NJCPA Jan/Feb 2013 by The Warren Group

Magazine of the

New Jersey Society of Certified Public Accountants

Insurance Advising Your Clients on Insurance Issues Preventing Insurance Issues at Your Firm Mitigating CPA Malpractice Directors and Officers Insurance

Jan â&#x20AC;˘ Feb 2013

January • February 2013

features

Ralph Albert Thomas, CGMA Chief Executive Officer & Executive Director rthomas@njscpa.org

Ellen C. McSherry, CGMA Chief Operating Officer emcsherry@njscpa.org

Advising Your Clients on Insurance Issues While most companies have coverage for health care and workers’ compensation, discover other types of insurance your clients might be interested in.

Don Meyer Director, Communications & Marketing dmeyer@njscpa.org

David Plaskow Managing Editor dplaskow@njscpa.org

Jeanette L. Miller

Preventing Insurance Issues at Your Firm Examine several possible scenarios and the insurance solutions your firm can take to help partners get a better night’s sleep.

Editorial Assistant jmiller@njscpa.org

Editorial Advisory Board Neil B. Becourtney, CPA Timothy A. Burley, CPA Salvatore A. Collemi, CPA Rebecca B. Fitzhugh, CPA Catherine Z. Horn, CPA Bernard M. Kiely, CPA Marcella LoCastro, CPA Anthony F. Marone, CPA William C. McNamara, CPA Marc D. Mintz, CPA John F. Raspante, CPA Margaret Van Brunt, CPA

The New Jersey Society of Certified Public Accountants 425 Eagle Rock Avenue Suite 100 Roseland, NJ 07068-1723 973-226-4494 Fax: 973-226-7425 njscpa.org

14 18

Mitigating CPA Malpractice Learn the techniques to help mitigate CPA malpractice risk in an increasingly changing and litigious economic environment. Directors and Officers Insurance See how recent events have necessitated a closer look at D&O insurance by corporate officers, board directors and audit committee chairpersons or members.

4 Close Up Poll Finds CPAs See the Economic Glass as Half Empty 6 News Briefs 20 A&A Buzz Auditing in a New Era of Health Care 22 Best Practices The State of Health Care Reform Exchanges in NJ 23 Financial Planning Derivatives and Credit Default Swaps 24 Forensic File CPAs and Post-Divorce Judgment Actions 25 Industry Insights Managing Legal Costs at Your Company

28 Tax Talk The Landscape of Environmental Remediation Costs 29 Tech Center Is Your Social Media Policy Street-Legal? 36 Student Outlook Life Begins Anew with an NJSCPA Scholarship 37 Legislative Views A Minimum Wage Debate 38 Member Profile A Chip Off the Old Block Society Pages CPE Offerings and Events, 30 Member Benefits, 31 Get Involved, 32 NJ State Board of Accountancy Report, 34 Classifieds, 35

26 Small/Sole Practitioner Exit Strategies for Life Insurance Policies in Qualified Plans

The Warren Group Design / Production / Advertising thewarrengroup.com custompubs@thewarrengroup.com

New Jersey CPA (ISSN 1534-6692) is published six times per year by the New Jersey Society of Certified Public Accountants, 425 Eagle Rock Avenue-Suite 100, Roseland, NJ 07068. Issue No. 37 Copyright © 2013 New Jersey Society of Certified Public Accountants. Annual membership dues includes $9 for a one-year subscription to New Jersey CPA magazine. Members may not deduct subscription price from dues. Periodicals postage paid at Roseland, NJ, and at additional mailing office. POSTMASTER: Send address changes to New Jersey CPA, 425 Eagle Rock Avenue, Suite 100, Roseland, NJ 07068-1723. The materials and information contained within New Jersey CPA are offered as information only and not as practice, financial, accounting, legal or other professional advice. The opinions expressed herein are those of the authors and not necessarily those of the New Jersey Society of CPAs. Publication of an advertisement in New Jersey CPA does not constitute an endorsement of the product or service by the New Jersey Society of CPAs.

Poll Finds CPAs See the Economic Glass as Half Empty B Y DON MEYER, NJS CPA C OM M U NI C AT I O NS & M AR K E T I N G D I R E C TO R

t’s no secret that Certified Public Accountants are considered thought leaders. They can provide unique insights and observations about the national and state economies because of their direct experience offering business advisory services in public accounting, industry, government, nonprofit and academia. It’s against that backdrop that the New Jersey Society of CPAs and Pennsylvania Institute of CPAs (PICPA) conducted a survey during September and October 2012 to identify the economic, business and political trends affecting the economies of New Jersey and Pennsylvania according to the CPAs residing within each state. The Franklin & Marshall College Center for Opinion Research conducted the survey on behalf of the NJSCPA and PICPA. There were 718 respondents for Pennsylvania and 489 for New Jersey. Survey respondents were primarily CPAs

in public accounting (81 percent of NJ respondents and 74 percent of PA respondents). The CPAs in both NJ and PA are pessimistic about the current economic conditions in the U.S., as well as the economic conditions they foresee for the coming year. Only one quarter of CPAs in both states (NJ, 25 percent; PA, 22 percent) believe the economic conditions today are better than they were one year ago, and only about three in 10 (NJ, 30 percent; PA, 28 percent) expect the economic conditions to be improved one year from now. CPAs do not agree on a single hindrance to economic growth in the country. New Jersey CPAs reported that fiscal issues, such as the global economy (93 percent), federal deficit (83 percent), impending fiscal cliff (80 percent), entitlements (77 percent) and federal regulations (75 percent) negatively affected national economic growth

93%

Global economy

Federal deficit

90%

83%

Impending fiscal cliff

83%

80%

78%

Entitlement spending

77%

79%

Federal regulations

75%

79%

Private sector lending

73%

U.S. tax policy

72%

67%

Affordable Care Act

67%

59%

66%

100

% A great deal or a fair amount

100

over the last year, but no one reason appeared predominant (see chart below). Very few CPAs in either state (NJ, 12 percent; PA, 6 percent) believe the fiscal health of the U.S. government is good, and more favor immediate deficit reduction (NJ, 45 percent; PA, 54 percent) than fiscal stimulus (NJ, 21 percent; PA, 14 percent) to encourage economic growth. Only one in five (18 percent) New Jersey CPAs believe the economic conditions in New Jersey are better

2012/13 Board of Trustees EXECUTIVE COMMITTEE President Thomas F. Roche III, CPA President-Elect Gerard Abbattista, CPA Secretary Brad E. Muniz, CPA Treasurer Walter J. Brasch, CPA Immediate Past President Carole A. Hedinger, CPA CEO & Executive Director Ralph Albert Thomas, CGMA TRUSTEES Jose E. Bombino, CPA Susan Burke-Leichner, CPA William A. Cadmus, CPA Edward I. Guttenplan, CPA Michael W. Gutwetter, CPA Karl A. Halteman, CPA Robert P. Herman, CPA Maryann Holloway, CPA Kenneth Pogrob, CPA Jody Rorick, CPA Mary E. Zago, CPA Joseph A. Zielinski, CPA

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than they were one year ago, and only one in four (28 percent) expect them to be improved one year from now. This pessimism may stem from the lack of revenue and workforce growth that respondents have seen over the past year and expect for the coming year. On a positive note, the survey found that 40 percent of NJ respondents expect their clients’ revenues to increase over the next year. Only one in five (21 percent) New Jersey CPAs believe the business climate in the state is excellent or good, and

most (58 percent) believe the state’s business climate hinders economic growth; however, more than half (58 percent) of the state’s CPAs say there has been noticeable improvement in the state’s business climate since Governor Chris Christie took office in January 2009. Two in five (39 percent) CPAs believe government red tape is worse than ever in New Jersey, although an equal number (38 percent) believe it is difficult but improving. New Jersey CPAs believe that pension funding for

public employees, rising health care costs and regulatory burdens hinder economic growth in the state. Nearly four in five (78 percent) report the state’s tax structure is worse than in most other states. New Jersey CPAs are in relative agreement that reducing both property tax rates and governmental red tape would improve economic expansion in the state, and that neither reducing state services nor reducing subsidies to higher education would. To view a copy of the survey, visit njscpa.org/news.

