot of accountants who don’t want to take that risk because they have job security. You can do this. It’s not as big of a risk as it may seem.”

Building Solid Infrastructure One thing Lance wishes he did from the get-go was being more diligent and organized when it came to the ﬁrm’s processes and procedures. 24

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To help his brick-and-mortar accounting ﬁrm run at maximum efficiency, Coombs developed a clear set of guidelines and procedures for his staff of ﬁve accountants. “Everybody has a role, and the business is able to function without me having to be there all the time,” he says. “If I’m not there, someone’s picking up the phone, someone’s sending out requests, and someone’s preparing the bookkeeping or tax returns.” And while Coombs might not always be physically present in the office, Coombs says he’s always “on”—whether that means FaceTiming clients, answering emails after hours, or connecting with his team on Google Hangouts. “Being an entrepreneur isn’t freedom, it’s autonomy,” Coombs says. “You’re able to do what you want when you want. But remember: If you don’t work, you don’t eat. If you’re going to become an entrepreneur, you’re going to have to work harder than you did in corporate America.”

Enjoying the Process Fellow CPA and 40 Under 40 Black CPA Award winner, Baseemah “Bee” Nance, knows a thing or two about working hard. She’s currently teaching accounting at San Jacinto College in Houston, serving as the chief operating officer for a nonprofit called Generation Teach, publishing a children’s book called “Sunny Gets Money!,” and running her own online financial consultancy, Professor Nance’s Accounting Academy, which provides financial training as well as accounting and consulting services. She created the online platform in 2006, and mainly works with nonprofits, startups, and women- and minority-owned businesses. “My goal is to eventually run the academy full time,” Nance says. “I have a lot of one-off clients, which is great, but it’s not something that’s predictable from an income standpoint. It’s a delicate balance because taking on more clients means that I’m going to be busier.” Professor Nance’s Accounting Academy started as a face-to-face tutoring business and has transformed into a one-stop online educational consulting firm. To keep up with it, Nance puts in 20 hours of work each week, meeting virtually with clients, shooting her educational YouTube videos, and private tutoring.

“Teaching financial things to people who don’t normally have a knack for financials and managing their finances is a beautiful thing,” Nance says. “It’s one of the reasons I fell in love with teaching. Experiencing the ‘aha’ moments and feeling the pride when someone learns and appreciates being able to maintain their own finances is what I’m most proud of.” For those looking to branch off and become their own bosses, Nance offers some advice: “Different things will come at you as you’re trying to build your business, but if you keep pushing, then eventually you’ll get to the other side of those obstacles. Then there are new obstacles, and you keep pushing. It’s a process. You never fully arrive at the destination, but that’s not the goal. The goal is to continuously be on this journey of building a business and learning, growing, and absorbing as much as you can during that process.”

Finding a Niche Before Kenneth Mason Jr., CPA, left his job as a senior audit associate in 2018, he started looking at what was happening in the accounting world. He was providing tax services to local businesses on the weekends, but quickly realized that wasn’t all he wanted to do. “I knew that in order to help businesses, it would take more than looking to see what happened at the end of the year,” Mason says. “That wasn’t enough to actually help businesses grow and keep the doors open.” Seeing a need, Mason, a member of the Illinois CPA Society and winner of its Young Professional Leadership Award, rebranded his Chicago-based virtual business, changed its name to Equibis, and shifted the focus to accounting for the cannabis industry specifically. He’s never looked back since. “Before I decided to enter a niche market, it was challenging to understand businesses from different industries. If you only have a small team, it’s hard to develop expertise in all these different areas, so you’re limited in the knowledge and resources you can provide to your clients,” Mason explains. When asked how he gained specialized knowledge needed to serve the cannabis niche, Mason explains that he built a network of other accountants, lawyers, and enrolled agent tax professionals who were also working in the cannabis space. “It was one of the most critical pieces, if not the most critical piece, for understanding and navigating the industry,” he says, stressing that this network’s deep value comes from learning from other people’s successes and failures. “If someone tells me, ‘I went wrong because X, Y, Z,’ I can avoid that same mistake by learning from their firsthand experience,” he says. Mason’s closing piece of advice for future entrepreneurs is to dream big: “Research—dig, dig, dig. Map out a vision. That’s what allowed me to build a firm that gives me the flexibility that I want in my life.”

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

D I R E C T O R ’ S C U T STRATEGIES FOR TODAY’S CORPORATE FINANCE LEADERS

The Board’s Responsibility for Post-Pandemic Succession Planning As the business landscape changes, and the talent market grows ever more competitive, board members must take a more active role in leading diverse and robust succession planning efforts.

Kristie P. Paskvan, CPA, MBA Board Director, First Women’s Bank and SmithBucklin Leadership Fellow, National Association of Corporate Directors kppaskvan10@gmail.com ICPAS member since 1984

Over the past two years, business leaders have had to accelerate or adjust components of their strategies. The pandemic hastened digital technology adoption, challenged our ability to create culture outside of physical gathering spaces, focused us on the intentionality of diversity, equity, and inclusion (DEI), and highlighted the power shift to employees as they push for purpose-driven workplaces and hybrid work environments. Each of these changes creates short and long-term financial impacts, but what’s less clearly reflected in the financials is the future effect of the talent war, as the high costs of employee turnover and its effect on succession planning can be obscured. Consider how many real estate leases have been revisited as building owners and managers struggle to maintain tenant cash flows to satisfy financing valuations. In one of the more visible changes, both leased and owner-occupied buildings have been reconfigured to be more culturally attractive to workforces by creating expanded spaces for collaboration, connection, celebration, and education. If we expect employees to travel for the purpose of gathering, the reason should be compelling and exponentially productive. Many older, underutilized office locations will need to be completely repurposed. When reviewing the pandemic’s impact on people, it also becomes clearer why capital has flowed to technology as companies recognize the need for digital transformation to accelerate their strategy and meet the needs of clients, vendors, and employees. In the future, collaboration and client interactions will change as AI seeps deeper into our work processes. Companies looking to get ahead in the talent war are evaluating whether new technology can replace operational roles in the workplace, allowing time for employees to provide necessary advisory support for business decisions, a change that will require upskilling in new technologies and analytics reporting. As a board director, and frequently the audit committee chair, I’ve watched these developments with great interest. These shifts mean that asset and liability categories on balance sheets will see revisions. Reserve estimates and critical audit matters will be closely scrutinized based on the heightened, long-term pandemic disruptions that span industries (especially retail, hospitality, and manufacturing) and impact the global economy. Many companies already track key performance indicators (KPIs) and key risk indicators (KRIs), but that practice is only becoming more important. KPIs can be any data point that