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NEWS

briefs

Serving Up Some Leadership at Inaugural NJSCPA Managing Partners Retreat

Managing partners and leaders from firms throughout New Jersey gathered in mid-October at Crystal Springs Resort in Vernon for the first annual New Jersey Society of CPAs Managing Partners Retreat. More than 30 MPs and leaders joined together to break bread, network and discuss difficult professional issues. Along with some golf and other outdoor activities, educational sessions featured national speakers Sam Allred and Paul Bridle who led the group in a series of dynamic sessions designed to foster thinking, collaboration and problem solving. From team-building activities to small breakout sessions, the retreat – designed by fellow MPs – fostered dialog and discussion as well as generated solutions for the challenges that accounting firms face today and going forward.

IRS Announces 2013 Pension Plan Limitations

The Internal Revenue Service (IRS) has announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2013. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. A pair of highlights includes: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457

plans and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500; and the catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $5,500. Learn more at irs.gov.

AICPA Continues to Voice Concerns About Private PTIN Directories Many CPAs have received emails from companies that are publishing and promoting a list of persons who have registered with the IRS for a preparer tax identification number (PTIN). These

New Jersey License Plates by the Numbers 1,000,000 Number of NJ plates made by corrections inmates annually 80,000 Personalized NJ plates on the road 5,400 Plates made daily 100 Years NJ vehicles have been using license plates 58 Cents per hour NJ inmates make for producing plates

companies have purchased the IRS’ PTIN list. Last year, the American Institute of CPAs had numerous conversations with IRS staff questioning the appropriateness of the specific data items that the IRS released, such as mailing addresses, email addresses and phone numbers. The AICPA also suggested that the IRS provide an opportunity for preparers to opt out of the release of some or all of the personal and business information and adequately communicate with PTIN registrants about the disclosure of their information. The IRS subsequently made some changes to partially restrict some of the data being collected from PTIN holders to protect their privacy. The IRS now permits tax return preparers to list either a physical address or a post office box as the business address when registering or renewing a PTIN. Also, any valid email address can be provided to the IRS as long as the PTIN holder regularly checks the email address for PTIN communications. These changes provide the PTIN holder with the ability to stop the release of a tax return preparer’s home address or email address that the preparer does not want made public.

Certain Tax Benefits Inflation-Adjusted for 2013

For tax year 2013, the IRS has announced annual inflation adjustments for more than two dozen tax provisions, including (1) the annual exclusion for gifts rises to $14,000 for 2013, up from $13,000 for 2012; (2) the amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax” is $1,000, up from $950 for 2012; and (3) the foreign earned income exclusion rises to $97,600, up from $95,100 in 2012. Details on these inflation adjustments and others, such as the low-income housing credit, the dollar limits for high-deductible health plans and others, can be found in Revenue Procedure 2012-41 in Internal Revenue Bulletin 2012-45.

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NJ/NY Cooperative Interstate Tax Program Update

The New Jersey/New York Cooperative Interstate Tax Program ended on December 31, 2010. Since that date, any returns or payments received by the New Jersey Division of Taxation have been forwarded to the state of New York. Effective September 1, 2012, any interstate returns and payments which include New York sales tax will no longer be sent to New York. All sales tax payments will be applied to New Jersey sales tax accounts. If a business erroneously submits an interstate return and payment with New York tax after September 1, 2012, it must apply for a refund of this overpayment using the Claim for Refund form.

Social Security Announces 1.7-Percent Benefit Increase for 2013

Monthly Social Security and Supplemental Security Income benefits for nearly 62 million Americans will increase 1.7 percent in 2013. The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $113,700 from $110,100. Of the estimated 163 million workers who will pay Social Security taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum. The Social Security Act provides for how the cost of living adjustment is calculated. To read more, visit socialsecurity.gov/cola.

SEC Sees Spike in Registration Since Financial Reform

The Securities and Exchange Commission reports that 1,504 advisers to hedge funds and other private funds have registered with the agency since the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated such registration. Information about registered advisers is available at adviserinfo.sec.gov.

National MAP Survey Results Are In

Nearly 2,400 accounting firms responded to the 2012 PCPS/TSCPA National Management of an Accounting Practice (MAP) Survey

covering financial information including fees, compensation and revenues. Access the New Jersey results at njscpa.org/news.

Change of Address for UEZ Refund Claims

Refund claims submitted by New Jersey urban enterprise zone businesses should no longer be sent to 153 Halsey Street, Box 47022, Newark. All refund requests for sales and use taxes paid by qualified businesses operating in the New Jersey urban enterprise zones, whether filing Form A-3730-UEZ or Form A-3730, along with supporting documentation, must now be sent to: By U.S. Postal Service NJ Division of Taxation Sales Tax Refund Section P.O. Box 289 Trenton, NJ 08695-0289 By Package Delivery Service (e.g., FedEx, UPS) NJ Division of Taxation Sales Tax Refund Section Quakerbridge Plaza Office Complex Building 9, Third Floor 3444 Quakerbridge Road Mercerville, NJ 08619

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SplashData suggests using passwords of eight (mixed) characters or more and using short words with spaces or other characters separating them. Avoid using the same username/password combination for multiple websites. Especially risky is using the same password for entertainment sites that you do for online email, social networking and financial services. Use different passwords for each new website or service you sign up for.

njscpa.org Spotlight

Find-A-CPA Teams Up with NJ 101.5 FM As a New Jersey Society of CPAs member, your firm is entitled to a free listing in the Society’s Find-A-CPA Online Referral Service. Located at findacpa.org, Find-A-CPA is accessed by an average of 1,000 people each month. And, with the coming tax season, we expect those numbers to increase. The NJSCPA is running a tax-season promotional campaign with New Jersey 101.5 FM. The wide-reaching campaign will consist of both on-air promotions during the Deminski & Doyle show (airing weekdays from 2:00 to 7:00pm) and online content at nj1015.com. The promotions will drive listeners to moneymattersnj.com and findacpa.org. So, take action now to be sure your firm can be found by visitors using Find-A-CPA. Enroll at findacpa.org/enroll. The free basic listing includes your choice of four services provided and four industries served. Additional services and industries can be purchased for $15 each per year. Questions? Contact Jeanette Miller at findacpa@njscpa.org or 973-226-4494 x246.

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Advising Your Clients on Insurance Issues As clients’ most trusted business advisors, CPAs understand the economics and intricacies of their clients’ businesses and are most attuned to the nuances and perils that could affect them in the future. Some client risks to consider that could be mitigated by the proper insurance include: Health Care

By Lewis D. Bivona Jr., CPA WithumSmith+Brown, P.C.

Have your clients evaluated what the impact of the Patient Protection and Affordable Care Act (PPACA) will be to their insured or self-insured health plans? A few things employers should be doing now for 2013 renewals include reviewing how your employees’ contributions compare to the current health plan contribution limits. If employees pay more than what is allowed, clients have to be ready to give them a voucher to shop for coverage in an exchange in 2014. Additionally, if an employer does not provide “minimum essential coverage,” it could be subject to fines ranging from $2,000-$3,000 per employee. Clients who are currently in insured health programs may also want to explore whether self-insurance may be beneficial to them and/or sponsoring a captive. Another key item to remind employers to discuss with employees is that flexible savings accounts will

be reduced to $2,500 per year, which would affect most cafeteria plans. While discussing flexibility, it might be appropriate to suggest to your clients that they evaluate a high-deductible health plan, coupled with health savings accounts, as a mechanism for engaging employees to control costs. Such a plan, combined with catastrophic insurance coverage, can lower employer costs without adversely affecting employees. Self-insured companies should be aware that there is the potential to be charged anywhere from $60 to $90 per participant in plans as part of the Transitional Reinsurance Program that will fund insurers writing policies for individuals under the PPACA.

Workers’ Compensation Many employers found that there was an uptick in the number of workers’ compensation claims as employees anticipated impending workforce reductions. As such, many carriers and state insurance pools have risen, or are in the process of raising, rates. Some companies established high reserves for claims that may not materialize but that can affect rates. It is important to advise your clients to shop around for the best rates, as well as review employee classifications and modification rates.

Employment Practices With reductions in force and a rebalancing of job responsibilities,

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more employers are finding that they are more likely to be sued for discrimination or other labor violations by current or former employees. While some business policies do provide some coverage, it

can be limited. It is wise to address this potential exposure by suggesting that your clients assess potential exposure to financial risk through the purchase of employment practices liability coverage.

Mergers and Acquisitions A flurry or mergers and acquisitions is now taking place, but all risks are not covered by standard directors and officers products. In many transactions, either the acquirees’ or acquirers’

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stockholders will argue that something was unfair about the transaction and, therefore, they were harmed. This could mean potentially high legal fees and settlements. Representations and warranty policies are available to cover corporate exposures for issues that may not have been identified during due diligence activities.

Cyber Attacks/Data Security There are a handful of carriers that offer coverage for costs related to cyber attacks – including asset misappropriation; and intellectual, private information and telecommunications intercepts. If your client is a technology company or relies heavily on technology, there are technology errors and omissions policies that cover various issues and expenses related to network security, as well as communications and media liability. Expenses covered under these policies can include security breach notification and remediation expenses, crisis management vendor expenses, business interruption and additional expenses.

Emerging Risks Vicarious risks are everywhere, and the urge to look for someone to blame and pay for the injuries will never go away.

There are many unknowns – not out of the realm of possibility in today’s world – to consider that could wreak havoc on your clients: Kidnapping and extortion have become prevalent thanks to globalization. Southeast Asia, the Middle East and South/Central America have become hotspots for these activities, but they also occur in other high-risk areas of the world. Kidnap and ransom policies also typically include rest and rehabilitation expenses post-incident. Environment risks, such as fracking, can disrupt regional aquifers and destabilize land and could potentially ruin groundwater and increase the susceptibility to earthquakes. Most property, homeowners or umbrella policies will not cover these exposures to a great extent. Nanoparticles are becoming widely used in the manufacturing of a wide array of products. What is unknown is the long-term risks of these particles, since they can be easily absorbed or ingested. Many policies that relate to product manufacturing only cover known materials or hazards. Climate risks, from alleged pollutants emanating from a manufacturer to aerosol affecting the ozone layer, are abundant. While several high-profile

We Go To Work For You.

cases have been filed and dismissed, it is only a matter of time before someone perfects a legal argument. Terrorism insurance might not sound like required business insurance, but for any business that has affiliates or supply chain partners that could be subject to terroristic actions, this coverage is quite prudent. This also begs the question of whether your clients have business interruption insurance for other critical supply chain interruptions. The aforementioned examples cover some of the major focal points of insurance risks for your clients. But remember, companies generally don’t address all risks, especially the leastlikely ones. The worst thing your client could say to you after an event is, “I wish someone had talked to me about my lack of coverage for that negative event.” As a trusted advisor, it is your duty to view their risks as your own. Lewis D. Bivona Jr., CPA, AFE, is a partner and insurance practice leader at WithumSmith+Brown, P.C. He is a member of the New Jersey Society of CPAs Insurance Trust, Educators Committee, and the Health Care and the Accounting & Auditing Standards interest groups. Contact him at lbivona@ withum.com or 609-520-1188.

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What’s Next? njscpa.org/convention

2013 NJSCPA CoNveNtioN & exPo June 12-14, 2013 / Bally’s, Atlantic City

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Preventing Insurance Issues at Your Firm CPA firms and their partners face many risk exposures daily – exposures that can stem from gaps in insurance coverage and cause major problems. For instance, firms rely heavily on technology and client data to perform services, so it is critical to ensure coverage for damage that might be done not just to clients but to the firm’s own computer systems, data and assets.

claims processes. Policyholders should seek advice from their insurance agents regarding their unique situations and major questions such as: “What should our policy limit be?” “Should we have a policy with an aggregate limit that is higher than the per-claim limit (e.g., split limit)?” “How much of a deductible should we have?” “How should we manage our risks?” “How many support services and resources are offered?”

Fraudulent and illegal behaviors are also pervasive, creating exposures that your firm and clients may have from client employees, as well as from your own staff members. The many risk exposures to firms and partners can seem overwhelming, but taken one at a time they can be managed to fall well within your risk appetite. Consider the following scenarios and solutions:

Problem – A middle-aged employee sues your firm for wrongful termination, alleging age discrimination when the firm had not provided him with the same opportunities it had provided younger employees. The jury awards a $1.1 million verdict against the firm. Solution – Thousands of such charges are filed every year, alleging violations of laws prohibiting discrimination and similar acts on the basis of age, gender, sexual orientation, physical or mental disability, medical condition, pregnancy, physical appearance, religion or creed, national origin or ethnicity, race or color. Employment practices liability insurance should also include extensive support to help policyholders avoid or reduce the impact of such charges. Are there telephone consulting services to assist policyholders with human resources protocols? Is there online support with tools such as job descriptions, best practices and comprehensive employee handbook templates?