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gives a business leader a look into the future. A KPI can be as simple as a sales pipeline report with revenues by employee or by geographic region, or a more complex analysis developed with operational data. KRIs help manage and mitigate risks. Risks generally fall into the categories of strategy, market, regulatory, technology, operational, liquidity, reputational, and talent. Since the pandemic, one of the KRIs that has turned red on many organizations’ dashboards is talent, as employers face high turnover, an empty pipeline, and weak succession planning. Succession planning is an important oversight area for any board of directors, with the CEO role and the next level of senior management a top priority for planning. However, with the Bureau of Labor Statistics reporting an average of 3.95 million people quitting their jobs each month during 2021, many boards have been pushed to delve deeper into wider-reaching DEI initiatives, employee mental health resources, reasons for turnover, and hiring practices. Data on talent has become critical for tracking succession opportunities within an organization’s talent pool and understanding key motivations for staying or leaving. There are some continuing trends that will make it difficult to align organizational values and DEI goals with achievable succession plans. You can’t have diverse succession planning if your pool of candidates narrows or homogenizes over time. And that’s exactly what’s happening: According to the 2021 Women in the Workplace report by McKinsey and Lean In, for every 100 men promoted to manager, only 86 women are promoted. While women hold 47 percent of entry-level roles, that number drops to 24 percent of roles at the C-suite level. For women of color, the numbers are worse, going from 17 percent of entry-level roles to just 4 percent

of C-suite roles. Men on the other hand hold 52 percent of entrylevel roles and 75 percent of C-suite roles. Additionally, many employees are going out on their own as contracted talent, so they aren’t on anyone’s succession radar. Of further concern is the fact that the number of women leaving the workforce has greatly exceeded that of men throughout the pandemic, with the Bureau of Labor Statistics noting the rate for women leaving was still trending at double the rate of men leaving as recently as October 2021. This makes the board’s involvement in succession planning even more critical. The technology and real estate decisions discussed earlier should be aligned with strategies for attracting and retaining diverse and talented employees. Further, succession planning should be an ongoing discussion as roles are vacated. High potential employees can be identified at the middle management level and given a chance to work on “tiger teams” engaged in education, coaching, and capstone projects determined by the board to advance their development. And instead of looking for someone with the exact same experience as the exiting talent, boards should evaluate whether the top roles still need the same skill sets. Overall, there’s data available at every company about their ability to attract, retain, and promote great talent. As talent struggles continue and the representation of diverse leaders remains low, board oversight will continue to evolve to encompass a deeper role in the succession planning process. If an organization’s C-suite and board can come together to prioritize effective and diverse succession planning efforts, they’re likely to see a much more robust pipeline of promising leaders in the years to come.

www.icpas.org/insight | Spring 2022

L E A D E R S H I P M A T T E R S ENHANCING YOUR ABILITY TO LEAD

How Savvy Leaders Can Surf the Turnover Tsunami Consistent and meaningful one-on-one check-ins are one key to keeping your—and your organization’s— head above water.

Jon Lokhorst, CPA, PCC Executive Leadership Coach, Lokhorst Consulting

The Great Resignation that swept many organizations up in a turnover tsunami doesn’t show any signs of slowing down. According to Fidelity’s Financial Resolutions Study, 39 percent of workers plan to look for a new job in 2022, and that number rises to 47 percent for early-career Gen Z workers ages 18-24.

jon@lokhorstconsulting.com

While competitive compensation is crucial to stemming turnover, it may be a short-lived solution without addressing one of the most significant factors driving people out of their jobs: bad bosses. Bad bosses were the second most cited reason workers quit their jobs in a 2021 survey by market research firm PlanBeyond. (What was the leading reason? More on that later.) What can you do as a leader to avoid falling into the sea of bad bosses driving good employees away? There’s a host of essential practices that’ll help you become more effective as a leader, but there’s one simple action that encompasses many of those practices and increases your likelihood of success. It’s also the best method of reducing turnover and retaining your best people amid the talent-related challenges of this era. I call it the meta-strategy for leadership: the one-on-one check-in meeting. In my personal experience, and that of my leadership coaching clients, these check-ins have been a real tide-turner. Here are six tips for creating a framework for meaningful check-in meetings that will elevate your leadership and enhance engagement among your team.

1. SCHEDULE A REGULAR CHECK-IN FOR EVERY TEAM MEMBER Generally, you’ll want to connect with each of your team members or connect every team member with their direct supervisor for these check-ins. Making these assignments is more complicated in CPA firms and other professional services firms where team members report to different supervisors based on their current client engagements. In these cases, assign a primary supervisor for each person. The bottom line is to ensure every employee in the organization has a regular one-on-one conversation with someone in leadership above them. After establishing these check-ins, schedule ongoing one-on-one meetings at regular intervals. These meetings don’t need to be very long. Once you develop a routine, a 20or 30-minute check-in should suffice, depending on frequency. It may be beneficial to meet more frequently with employees who are new to the team or their roles, or if you’re new to 32

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the team. The same is true if your team is in the midst of significant change or a complex project.

2. KEEP A RUNNING LIST OF AGENDA ITEMS Train your team to keep an ongoing list to track their questions, concerns, and ideas for each check-in. Keep a similar list of the items you want to bring to their attention. This is one way these check-ins can save you time in the long run, as they keep your team members from coming to you with one-off issues that can wait as they know they’ll have an opportunity to discuss them.

3. START WITH YOUR TEAM MEMBER’S AGENDA Let your team members present the items on their agendas first. That enables you to gauge whether they recognize what should be their top priorities and other issues of concern. Getting them engaged will help you avoid the trap of talking too much and instead bring a coaching approach to the conversation. It also provides an opportunity to observe and respond to anything that may be weighing them down, including factors outside of their work (and for you to note possible turnover risks). Over time, I found that my team members covered most of the items I had compiled on my own running list.

4. ADD YOUR POINTS Once your team member completes their list, present any items from your list that haven’t been covered. Beyond the tactical discussion of to-do list items, use this time to check on the team member’s experience and well-being. Incorporate discussion about their professional growth, development, and career aspirations. If you find that your regular check-ins are consumed by tactical discussion, schedule a separate one-on-one for developmental conversations. A perceived lack of professional growth is another common reason why employees leave their jobs.

5. CLOSE WITH CLEAR FOLLOW-UP ACTIONS Each check-in should end with clear follow-up steps, both for your team member and for you as a leader. These steps should include a plan for reporting on follow-up actions after they’re completed, whether in the next check-in meeting or at some point in between. Model the thorough follow-up you want from them by completing your own action steps.

6. DON’T FORGET TO EXPRESS YOUR APPRECIATION There’s an appreciation deficit in the workplace. Remember the PlanBeyond survey referenced earlier about employees’ reasons for quitting jobs? The leading reason for employees leaving was a lack of appreciation. A team member who feels undervalued is your greatest turnover risk. You may have good intentions for showing appreciation to your team members—don’t let those good intentions fall by the wayside as your day-to-day work drowns you in a myriad of other details. Don’t let your drive for results keep you from pausing to celebrate your team’s achievements. If you’re at risk of neglecting appreciation, put a reminder in your one-on-one meeting notes to help build a habit of recognition into those conversations. If you’re not already holding one-on-one check-ins with your team members, start building them into your routine and the routine of your team now. If you’ve already established this practice, use these tips to enhance the effectiveness of these meetings. As you try to surf the turnover tsunami, I truly believe greater appreciation and communication is going to be key to keeping your best people on board this year. www.icpas.org/insight | Spring 2022

E V O L V I N G A C C O U N T A N T TRENDS IN ACCOUNTING, AUDITING, AND CONSULTING

Blockchain and CPAs: Imagining the Partnership of the Future As blockchain technology permeates more applications, it stands to change the entire business ecosystem— including the CPA profession.

Andrea Wright, CPA Partner, Johnson Lambert LLP awright@JohnsonLambert.com ICPAS member since 2010

When I sat down to begin this column on Jan. 26, 2022, the prices of bitcoin and Ethereum’s ether—the two most valuable cryptocurrencies by market cap—stood at $38,092 and $2,638, respectively off their recent all-time highs, and there was talk of the White House preparing to address the risks and opportunities of cryptocurrencies and digital assets via executive order. Many people in the business world have watched from the sidelines the dramatic— though inconsistent and tempestuous—rise in value and prevalence of cryptocurrency and surmised it as the endgame for blockchain technology. I say it’s just the beginning. I can point to another use case quickly gaining mainstream attention: non-fungible tokens (NFTs). NFTs use blockchain technology for storing, exchanging, and proving ownership of physical and digital assets of value. While it’s true that we’ll need to wait for the long-term benefits of blockchain to materialize, there’s strong belief that this technology will shape how society functions in the future in ways we can’t yet imagine. I want to present an argument for what’s possible with blockchain technology, specifically NFTs, and how they have the potential to impact all aspects of society and commerce, including the deliverables CPAs provide to their clients. First, a quick primer: As you may know, blockchain technology is a decentralized digital ledger system that records transactions permanently in a peer-to-peer network. Cryptocurrencies are digital currencies that run on blockchain technology, where transactions are recorded and verified by the decentralized system. NFTs, like cryptocurrencies, are transacted and stored via a blockchain—specifically, the Ethereum blockchain. NFTs are digital tokens that represent ownership of unique items, allowing us to tokenize both digital and physical assets, like art, collectibles, and even real estate. Key to understanding the importance of NFTs is grasping the concept of smart contracts. Also built on Ethereum’s platform, smart contracts are simple computer programs operating on an “if this, then that” structure, as in, “If you complete this task, you’ll receive this amount of money.” While much of the world today is focused on utilizing blockchain technology to empower cryptocurrencies to hedge against inflation, taxes, and intermediaries like central banks, and to create or prove ownership of NFTs, the use cases for blockchain technology—and NFTs—are seemingly limitless. Yes, many scoff at the idea of being the “owner” of a piece of digital art, for instance, which is something that seemingly can be copied, but simply Googling Vincent van Gogh’s “The Starry Night,” copying the image, then saving it on your computer’s desktop doesn’t make you the owner of that artwork either. The point being that NFTs prove ownership of a unique item. That unique item doesn’t have to be a piece of art—it could be a pair of shoes, the deed to a house, a set of financial statements, or a tax return.

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Why would CPAs use blockchain technology to prove ownership? Why would we want to issue financial statements or tax returns as NFTs? The answer is simply because NFTs have the ability to remove centralized clearinghouses, prove authenticity, and easily allow the recipient to prove to others that those items are legitimate. Leveraging an NFT to represent a tax return or a set of audited financial statements would allow a CPA firm to prove that they did indeed prepare the deliverables as well as provide a way to confirm the authenticity of those documents. Minting an NFT—the process of creating one—and providing it to a client would give confidence to those who may use the deliverables connected to that NFT to perform their work. For instance, banks or other lenders would be able to easily validate the authenticity of a document by looking at the blockchain.

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Minting NFTs of products that CPAs produce today is one small example of how blockchain technology could transform the accounting industry. Imagine a place that doesn’t exist in the real world, isn’t governed by any one entity, has a currency that isn’t monitored or managed by any government or regulatory body, and yet transacts in the equivalent of millions of dollars a day. This is a metaverse, a digital world where businesses (even CPA firms) operate alongside the virtual population— and it’s real. In fact, Prager Metis opened the first official CPA firm in the metaverse Decentraland earlier this year. The idea of a metaverse hasn’t quite caught on yet, but we’re just scratching the surface of what’s possible today, and the rise of metaverse worlds and accelerated automation within our physical world over the next 20 years will likely introduce many new use cases for blockchain technology and NFTs. Specifically, I believe that smart contracts and NFTs will support the automation of our future and open opportunities for CPAs to provide their clients with new and exciting services. Today, we’re at the same stage with blockchain as we were in 1995 with the internet—we’re not quite sure how to use it other than to post funny cat videos, but many understand that it’s going to be something powerful. I’m excited to see what’s to come and how the world and the profession will change as blockchain becomes the engine that powers commerce.