By Jack Witherspoon CAMICO

Professional Liability Problem – Your largest client goes bankrupt and blames your firm for having neglected to advise and warn management. “We relied on the CPA firm for help, and it failed to advise us about how vulnerable our business was to a market downturn.” Solution – An appropriate professional liability policy will cover the damages from errors or omissions and protect the assets of your firm and its owners. Professional liability is a complex field, and an insurance program should include a high level of support from the carrier in the underwriting, loss prevention and

Employment Practices Liability

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Business Liability Problem – Your firm hosts a reception where alcohol is served, and a tipsy client trips and breaks his wrist. He sues your firm for medical expenses, loss of income, pain and suffering. Solution – Business liability coverage protects the policyholder from financial loss resulting from claims of injury or damage caused to others by you or your employees, including damages from medical costs, personal injury, libel, slander, disparagement and advertising misprints. Business liability policies are also combined with other general liability policies to create a more comprehensive business owners package.

Business Property Problem – An office fire damages your furniture, fixtures and equipment. Valuable papers and records are destroyed. Your business, cash flow and revenues come to a halt, and you must rent temporary space to continue operations. Solution – A business owners policy protects the property your business owns, including office equipment, phone systems, furniture and inventory damaged by fire, theft or other covered perils. Some policies also cover damaged computers and media as well as loss of income and valuable papers to help you meet your continuing financial obligations, such as rent or payroll, and extra expenses for additional costs.

Data Breach Problem – A hacker attacks your computer system and compromises confidential client data. When you notify affected clients that their personal identity information has been exposed, they threaten to take their business elsewhere and demand that you pay for credit monitoring services for them. Solution – Some professional liability policies cover the costs to notify third parties of unauthorized disclosure of personal identity information. However, expenses for credit monitoring services, public relations and reputational services are generally covered by a data breach insurance policy.

Fidelity Bond

Personal Umbrella

Problem – One of the firm’s employees embezzles funds from both a client and the firm. Solution – Professional liability policies do not cover intentional misconduct, but most include an “innocent insured” provision when a member of the firm’s staff embezzles funds from a client. Losses incurred directly by your firm may be covered by a fidelity bond designed to respond to dishonest acts committed by an employee.

Problem – Your 18-year-old son is speeding in your car when he crashes into another car, injuring the other driver and causing expenses and damages far exceeding the limits of your auto insurance policy. Solution – A personal umbrella policy provides higher personal liability limits that may be needed to protect a firm partner (and his/her estate) from a wide range of liability exposures in excess of the limits provided in the required underlying auto and home policies. The policy can also provide extra coverage in the event of a lawsuit to help handle defense and liability costs.

Workers’ Compensation Problem – A staff member throws his back out while lifting a box and opts for back surgery. Solution – New Jersey requires that all NJ employers not covered by federal programs have workers’ compensation coverage or be approved for selfinsurance for work-related injuries and illnesses. Even out-of-state employers may need workers’ compensation coverage if a contract of employment is entered into in New Jersey or if work is performed in New Jersey.

Clearly, the unique risk exposures and challenges to firm partners can be daunting, but by discussing your situation with your insurance agent, you can determine the best options for you and your firm. Jack Witherspoon heads CAMICO Insurance Services. For additional information, call 800-652-1772 x6847.

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Mitigating

CPA Malpractice Professional liability claims faced by CPAs will never be eradicated, but they can be reduced if solid risk management and constant adherence to professional standards are followed. Follow these techniques to help lessen exposure in the increasingly litigious environment in which CPAs practice. Client Screening, Selection and Retention

By John F. Raspante, CPA North American Professional Liability Insurance Agency, LLC

Client screening, selection and retention are often the first line of defense when it comes to a solid risk management program. With today’s technology, CPAs have a plethora of information at their fingertips. Also consider using companies that specialize in background checks. Some firms even utilize client selection committees as part of their client selection and retention policies. It’s imperative that firms perform background checks on all new and existing clients. Less elaborate, but no less effective, screening techniques include: • Discussions with the previous CPA. • Discussions with the referral source. • CPAs should ascertain the time to complete the engagement. • CPAs should determine if they have the requisite knowledge and industry expertise for the engagement. • Confirm potential clients’ litigious nature, if any. N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

• Search engine background checks. For additional guidance, refer to American Institute of CPAs Practice Alert 2003-03, Acceptance and Continuance of Clients and Engagements, at aicpa.org/download/ secps/pralert_03_03.pdf.

Enhanced Engagement Letter Language In recent years, engagement letters have become more common and more of a requirement to satisfy professional standards. “Enhanced engagement letters” embrace the changes that have taken place in the profession and have been successful in claims defense. Firms that have standard 1040 engagement letters may not be capturing engagement letter language that encompasses the heightened Report of Foreign Bank and Financial Accounts regulations, the greater oversight by taxing authorities and the disclaimer for responsibility in nexus examinations. Jurisdiction paragraphs may not be used, and firms may be unknowingly governed by laws other than in the states in which they are domiciled. As the profession and liability exposure changes, so should the engagement letters that govern these engagements. The following recommended language can be used to mitigate damages that can occur as a result of having claims adjudicated in jurisdictions other than the home

state: “Notwithstanding anything contained herein, both accountant and client agree that regardless of where the client is domiciled and regardless of where this agreement is physically signed, this agreement shall have been deemed to have been entered into at accountant's office located in <specific county>, <specific state>, U.S., and <specific county>, <specific state>,

U.S., shall be the exclusive jurisdiction for resolving disputes related to this agreement. This agreement shall be interpreted and governed in accordance with the laws of <state>.”

Communication and Documentation The CPA profession relies on solid client communications for success.

Equally important is the need to timely document those communications. Many an attorney has said, “If the advice to a client wasn’t documented, the advice essentially wasn’t provided.” Consider the following scenario: A long-term client asks for advice regarding its desire to take a minimum required distribution (MRD) from a retirement account. The practitioner

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responds that there is no need to take a MRD because the practitioner suggested the client contribute to a Roth 401(k) years earlier. The client responds that no such advice was ever provided, and if the client now owes taxes on this MRD it is the practitioner’s fault. Documentation quickly mitigates a he-said she-said scenario. CPAs cannot always document, nor is documentation always feasible. However, certain litigious client types, high-risk engagements – including nonfilers – and sophisticated transactions may require elevated communications and timely documentation.

Education and Training Constant training and education in a respective field is the mark of a true professional. CPAs are expected by the public and their clients to be knowledgeable and up to date in the field of accounting. Falling below this expectation can be construed as negligence. State boards and professional societies require satisfying continuing professional education (CPE) requirements, and many insurers ask in insurance applications whether these requirements were satisfied. If sued, a CPA may have his/her CPE records and affirmations of satisfying

CPE requirements subpoenaed by the plaintiff as an indication of performing substandard work. Firms must monitor each professional’s CPE requirements and whether those requirements have been fulfilled. CPAs should also be trained in the newest technologies and in the industries in which their clients operate. A recent CPA firm was considered negligent in not employing data mining technology in its audit procedures. The jury felt that data mining applications used during the audit would have caught the undetected embezzlement.