Start saving today! This column was co-authored with Dave Fuge, chief innovation officer at Johnson Lambert LLP.

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P R A C T I C E P E R S P E C T I V E S MOVING YOUR FIRM FORWARD

Planning for Your Last Busy Season Whether you look forward to two more busy seasons or 20, you should start planning today for a practice transition or sale that realizes the true value of your hard work.

Art Kuesel President, Kuesel Consulting art@kueselconsulting.com

I have tremendous respect for those of you who’ve weathered the storm and emerged triumphant: We’ve been tested, and we’ve passed. The ups and downs of COVID-19, the challenging labor market, supply chain issues, and inflation have been enough to make any business owner throw their hands up in surrender. And many business owners have— and without proper planning, they walked away without extracting the real value they built over the years. But here you are, at your desk, reading the latest issue of Insight. What’s next for you and your practice? Look a few years down the road: Do you still want to be sitting at your desk, or do you have different plans? Even if your plans are years down the road, you must start mapping out an effective succession or transition plan early to enable you to realize the full value of the work you put into your firm. Here are five steps to planning for your final busy season. 1. Define the next phase and timeline. Perhaps you’d like to retire from full-time work but still do part-time consulting, or maybe you want to sell your firm as soon as you turn 66. Or maybe you’re still deciding! Even if you’re not sure of what you want to do after you leave the firm, it’s important to set a timeline that’ll help dictate your actions. For example, if you want to transition away from your firm in two years, your action plan will be different than if that timeline is 10 years. 2. Understand your options. Is there someone in your firm with partner potential rising through the ranks? Do they aspire to be a partner? If the answer is yes, this could be an excellent option for practice transition. But you need to share your plans and timeline and get a clear picture of their desires and goals. With enough time, you can grow the right person into the role, but without an internal player with partner potential, the most likely path to realizing the full value of your practice will be an external sale. 3. Know the value of your practice. The value of your public accounting practice could range from 10 percent to 150 percent of your annual fees. While 1 times fees has been a long-standing average valuation for an external sale, it’s no longer a guarantee. Buyers value niches and specialties, larger business clients, strong profitability, and growing geographic locations more than they do a generalist practice with no client concentrations, low margins, and a ton of 1040s in a slow-growth market. Buyers also want to be sure your client base will stick around after you’re gone, and that requires an effective and orderly transition, generally taking two years.

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4. Determine how quickly you need your payout. While not a rule, internal buyouts often have longer payment terms than external sales. An internal buyout could stretch a payment plan out for upwards of 10 years, whereas an external sale could have you fully paid out in as few as three. So, if you’re counting on the sale of your practice to build your beach house, make sure this is clear in your communications with prospective buyers. 5. Put your plan into action. Knowing what the landscape looks like and understanding your own timeline means you can make choices that influence the value of your practice. Talk to your staff about their thoughts on being a partner and develop them to be in

a position to take on your practice when the time is right. Weed out smaller, less profitable clients in favor of larger, more profitable clients to boost the value of your practice. And, if an external sale is the end game, talk to other firms that could be suitors to gauge their interest in acquiring your firm. You can always change course depending on the circumstances but having a plan in place will increase your odds of making choices that add value to the firm and solidify your legacy. You’ve worked too hard to give up and leave the future of your firm to chance. A little planning today can go a long way toward a more seamless and lucrative transition to what’s next.

www.icpas.org/insight | Spring 2022

E T H I C S E N G A G E D EXPLORING ETHICS IN BUSINESS & FINANCE TODAY

How to Right Your Retention Efforts During the Great Resignation and Beyond Leaders who ensure organizational and employee values align stand to realize both enhanced retention rates and a better place to work.

Elizabeth Pittelkow Kittner CPA, CGMA, CITP, DTM Head of Finance, International Legal Technology Association ethicscpa@gmail.com ICPAS member since 2005

In today’s job market, employers are competing for talent across industries and geographic boundaries. Highlighting the increasingly competitive landscape, a February 2022 Bloomberg article reported that people are leaving the accounting industry in droves. Balancing what is good for the organization with what is good for its employees is one of the greatest challenges leaders currently face. In a simple example, it may be good for an individual to be employed at an organization to gain experience, while it may not be good for the organization if that individual is toxic for the culture. Alternatively, while it may be good for an organization to have individuals doing the same tasks for several years, it may be disadvantageous for individuals if they value career advancement and skills development. It is the role of a strong leader to find the right balance between the interests of individuals and the interests of the organization, and ideally the interests intersect more than they conflict. When an organization and the individuals within that organization want the same thing, that alignment has many benefits, such as incentivizing mutually desirable outcomes, alleviating turnover, and deepening employee engagement. Observe the chart of values drawn from Dr. Stefaan De Clercq’s comprehensive value model, which was derived from S.H. Schwartz’s theory of basic human values. These values were used by Babak Panahi et al. in “Personal-Organizational Value Conflicts and Job Satisfaction of Internal Construction Stakeholders,” an assessment of job satisfaction in the construction industry in Malaysia. The paper’s authors conclude, “The research findings indicated that conflicts even beyond the effects of differences in demographics, personal, and organizational values, have negatively affected job satisfaction of the internal construction stakeholders in Malaysia. It demonstrates that personal-organizational value conflict is a better and stronger predictor of job satisfaction than demographics, personal characteristics, organizational characteristics, or all three combined.” The lesson is to determine how to understand your employees’ values versus your organization’s values. Your organization’s values should be well known: They should be written down, clearly defined, and frequently promoted. To determine your employees’ personal values, you can ask them either in conversation or via a survey. Then, the challenge is to determine how to inspire your employees to live the organization’s values in light of their personal values. Here are three examples of values I have seen promoted by organizations and how they could align with personal values.