Fox Rothschild’s nationwide network of tax attorneys – including a team of 20 throughout our Atlantic City, Princeton and Roseland offices – provides a comprehensive array of planning and counseling services to businesses and individuals, including: • Business and International Taxation

• Nonprofit Organizations

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• Trust and Estate Law and Administration

Atlantic City, NJ 1301 Atlantic Avenue Atlantic City, NJ 08401-7212 609.348.4515

Princeton, NJ 997 Lenox Drive, Building 3 Lawrenceville, NJ 08648-2311 609.896.3600

Roseland, NJ 75 Eisenhower Parkway, Suite 200 Roseland, NJ 07068-1600 973.992.4800

www.foxrothschild.com A Pennsylvania Limited Liability Partnership

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Administered by

Client Terminations For the same reasons CPAs use engagement letters, they should also use termination letters when applicable. Many professional liability claims are due to client terminations. Termination letters should be used regardless of which party initiates the termination process. The letter language will vary depending on which party initiates the termination, but a letter should be used nevertheless. Exercise care in considering last-minute terminations, and consider completing all work before the termination occurs. The following circumstances – not all inclusive – could result in client termination: • The client fails to provide all information needed to complete the engagement. • A conflict develops, such as in a divorcing spouse engagement. • The client fails to consider the advice provided. • The client acts unethically or unlawfully. • The accounting fee remains unpaid. A carefully drafted termination letter will eliminate some exposure that could develop. List the termination reason, pending due dates, work and fee status, CPA willingness to communicate and cooperate with the successor CPA (after the client provides written consent), and wording that the items listed may not be all inclusive. While CPA malpractice cannot be eliminated, claims CPAs face can be mitigated through a comprehensive risk management program and adherence to the ever-changing professional standards imposed upon CPAs. John F. Raspante, CPA, M.S.T., CDFA, is the senior vice president and director of risk management for the North American Professional Liability Insurance Agency, LLC. He is a member of the New Jersey Society of CPAs Accounting and Auditing Standards Interest Group and the New Jersey CPA magazine Editorial Advisory Board. Contact him at johnr@naplia.com or 508-656-1300.

Working together with some of the most trusted names in insurance, Askin, Weber & Reed has been providing quality insurance programs to the New Jersey Society of CPAs (NJSCPA) and its members for more than 60 years. NJSCPA members and their families are able to easily and conveniently access a large variety of insurance coverages at special group rates.

From helping protect your family and assets, to helping protect your business, we have a solution that’s right for you, including these group products:

• Accidental Death & Dismemberment Insurance

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To customize a plan to meet your needs, call us toll-free at 1-973-783-7505, or connect with us online at www.awrins.com. Underwritten by:

The United States Life Insurance Company in the City of New York New York, NY

American General Assurance Company Schaumburg, IL The underwriting risks, financial and contractual obligations and support functions associated with products issued by American General Assurance Company (AGAC) and The United States Life Insurance Company in the City of New York (USL) are each company’s responsibility. Plans may vary or may not be available in all states.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

AG9538 (09/12)

Directors and

Officers Insurance In an ever-increasing regulatory environment, how do corporate officers, board directors and audit committee chairpersons or members protect themselves from personal liability? Shifting Trends

By Marcella LoCastro, CPA MLoCastro Consulting LLC, and Melissa Carmichael Aon Financial Services Group

During the last four years, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Behavior or actions that once might have been considered simply a mistake are now sometimes punishable by jail. The notion that liability only attaches to those who act with intent or knowledge seems to be dated. The implications for corporate officers and directors who are often the target of these strict liability provisions are significant. They are now at risk for liability arising out of matters in which they were not involved or even aware. The statutes don’t require any evidence of wrongdoing or fault, but instead impose liability because of position rather than culpability (e.g., the Responsible Corporate Officer Doctrine).

SEC Enforcement The Securities and Exchange Commission (SEC) has used its authority under Section 304 of Sarbanes-Oxley to clawback compensation of corporate executives.

One recent example includes the CFO of Beazer Homes who returned $1.4 million in bonus compensation even though he was not charged with any wrongdoing in connection with the company’s accounting fraud. Section 954 of the Dodd-Frank Act greatly expands the compensation clawback beyond just the CEO and CFO to any current or former executive officer who earned bonus compensation during the three-year period preceding a restatement of financial information. In addition to the compensation clawback provisions included in Dodd-Frank, the act also provides for a whistleblower bounty that rewards whistleblowers 10-30 percent of the monies collected should the information they provide lead to an SEC enforcement action in which more than $1 million in sanctions are imposed. The first such bounty was paid in August 2012 for $50,000, but it is clear that there will be many more to come. Since the whistleblower bounty program began in 2011, it receives approximately eight tips per day. It appears whistleblowers are motivated by the bounty program and are coming forward to report securities law violations. In various speeches, SEC staffers have remarked that whistleblowers have included C-suite executives who, for a variety of reasons, feel compelled to notify the government of potential wrongdoing. It seems likely that the number of SEC investigations will continue to

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

increase, along with the exposure of corporate executives to personal liability.

Who and What to Cover The first line of protection for corporate officers and directors against regulatory actions has always been the corporation and its indemnification obligations under the corporate bylaws. Directors and officers (D&O) liability insurance historically has been viewed as a backstop to reimburse the corporation for (1) indemnification obligations; (2) insolvency situations; (3) legal expenses; and (4) settlements or judgments incurred by directors and officers. Will corporations choose to continue to indemnify their directors and officers for all costs associated with defending and resolving legal/regulatory actions against them, or will they potentially face a real or perceived conflict of interest in doing so? There is no bright line response to that, but there has been an emerging shift in the mindset of corporations and their obligations to directors and officers versus their obligations to shareholders. Although corporate indemnification provisions are typically very broad and permit indemnification for most allegations of wrongdoing, there have been some recent examples where corporations have chosen not to indemnify their directors and officers. Generally, these circumstances are not a matter of public record, but they do exist and are growing in number.

As such, it has become imperative to evaluate D&O insurance policies to ensure that adequate protection is in place should a corporation choose not to provide indemnification. Many D&O insurance policies available today include provisions for advancement of defense costs within a specific period of time (60-90 days) if a company does not provide indemnification for any reason. Similarly, in addition to appropriate advancement of cost provisions, it is critical to ensure that the D&O insurance policy includes an affirmative written grant of coverage for the defense of a SOX 304 or Dodd-Frank 954 action. Given that these statutes do not require any showing of wrongdoing or fault, it may be necessary to amend the definition of loss in a D&O insurance policy to expressly include coverage for defending such claims, rather than relying on the traditional policy language. Similarly, those exclusions declining to provide insurance coverage where the insured director and/or officer obtained illegal personal profit or advantage from the alleged illegal activity should be amended so that they will not apply to the costs of defending a SOX 304 or Dodd-Frank 954 act. Typical D&O policies provide coverage for the corporation, directors and officers under one shared limit of liability. This can be problematic in the event of insolvency where the policy limits can be held as a corporate asset

and are not accessible to individuals as was the case in Enron and WorldCom. Consequently, many companies started purchasing additional Side A coverage with difference-in-conditions features. These policies cover only the directors and officers when there is no indemnification; they do not provide coverage for the corporation and, hence, are available to individuals in the event of insolvency.

Caution for CPAs It is vital that CEOs, CFOs, board directors, chairpersons, audit committee members and all corporate executives not only review the corporate indemnification available to them, but also focus significant attention on the terms and conditions of their D&O insurance policies should they need to avail themselves of the insurance coverage secured on their behalves. For CPAs, this should be done before accepting a director/officer position at a nonprofit, public or private company. Marcella LoCastro, CPA, CITP, is on the boards and audit committees of BioClinica, Inc., Immunomedics, Inc., and the Editorial Advisory Board of New Jersey CPA magazine. Contact her at marcy@mlocastro.com. Melissa Carmichael is the managing director, east region leader, of the Aon Financial Services Group. She is a licensed insurance broker. Contact her at melissa.carmichael@ aon.com.

N E W J E R S E Y C P A â&#x20AC;˘ J A N U A RY â&#x20AC;˘ F E B R U A RY 2 0 1 3

A&A

buzz

Auditing in a New Era of Health Care B Y JOH N J. WAL S H III, C PA, PAR E NT E B E ARD LLC

ealth care reform has been getting much attention lately. But regardless of the politics involved, the overall health care sector has been changing significantly as providers implement new technologies and regulations, which will inevitably create new auditor considerations. The following are some of the more significant areas auditors will need to stay abreast of and determine how they impact health care clients.

Estimated Third-Party Settlements Health care entities, particularly hospitals, have increasingly had their billings subjected to review by various outside organizations. Medical records are constantly reviewed by representatives for Medicare, Medicaid and other third-party payers. The review results can be very subjective and are often based on the documentation found within the medical records. Repayments can be required for current and prior

hospitals are acquiring physician groups, and health care systems are acquiring stand-alone hospitals. Under U.S. generally accepted accounting principles (GAAP), the acquirer records the fair value of the assets received and liabilities assumed, which may result in goodwill or a gain (formerly negative goodwill). These transactions can be very material to the acquirer’s financial statements, so auditors typically request a valuation be performed – usually by a specialist – to determine fair value. Auditors need to understand the inputs and methodology used by the specialist to ascertain the reasonableness of the fair value determination and properly document their procedures in the audit work papers. fiscal years. As such, it is important for health care entities to evaluate their billing processes, identify potential areas for take backs and set appropriate reserves for potential take backs. As hard as it is to estimate thirdparty settlements, it can be even more difficult for auditors to evaluate these amounts for reasonableness. Auditors need to have a good understanding of clients’ billing processes, as well as how they evaluate those processes. If clients have few mechanisms to identify potential areas for take backs, auditors will be hard pressed to determine a reserve’s reasonableness without performing a significant amount of testing. When auditing estimated third-party settlements, auditors should coordinate their testing with individuals outside of the accounting department, including coding, billing and compliance.

Accounting for Acquisitions The health care industry is currently in a state of consolidation as N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

Goodwill Due to acquisitions, a hospital or health system may record a significant amount of goodwill on its balance sheet. GAAP requires an annual evaluation of goodwill for potential impairment. These evaluations consist of comparing the fair value of the reporting unit to its carrying value. As such, significant goodwill amounts could cause auditors to request expert valuations of the reporting unit’s fair value. In addition, GAAP has recently changed to allow a qualitative morelikely-than-not assessment of goodwill’s impairment prior to obtaining an expert’s valuation. This qualitative assessment makes the goodwill impairment more subjective and requires auditors to obtain more audit evidence to support their conclusions.

Economic Conditions Given the economy, auditors should have a heightened sense of risk awareness when performing audits.

Some procedures will surround fraud potential, such as the misappropriation of assets, forging checks and reporting expenses fraudulently. Auditors need to identify the internal controls over these types of transactions and test them accordingly. Fraud could also include fraudulent financial reporting, often through the use of fraudulent journal entries. Given the level of estimates needed to prepare a set of financial statements, identifying this kind of fraud can be difficult. Auditors should perform tests to determine whether the estimates used have an unreasonable bias and be aware of any financial covenants their clients need to meet in accordance with debt agreements. The closer clients are to their debt covenant thresholds, the more important journal entries can be, which means auditors should have a higher level of scrutiny when auditing these entries. Uncertainty, financial pressure and regulatory considerations are causing health care entities to evaluate their businesses more than ever, which means additional auditor risk. However, with appropriate planning and timely communication with the audit team and clients, auditors can perform the necessary procedures to help reduce that risk to acceptable levels. John J. Walsh III, CPA, FHFMA, is an audit senior manager for ParenteBeard LLCâ&#x20AC;&#x2122;s Health Care Business Services Group. He is a member of the New Jersey Society of CPAs Accounting & Auditing Standards and Health Care interest groups. Contact him at john.walsh@ parentebeard.com. N E W J E R S E Y C P A â&#x20AC;˘ J A N U A RY â&#x20AC;˘ F E B R U A RY 2 0 1 3

BEST

practices

The State of Health Care Reform Exchanges in NJ BY TONY NOVAK, CPA, FREEDOM BENEFITS

ccording to the federal government, New Jersey is behind schedule for the development of its health insurance exchange for 2014. Regardless, the state’s new exchange will likely be operating in time to begin enrolling individuals and small businesses within the next 12 months.

coverage. Several surveys indicate that about 30 percent of small businesses (with up to 50 employees) are considering dropping their expensive group health insurance in favor of allowing working-class employees to purchase subsidized coverage directly through the exchange. Small businesses are not required to provide employee health coverage, and the number of companies that elect this as a voluntary benefit declines each year. Some larger employers may also use the same strategy; however, large companies would pay a fine for not providing coverage. The year 2014 may be the largest single-year decrease in employer-provided health coverage.

Background Federal health reform law, known as the Patient Protection and Affordable Care Act (PPACA), requires each state to establish an online marketplace – similar to the way Expedia sells airline tickets – to enroll small businesses and individuals into new government-mandated insurance plans for 2014 and beyond. It also authorizes the payment of substantial development costs for states that abide by the law. The insurance exchange will match lower-income purchasers with government-paid subsidies to help reduce the cost of coverage. States not in compliance with the requirement forfeit federal subsidies and their rights to control the insurance options offered within their jurisdictions. Some New Jersey lawmakers view the federal incentives as a lure that will eventually burden state government with massive new costs for health care. The federal government already offers a similar online insurance exchange through the Department of Health and Human Services at healthcare. gov. Some states will elect to forfeit the financial incentives and have the federal government run their insurance exchanges. The NJ State Legislature first passed a bill authorizing the development of a health exchange in early 2012, but Governor Chris Christie vetoed it. In October, the Legislature passed a second modified authorization bill, the NJ Health Benefit Exchange Act (A-3186). In October, the governor commented, “I’ll make decisions when I have to” with regard to the proposed exchange and asserted his belief that “ultimately, it’s an executive branch call.” In December, the governor vetoed the second bill.