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Value Achievement

Deﬁnition Personal success through demonstrating competence according to social standards

Benevolence

Preservation and enhancement of the welfare of people with whom one is in frequent personal contact

Conformity

Restraint of actions, inclinations, and impulses likely to upset or harm others and violate social expectations or norms

Goal-orientedness

Living and working to fulﬁll a purpose, not giving up

Materialism

Attaching importance to material goods, wealth, and luxury

Power

Control or dominance over people

Prestige

Striving for admiration and recognition

Relations

Having good interpersonal relations with other people and valuing true friendship

Security

Safety, harmony, and stability of society, relationships, and self

Self-direction

Independent thought and action—choosing, creating, and exploring

Social commitment Preservation and enhancement of the welfare of all people Stimulation

Excitement, novelty, and challenge in life

Tradition Universalism

Respect, commitment, and acceptance of the customs and ideas that traditional culture or religion provide the self Broadmindedness, appreciation, and protection of nature and beauty

TREAT EACH OTHER LIKE FAMILY, BUT BETTER This value draws on the principles of relations, security, and tradition, creating an expectation that employees will bring the best part of their unique family experiences to the workplace, offering respect and loyalty while avoiding the bickering common in some families. In return, organizations that espouse this value should ensure that their employees are receiving the same respect and loyalty that the organization expects from them. This includes paying a fair wage for the work performed and offering flexibility based on people’s situations. Market research for salaries is available and can be used as part of discussions for new hires, market adjustments for existing employees, and promotions. Additionally, providing a positive and flexible work environment is part of creating a strong organization, as when people feel that they are being paid fairly and have flexibility in when and how to complete their work, their job satisfaction is likely to increase.

quality work, and meet or exceed deadlines. Accountability starts with each employee and is a part of the culture of the organization. Servant leadership is also expected from every employee, with every level helping others both above and below them in their roles. These are just a few examples of how aligned values might look. Think about what values your organization promotes and if they are the right ones to align your organizational culture with individual values. When an organization and its leadership hold to clear values and ensure that those values align with those of their employees, it lays the groundwork for a long and mutually beneficial relationship.

TAKE THE HIGH ROAD This value means that when there are several paths to an outcome, the organization expects its employees to take the ethical path. Trust and transparency will permeate the organization when integrity is prioritized and failure is OK. Achievement and “goalorientedness” may be both organizational and personal values within an organization like this. This value also emphasizes organizational reputation and sustainability. For example, if an employee is comfortable enough to admit they made a mistake instead of trying to hide it, the organization should reward that admission and work with the individual on how to avoid such mistakes in the future. Also, when employees leave, the organization will have fewer unknown issues to deal with if they are sharing their work along the way.

LEAD FROM EVERY SEAT IN THE ORGANIZATION This value means that leadership is more than just a title, evoking the values of benevolence and self-direction. Leaders are expected to behave in a way that sets an example for others, and selfleadership and servant leadership are expected of everyone at every level. Self-leadership may be especially important in remote environments since employees are not around their supervisors as much and must learn to prioritize their time and tasks throughout the day. Employees are expected to demonstrate strong performance, produce highwww.icpas.org/insight | Spring 2022

F I N A N C I A L L Y S P E A K I N G BEST PRACTICES IN FINANCIAL PLANNING

Navigating the New Guidance on Qualified Plan Rollovers A new rule from the U.S. Department of Labor could create a regulatory landmine for investment advisors— here’s what to know.

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

Registered investment advisors and their firms have long viewed 401(k) and 403(b) plans as great sources of potential business. A soon-to-be retired client, current or prospective, might have a six- or seven-figure account balance begging for an investment advisor to manage it. What growth-oriented financial advisor is going to miss such a business opportunity? Well, the U.S. Department of Labor (DOL) wants you to live up to your role as a fiduciary advisor when working with these clients and prospects. Under ERISA, an advisor’s recommendation that a client roll over assets from a qualified plan into an account to be managed by the advisor or their firm creates a conflict of interest and a prohibited transaction, subject to sometimes draconian civil penalties if doing so increases the compensation the firm earns from the client. On Dec. 18, 2020, the DOL issued PTE 2020-02, which creates an exemption from the prohibited transaction rules as long as advisors follow certain steps. The rule becomes fully effective between February 1 and July 1, 2022. The bottom line is that qualified plan to IRA rollovers are still permitted, but the fiduciary advisor better make sure a whole lot more documentation is in place to justify any recommendation where the advisor manages the IRA. Let’s review DOL PTE 2020-02 and some of its implementation issues.

DETERMINING ERISA FIDUCIARY STATUS First, determine if you’re a fiduciary and therefore subject to DOL oversight. When it comes to IRAs, a person (or firm) is deemed a fiduciary by the DOL if he or she (1) provides advice or recommendations on securities investing (2) on a regular basis (3) pursuant to an agreement or understanding with the IRA owner (4) such that the advice serves as a primary basis for the owner to make investment decisions and (5) that the advice is individualized based on the needs of the IRA owner. If this sounds like your relationship with your IRA clients, then the DOL says you’re a fiduciary. Note that the fiduciary nature of the client-advisor relationship is characterized by its ongoing nature. If you as a CPA provide, for example, a single recommendation to a client in a specific IRA rollover situation, you’re likely not an ERISA fiduciary and therefore not subject to DOL oversight.

IMPLEMENTING THE IMPARTIAL CONDUCT STANDARDS To enjoy the benefits of PTE 2020-02, the fiduciary advisor must comply with the impartial conduct standards defined in the DOL’s Field Assistance Bulletin 2018-02. These include 40

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providing investment advice that’s in the best interests of a retirement investor; assessing only reasonable compensation, based on the current competitive marketplace; making no materially misleading statements about the investment; and seeking to obtain the best execution of the investment transaction reasonably available under the circumstances. The firm must update its written policies and procedures such that they comply with the impartial conduct standards and that a reasonable person would conclude from reviewing the policies and procedures that there are no incentives for the firm or advisor to place their own interests ahead of the interest of the client.

PUTTING NEW PAPERWORK IN PLACE A firm and/or its advisors must disclose if they’re ERISA fiduciaries to the client in writing. This disclosure should include a written description of the services provided by the firm and advisors and a brief discussion of material conflicts of interest. This client communication might be crafted in such a way as to provide the client with a summary of the considerations for deciding whether or not to roll qualified plan assets into an IRA. Finally, both the client and advisor should sign this communication, whether or not the assets were rolled over into an IRA. While PTE 2020-02 doesn’t specify the form of this analysis, at a minimum I believe it’s a good practice to document items such as services provided by the advisor and the retirement plan sponsor, investment choices for the IRA and qualified plan account, fees and expenses for both accounts, and various other considerations, such as withdrawal privileges, access prior to age 59.5, legal protections, etc. In other words, summarize in writing the relevant characteristics

of both accounts. The advisor must make a good faith effort at obtaining this information regarding the qualified plan or document that he or she was unable to obtain it. Develop a format that can easily be reviewed by a third party (like a regulator) to show that you and the client both understood the pros and cons of funding an IRA through direct rollover of the qualified plan account balance prior to the client making the determination whether or not to do so. The firm must also prepare an annual retrospective review, designed to document and aid compliance with the impartial conduct standards and the policies and procedures referred to above. The report is addressed to an executive officer of the firm, who must then certify that he or she has reviewed the report. The report covers the trailing 12-month period and must be completed no less than six months following the end of the review period. The initial retrospective review will cover the 12-month period ending Jan. 31, 2023—so get ready! As we all know, the trend in financial services is for providers to become more transparent to consumers. It’s not just competition and technology driving this wave, but regulatory authorities. The DOL has left no doubt that its reach extends beyond ERISA plans to include most advisor-managed IRAs. PTE 2020-02 provides tangible, measurable criteria for advisors to demonstrate this transparency. While I’m certain that more guidance will be forthcoming—some of which may be advisor-friendly—for now advisors need to take care to document the process that a client should follow when deciding what to do with his or her retirement plan account. It’s a new world when advising clients on IRA rollovers—proceed accordingly.

www.icpas.org/insight | Spring 2022

C O R P O R A T E I N S I D E R WHAT’S TRENDING IN PUBLIC COMPANY FINANCE

Planning for Post-Pandemic Business Continuity Don’t assume that we’ve learned all we need to know about navigating disruptions after the many rapid pivots COVID-19 necessitated—a business continuity plan is as important as ever.

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

When COVID-19 struck, many businesses swiftly shifted to remote work, sending office workers home to learn how to hold video conferences, obtain electronic signatures, and manage digital workflows. With necessity as the mother of invention, the global workforce generally found ways to keep things moving forward despite the challenges of shelter-inplace orders. Now, after two years of uncertainty and shifting requirements, does it make sense to continue the cycle of business continuity planning? Haven’t we already figured out how to be sufficiently resilient in an emergency? First, let’s define business continuity planning. An effective business continuity plan allows an organization to continue delivering its products and services in the wake of a disruptive event. While the pandemic is certainly disruptive, it is by no means the only form of business disruption we could experience: Just days after my organization moved to remote work at the start of the pandemic, one of our physical locations that provides essential services was hit by an earthquake. Hurricanes, power outages, fires, and unexpected staff resignations are all disruptive events that could affect business continuity. No business is too small or too simple for a business continuity plan. I recently observed a small organization struggle to regain its footing when a key person unexpectedly took medical leave. Even after all the pandemic-era pivots this organization had withstood, this unexpected turn of events demonstrated the strong need for a robust, well-documented, and up-to-date business continuity plan at every organization. According to my colleague Travis Pons, senior manager of business continuity planning at Discover Financial Services, “There are three pillars of resiliency: emergency response, incident and crisis management, and business recovery. A good business continuity plan will address each area and will include robust documentation to support every aspect of the plan.” The emergency response pillar should cover site-based considerations like how to keep people safe in the event of an emergency. The incident and crisis management pillar should ensure the organization is prepared to respond to incidents that have potential to create an operational outage, cause the company damage or loss, or damage the organization’s reputation. The business recovery pillar concerns the restoration of activities and processes to bring a business back to an acceptable level of operations following a disruption. Another framework for examining business continuity planning is found on Ready.gov. Key elements of this framework include business impact analysis, recovery strategies, plan development, and testing and exercises. Let’s review these four elements, as well as an important fifth point.

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• Business impact analysis: This phase of continuity planning involves thinking about what could go wrong and what the impact would be. Identify critical processes and the people, technology, information, and resources required to remain functional. Rank the importance of these processes based on the negative impact to the organization if they were suspended. Consider which supporting technologies are critical and which aren’t and identify whether there are critical dependencies on secondary processes. Finally, consider financial, legal, and regulatory impact. • Recovery strategies: Recovery strategies will guide how to get business operations up and running again after a disruption. There are often several strategies to pursue, and it can be helpful to document all of them, as circumstances may make some of those options impossible to implement. Some considerations as you develop recovery strategies may include: What do you do when a process is dependent on a vendor and that one vendor fails? Which vendors operate in risky areas? Are there any special devices needed to restore processes? What plans do you have for data backup and security? Is data stored in different locations so you can shift quickly to a backup if the disruption is localized? • Plan development: Create a team to develop and maintain the plan. Keep a list of all the people responsible for implementing the plan and ensure roles and responsibilities are clearly communicated. Communication and action plans should be explicit so that everyone knows what they need to do and when. Each part of the plan should be fully documented to enable swift execution. The documentation should include details of critical processes, critical systems, vendors, and employee contact lists. • Testing and exercises: Create a test plan and practice exercises that allow you to determine whether you have all the relevant information and documentation to support plan execution. Consider targeted testing along with a full-scale practice run of your plan. • Modify and maintain: Based on the results of your testing, adjust your plan, update your documentation, and test again. Between planning cycles, continually update your plan as technologies, people (including third-party vendors), and processes change. While it’s important to keep your plan current, there’s no need to start from scratch for each cycle—update, enhance, and expand the plan to make it better every year. Here at Discover, we practiced a pandemic scenario in our business continuity planning exercises long before COVID-19. Having now lived through that reality, we found our preparations enabled us to rapidly shift to remote work and keep all our business processes operating effectively without any meaningful disruption.