Comparison with Current Choices New Jersey residents now have a choice of seven health insurance plans through the Individual Health Coverage Program. The 2014 plans will appear similar from an individual consumer’s perspective. The number of commercial insurance companies offering coverage in 2014 will likely decline from the current nine carriers listed for 2012. 2012 premium rates for individual health insurance in New Jersey range from a low of $314 per month for a young adult on the least-expensive plan to more than $3,000 per month for an older adult on a health maintenance organization. Rates are likely to be significantly higher after 2014, although many working-class people will see premiums capped at 9 to 16 percent of household income. The impact of rate review actions designed to slow the rate of cost increases is uncertain. Private insurance exchanges are likely to thrive in New Jersey alongside the state exchange. Most of the state’s insurers are already active in this approach. COBRA, Small Employer Group Continuation and Continuation of Coverage for Dependents Under 31 insurance programs will continue to be available outside of the exchange. NJ Protect, the state’s pre-existing condition insurance plan, is expected to end by December 2013.

Pros and Cons The health exchange law is designed to create access to affordable, quality health insurance for both consumers and small businesses and help New Jersey reap millions of dollars in federal subsidies and tax credits. Critics argue that the insurance exchange bill will drive up health costs in the near term and leave the state with significant long-term expenses. Regardless of what type of exchange is used, the PPACA is likely to hasten the decline in employer-provided health

Tony Novak, CPA, M.B.A., M.T., is the principal of Freedom Benefits. He is a member of the New Jersey Society of CPAs Health Care, Technology and Personal Financial Planning interest groups. Contact him at or tonynovakcpa@gmail.com or 800-609-0683.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

FINANCIAL

planning

Derivatives and Credit Default Swaps B Y TW INKL E TAIL OR

fee from the buyers and profits from the periodic stream of cash flows through the life of the contract without any upfront overhaul capital requirement. CDS’ arose in response to demand by financial institutions, mainly banks, for purposes of hedging and diversifying credit risks, similar to those for interest rate and currency risks. CDS’ have also become popular as a low-cost means of taking on credit exposure. The result has been that credit has gradually changed from an illiquid risk that was not suitable for trading to a tradable risk. Insuring against the loss as hedging is one use of a CDS. Another use – called a naked CDS – resides with speculators to “bet” on the credit quality of a particular reference entity or obtain credit exposure to a particular entity without a direct investment in it. The naked CDS provides an efficient way to view the credit of a reference entity. An investor with a positive view of the credit quality of a company can sell protection and collect the payments that go along with it, rather than spend a larger sum to buy the company's bonds. An investor with a negative view of the company's credit can buy protection for a relatively small periodic fee and receive a big payoff if the company defaults on its bonds or experiences some other credit event. Both parties lack the actual investment in the reference entity. As usual, rewards come with risk. One such risk is counterparty risk. A protection buyer faces the risk of seller default. Upon a credit event, the seller may not be in a position to honor the contract. One way to overcome this is to deposit collateral with the buyer. A protection seller, on the other hand, faces the risk that the buyer may default on the premium payments, depriving the expected income streams. The seller may then buy an offsetting protection from another party to mitigate its risk, a naked CDS. Market risk also arises, since the market for CDS’ is over the counter and unregulated, and the contracts often get traded so much that it is hard to know who stands at each end of a transaction. There is the possibility that the risk buyer may not have the financial strength to abide by the contract’s provisions, making it difficult to value the contracts. Despite these concerns, credit default swaps have proven to be a useful portfolio management and speculation tool and are likely to remain a critical part of financial markets.

derivative is a financial contract whose value is derived from the performance of underlying market factors, such as interest rates, currency exchange rates, as well as commodity, credit and equity prices. Derivative transactions include an assortment of financial contracts, including structured debt obligations and deposits, swaps, futures, options, forwards and various combinations thereof. One such derivative is a credit default swap (CDS), which deals specifically with credit risk and liquidity. The investor purchases protection from a “protection seller” with a view to hedge this risk of default. A CDS can best be thought of as a simple insurance contract in the event that a specific bond or entity defaults on debt; or another negative credit event occurs, such as a ratings downgrade, bankruptcy or debt restructuring, among others. The protection seller assumes the risk that the buyer does not wish to shoulder in exchange for a periodic premium, similar to an insurance premium, and is in return obligated to pay bond par to the buyer if any credit event occurs. The CDS contract is not actually tied to a bond or debtor, but merely refers to it as a “reference obligation” or “reference entity” that is not a party to the contract. The buyer will gain protection or earn profit, depending on whether the reference entity has a credit event. If so, it can put the bond back to the protection seller, insuring the loss associated with the default. On the other hand, if there is no credit event, the protection seller receives the periodic

Twinkle Tailor, CPA Candidate, is a member of the New Jersey Society of CPAs Accounting & Auditing Standards, Business Valuation Forensic Litigation Services, Personal Financial Planning and Technology interest groups. Contact her at twinkle.tailor@yahoo.com.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

FORENSIC

file

CPAs and Post-Divorce Judgment Actions B Y ROY H . KVAL O, CPA, THE C U R C HI N GRO U P, LLC

s a valuation analyst, you’ve just successfully assisted in the economic mediation of a divorce by providing a valuation of the couple’s multi-million dollar restaurant in one of New Jersey’s most high-end locations. There are ample assets and cash flows to provide for the couple and their two children. The couple has come to agreement on the final settlement, which the attorneys have meticulously incorporated in the divorce agreement. The case is put to rest with the judge’s ruling and everyone is satisfied. So, everyone lives happily, but separately, ever after, right? Unfortunately, this is not always the case. Many divorce cases end up back in court for a variety of reasons. While many cases are revisited due to noneconomic issues, such as enforcing or modifying parental visitation rights, many more post-divorce actions are centered on economic issues. A CPA may be called upon to assist in unraveling the post-divorce financial activity of the parties. There is generally a motion for enforcement of the original agreement when one side is not living up to his or her end of the bargain, such as the nonpayment of alimony or child support payments. In this case, the courts are used as a lever to get the nonpayer back on track. On the other hand, a modification motion is usually precipitated by a change in circumstances that makes the existing agreement unfair. Most New Jersey residents felt the effects of Hurricane Sandy. Therefore, it’s all too easy for us to visualize how a business could instantly cease without much warning. With Sandy, many businesses quite literally disappeared. And, in instances where the business is lucky enough to still be physically standing, the patrons are probably gone – hopefully temporarily – and in some cases permanently.

What happens when a business that was the economic engine of a divorce settlement suffers a catastrophic downturn? Assume in our aforementioned example that the operating spouse did everything right, maintaining appropriate levels of property insurance and business interruption insurance and that these were included in the divorce agreement. However, under these extreme circumstances, this may still not be enough to maintain the financial support agreed to in the divorce. Due to the uncertainty of customer demand, it simply may not be prudent to attempt to reinstate the restaurant to its former capacity right away. The diminishment in cash flows, although clearly apparent, may not be readily quantifiable. In the event that the operating spouse files a motion for a post-judgment modification to seek relief in the form of reduced alimony and child support, a detailed analysis of the changed economic circumstances of the business operations will likely be needed from a CPA expert in order to help determine the available cash flows going forward. In ordinary circumstances, alimony and child support are based upon the couple’s historical cash flows, in which case convincing evidence is relatively easy to quantify. Conversely, the difficulty encountered in any forward-looking analysis is that it necessarily relies on the analyst’s ability to verify management’s judgment about future business activity and can therefore border on being speculative. In the event that the business operations return to former levels, the nonoperating spouse would likely seek a modification motion to restore alimony, but generally only to the highest levels achieved during the marriage. And, logically, child support payments would not be limited by the earnings during marriage, but rather based upon the parent’s ongoing earnings ability. Some other instances that may necessitate post-divorce action are retirement, disability, significant change in financial status and realigning child custody arrangements. In the case of business casualty losses resulting from Hurricane Sandy, the time to begin analysis is now while the effects of the events are fresh. This may help foster an understanding of the needed economic changes. It is important for accounting and financial advisors to help clients identify these potential issues early and suggest that they seek appropriate legal counsel. Roy H. Kvalo, CPA, ABV, CFF, CGMA, CVA, is the director of litigation and valuation services for The Curchin Group, LLC. He is also a member of the New Jersey Society of CPAs Business Valuation Forensic Litigation Services Interest Group. Contact him at rkvalo@curchin.com.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