9.23.22 A Good Day for Doing Good! Be part of the Illinois CPA Society’s 13TH annual CPA Day of Service.

It’s as easy as 1-2-3: Choose a community organization or charity to help Register your volunteer activity plans at www.icpas.org/CPADayofService Receive a free CPA Day of Service t-shirt (while supplies last, free to ICPAS members)

However, the world has changed and the way we execute critical business processes has changed with it. The pandemic drove rapid technological advancements that require new thinking or even expert input to understand business impact and recovery strategies. The fires, floods, storms, and earthquakes that we’ve experienced over the years keep us searching for new and better ways to identify risks and maintain continuity through disruptive events. The case for continuously enhancing our business continuity plans is strong. To ensure readiness for the next disruption, whether it be the zombie apocalypse, rogue robots, space invaders, or those dinosaurs that are always escaping from their park, identify what could negatively impact your business, what’s important to continue operations, then build a plan that allows your organization to carry on no matter what 2022 and beyond brings.

Volunteer as an individual, or get a group together and volunteer as a team. You can choose ANY volunteer activity you like. See our website www.icpas.org/CPADayofService for ideas.

Questions? Email us at cpados@icpas.org

www.icpas.org/insight | Spring 2022

T A X D E C O D E D DECIPHERING TODAY’S STATE AND FEDERAL TAX LAWS

Demystifying Motor Fuel Taxes As Illinois’ leaders debate freezing taxes on gasoline and diesel, here’s your guide to the esoteric world of state, local, and federal motor fuel taxes.

Keith Staats, JD Executive Director, Illinois Chamber of Commerce Tax Institute kstaats@ilchamber.org ICPAS member since 2001

Motor fuel taxes have been in the news recently: In his combined State of the State and Budget address, Gov. J.B. Pritzker proposed freezing the automatic inflation-adjusted increase in the state motor fuel tax of 2.2 cents per gallon scheduled for July 1. There’s also a case in the Illinois Supreme Court that’ll determine the permissible uses for local taxes on motor fuel. Meanwhile, in Washington, D.C., Congress has been discussing suspending federal motor fuel taxes to counteract quickly rising prices of gasoline and diesel fuel. The taxation of gasoline and diesel fuel consists of a series of “stealth” taxes. That is, when you purchase fuel at the pump, you see the total price per gallon inclusive of a variety of taxes with no readily available breakdown. The purpose of this column isn’t to opine as to whether the motor fuel tax burden is good or bad—that’s a debate for another day. Rather, I seek to decode a tax that’s largely invisible to most people, including tax practitioners who don’t deal routinely in the specialized and arcane area of motor fuel taxes. The taxation of motor fuel is a complex combination of federal, state, and local taxes imposed at the wholesale and retail levels. According to the Illinois comptroller, $2.4 billion in motor fuel taxes were administered and collected by the state during the fiscal year that ended June 30, 2021. The Illinois General Assembly’s Commission on Government Forecasting and Accountability estimates that the state’s portion of the sales taxes on motor fuel will generate approximately $700 million during the current fiscal year. This figure doesn’t include the local or federal portions of the sales taxes. Whether the taxes are imposed and paid at the wholesale or retail level, the taxes are ultimately paid by consumers when they make a purchase at the pump. The tax rates also differ between gasoline and diesel fuel. The United States imposes a federal excise tax of 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. At the state level, Illinois currently imposes a tax of 39.2 cents per gallon of gasoline and 46.7 cents per gallon of diesel fuel, subject to an automatic inflation adjustment each July 1. Other state taxes imposed on motor fuel include an underground storage tank tax of 0.3 cents per gallon, an environmental impact fee of 0.8 cents per gallon, and 1.1 cents per gallon for funding Illinois’ Underground Storage Tank Fund. There may also be local motor fuel taxes. In Cook County, an additional 6 cents per gallon tax is imposed, and Chicago assesses an additional 8 cents per gallon tax. In DuPage, Kane, Lake, and McHenry counties, there’s an additional 4 cents per gallon tax, and these counties

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have the legal authority to increase their county motor fuel taxes up to 8 cents per gallon. Legislation enacted in 2019 also authorized Lake and Will counties to impose a county gas tax of up to 8 cents per gallon. Any city of over 100,000 in population has the statutory authority to impose a city tax of 1 cent per gallon if the tax is approved by a voter referendum. In addition to the federal, state, and local motor fuel taxes, gasoline is subject to state and local sales taxes on the retail sale of gasoline. The basic state sales tax is 6.25 percent. There are also numerous locally imposed sales taxes administered and collected by the Illinois Department of Revenue, depending on the location of the sale. For example, a sale of gasoline in Springfield is subject to additional local sales taxes of 3.5 percent for a total sales tax of 9.75 percent. Combining all these taxes (and taking an average tax rate for the sales taxes), the American Petroleum Institute (API) determined that the average amount of taxes on a gallon of gasoline in Illinois is 78 cents per gallon—a tax burden beat out only by California’s 86.55 cents per gallon. The API reports the national average is 57.09 cents per gallon. Diesel fuel is subject to the same array of federal, state, and local taxes in Illinois, although as noted above, the federal and state motor fuel taxes are imposed at a higher rate per gallon on diesel fuel. According to the API, the average rate of taxes per gallon of diesel fuel in the United States is 64.64 cents per gallon compared to 91.42 cents per gallon in Illinois. Illinois has the third highest total taxes per gallon on diesel fuel, trailing California at $1.24 per gallon and Pennsylvania at 99.6 cents per gallon.

At the time of writing this column, the governor hasn’t provided details or legislative language for his proposed suspension of the automatic inflation increase, but to implement a suspension, the law must be amended. The governor has received criticism of his proposal from road builders and unions, as state and federal motor fuel taxes are earmarked for road construction and maintenance. In fact, a 2016 amendment to the Illinois Constitution states that motor fuel taxes can be used for nothing but transportation infrastructure and operation. The scope of the constitutional limitation as it applies to local taxes is currently the subject of litigation before the Illinois Supreme Court in Illinois Road and Transportation Builders Association v. County of Cook. It's unclear whether the governor’s proposed suspension of the 2.2 cents per gallon increase would be for the upcoming fiscal year beginning July 1, 2022, only, delaying the increase until July 1, 2023, when it would take effect along with any additional inflation adjustment based on inflation this year, or whether this year’s increase would be permanently eliminated. The answer to this question makes a material difference in motor fuel tax rates and receipts going forward. As we await rulings from legislative and judicial bodies, I hope this column helps to decode the complexities of the existing tax structures they may modify.

www.icpas.org/insight | Spring 2022

Four Ways to Level Up Your Fraud Detection Skills Auditors—and CPAs of all stripes— can use these four strategies to boost their fraud IQ. BY KATE BURIAN, CPA, CFE

Once the opportunity of a gap in internal controls presents itself, add in motive and rationalization, and you could have yourself some fraud. As a forensic accountant, I’ve seen company checks deposited into personal accounts, carte blanche use of credit cards, fake vendors, ghost employees, and altered invoices—often from longtime, trusted employees. So why don’t auditors always catch these things? You may be aware of the expectation gap between what the public assumes the auditor is doing and the auditor’s actual responsibilities. Forensic accountants and fraud examiners are often hired to respond to a specific allegation of misconduct. From there, we use our narrow scope to collect information, conduct interviews, report our findings, and make recommendations on closing those internal control gaps. This limited purview is part of what makes uncovering fraud so challenging, but my audit background has proved essential in getting me to this point in my career as a forensic investigator. Even if you don’t see yourself transitioning to an advisory role to take on fraud, there are still some steps you can take to increase your fraud acumen while staying within the bounds of your role. 1. Familiarize yourself with fraud schemes. The Association for Certified Fraud Examiners (ACFE) has some great free resources, including a study on occupational fraud that I found very helpful. (Check it out at www.acfe.com/rttn.) Learning more about how fraud occurs can help enhance your understanding of risk and help you brainstorm about what could go wrong. Know that while internal controls may look fine on paper, they can be different in practice. Are employees hoping that someone else in the approval chain is substantively reviewing transactions but not doing so themselves? Are employees OK denying approval when there isn’t sufficient support? Make sure everyone isn’t just going through the motions. 2. Rethink your fraud interviews. Don’t assume everyone you interview knows what fraud looks like. Use your knowledge about the company to come up with more pertinent questions that are tailored to the person you’re speaking with. (This is also your chance to speak directly with people outside your usual accounting contacts—use this time wisely!) 3. Check your bias and professional skepticism. We generally believe that people are inherently honest and most of us would rather avoid confrontation. Don’t be afraid to go back to your client to ask for clarification or additional corroborating evidence. Then watch out for confirmation bias, which comes into play when we weigh evidence that fits our assumptions and expectations more heavily than evidence that doesn’t. Remember: That contradictory evidence might be telling you something! 4. Highlight the importance of a whistleblower hotline. It’s not a matter of if your client will be subjected to fraud, but when, so make sure they have a mechanism to collect anonymous tips—one of the most effective ways to detect fraud in organizations. On your next trip to the client, come armed with stats from the ACFE report mentioned above on how effective a hotline is. Fraud affects every industry and companies of every size, costing trillions in damage globally. To address it, we have to know more about it—only then can we all play a role in helping to detect and prevent fraud. Illinois CPA Society member Kate Burian, CPA, CFE, is a senior manager of forensic investigations at Sikich. She has served as a firm ambassador and a member of the Young Leaders Advisory Council and Women’s Connection Committee. 46

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www.icpas.org/insight | Spring 2022

INSIGHTS FROM THE PROFESSION’S INFLUENCERS

Like many CPAs, Maria Tabrizi, CPA, chose her career with a practical outlook. “When I was considering a major, I was thinking of the value proposition. Since I was paying for it, I wanted to get the most I could out of my degree. An accounting degree at that time was a four-year bachelor’s degree—but if I could pass this test at the end, I’d have these three initials hanging off my name that could probably give me the ability to do a lot more,” she explains. Tabrizi, a longtime Illinois CPA Society member who’ll deliver the keynote address at the Women’s Leadership Forum on May 13, 2022, spent five years in public accounting after college. There, a mentor gave her a lesson she has carried with her ever since. “She told me to trust my gut and use my common sense,” Tabrizi recalls. “Don’t think that because someone has many more years of experience or has worked in that field forever that they know more than you if they're telling you something that doesn’t make sense.”

Maria Tabrizi, CPA Inside her path to EVP, chief risk officer, and chief technology officer at the only women-founded, women-owned, and women-led U.S. commercial bank formed to serve the women’s economy.

That lesson has served Tabrizi well throughout her nearly 30-year career in audit, risk management, and other roles within the banking industry, and still carries weight in her current role as chief risk officer and chief technology officer at First Women’s Bank in Chicago. “What I learned in public accounting still really helps me have the confidence and curiosity to constantly solve new problems and ask tough questions,” she says. “It also provided me with so many of the soft skills I’ve needed as I’ve moved on in my career. And I have to tell you, coming out of college with an accounting degree, I never realized how much I’d be writing.” First Women’s Bank was a different path for Tabrizi, coming from working at traditional established banks to help lead a mission-driven startup organization. First Women’s Bank is the only U.S. bank that was specifically founded to serve women-owned small businesses, whose owners have a significantly harder time accessing capital than their male counterparts. In fact, women receive 16 percent of all conventional business loans and just 4.4 percent of the total dollars lent; according to a 2019 study from Boston Consulting Group, the global economy could grow by $2.5 trillion if women and men around the world were able to participate equally.

BY HILARY COLLINS “This was a big change for me, but the mission had my heart from the very beginning,” Tabrizi says. “It was a chance for me to start something really exciting and a little daunting. We’re here to grow the economy and advance the role of women within it.” Looking to the future, Tabrizi says one of her greatest dreams is to see the bank actually move the needle on the gender lending gap in a concrete way. “In 10 years, I’d love to really see a change in women’s access to capital, but I also hope we inspire others,” she says. “We’re the first ones to do what we’re doing, and I want more people to ask themselves: Why not? Why can’t I be the first one to try something new?”