INDUSTRY

insights

Managing Legal Costs at Your Company B Y M ICHAEL L ONG , CPA, M GL ASSO C I ATE S LLC

“A

n ounce of prevention is worth a pound of cure” seems uniquely appropriate to convey the message that minimizing legal costs has a profound impact on a company. While we can immediately appreciate the obvious cash flow impact, consider how much time and opportunity cost is absorbed by a business to defend itself against a legal action. When I began my career in corporate accounting, I was conditioned to believe that legal fees are best managed by rigorously reviewing legal bills before sending them to the accounts payable department. I went to great pains to find at least one mistake or reason to take a credit, and I learned quickly that if I didn’t find at least one incorrect line item, the bills were sent back to me for further review. Many companies maintain this same practice today. Over the last few years, working closely with clients, I’ve found the true added-value approach to controlling legal costs lies in being proactive, rather than reactive.

benefits and deliver to each terminated employee an information package outlining all points discussed. The terminated employees may or may not compare notes – they were reminded of the confidentiality agreement – and they leave with a clear understanding of the transition process. The employees may not be happy with the situation, but due to clear, consistent and accurate communication, leadership has significantly mitigated any incentive for the terminated employees to pursue legal action against company X.

Take One

Take Away

For example, let’s assume company X decides to terminate a number of employees due to an outsourcing opportunity. The company doesn’t have a policy for terminating employees, and it’s left to the CEO who has never before terminated an employee. He then meets alone with each employee to discuss his or her termination. Because the CEO is completely unprepared, he’s not able to respond to the employees’ questions regarding termination date, severance pay, COBRA or unpaid vacation. Unfortunately, the CEO relays inconsistent and incorrect information. Following the meetings, the employees talk, compare notes and collectively decide to sue the company on several issues. The CEO must now explain to the company board of directors that due to an impending legal action, his outsourcing savings estimate may be in jeopardy.

The following are a few practical preventative measures to help control legal costs as they relate to employment practices: • Purchase employment law liability insurance that covers defense costs and liability. • Maintain comprehensive employee policies and procedures. • Retain internal or outsourced HR support. • Limit the signature of contracts to specific managers. • Require employees to sign nondisclosure and noncompetition agreements. • Require attorney review of all nonboilerplate employment contracts. • Foster a corporate culture of equality and consistency. • Require the use of independent contractor agreements, where applicable. • When using an outside law firm, designate one lawyer to ensure legal resources are used in a cost-effective manner.

Take Two Let’s now look at the aforementioned example in another way. Company X has a qualified human resources (HR) director as well as utilizes the services of an attorney who concentrates in the field of employment law. The pair has already prepared an employment manual that sets forth policies and practices that comply with applicable laws, and they are also available on a telephone hotline basis to answer questions and give guidance. The CEO and the HR director, armed with the company’s established termination procedure, meet with each employee to explain the reasons for termination. They discuss timing and dates, describe the severance policy, explain COBRA

The true value of a controller or a CFO rests in his or her ability to create value. If one could borrow from the return on investment (ROI) concept and think about a return on avoidance (ROA), the relationship between prevention and avoiding significant legal costs is profound, and there will be considerable low hanging fruit for the picking. Michael Long, CPA, CGMA, is the founder and CEO of MGL Associates LLC. He is a member of the New Jersey Society of CPAs. Contact him at michael@mglusa.com or 908-879-9041.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

SMALL/SOLE

practitioner

Exit Strategies for Life Insurance Policies in Qualified Plans B Y K ENNETH A. H OROW I T Z, I NTE GR ATE D B E NE F I T C O N S U LTA N T S

he payment of life insurance premiums with tax deductible contributions is one benefit of purchasing life insurance in a qualified plan. The predictability of earnings at

guaranteed rates can make it a prudent part of the retirement plan’s asset mix. Although there are tax benefits to purchasing life insurance in a qualified plan, when the insured plan participant

terminates employment or retires he/she will have to make a decision regarding the insurance policy, which will depend on the term and conditions outlined in the plan document. Possible exit

STRATEGY

TAX IMPACT

ADVANTAGES

DISADVANTAGES

Plan Surrenders Policy Roll cash-surrender value plus other plan assets into IRA.

Not taxable.

IRA assets grow tax-deferred until distributed.

No insurance death benefit.

Plan Annuitizes Policy Use cash value plus investment fund to purchase annuity that provides monthly income to retiree and/or spouse.

Cash value is taxed as ordinary income as received if distributed.

Provides guaranteed income.

No insurance death benefit.*

Plan Distributes Policy Participant may take policy as a distribution from plan and roll remaining plan assets into IRA. May do trustee-to-trustee transfer to IRA minus 20-percent mandatory withholding due on cash values of the policy.

Policy value taxed as ordinary income. May be subject to penalty taxes if participant is under age 59½ years.**

Maintains death benefit. IRA assets grow tax-deferred until distributed.

Individual pays ongoing premiums on after-tax basis.

Purchase Policy Participant may purchase policy from plan for policy values** and roll remaining plan assets into IRA.

Not taxable.

Maintains death benefit. IRA assets grow tax-deferred until distributed.

Individual pays ongoing premiums on after-tax basis.

Purchase Policy After Taking Maximum Loan Trustee takes maximum loan from policy; participant purchases policy from plan for policy value** less loan amount, rolls remaining plan assets into IRA.

Not taxable.

Maintains death benefit. IRA assets grow tax-deferred until distributed. Loan reduces purchase price.

Individual pays ongoing premiums on after-tax basis, pays interest on loan and loan balance reduces death benefit.

Roll Policy into New Plan Participant may roll policy into a plan established by new employer. May also roll remaining assets to new plan.

Not taxable.

Maintains death benefit. Other plan assets grow tax-deferred until distributed.

New plan must allow life insurance as an investment.

Pension Transition Provision Policy surrendered in plan, new policy issued outside plan for net amount at risk (face amount minus cash-surrender value) at attained age without underwriting. Roll remaining plan assets into IRA.

Not taxable.***

No underwriting required. Maintains a reduced death benefit. IRA assets grow tax-deferred until distributed.

Individual pays ongoing premiums on after-tax basis. Policy is more expensive to maintain, reduced death benefit.

*Participant may choose a joint and survivor option which provides a death benefit if the annuitant predeceases beneficiary. **Policy value determined pursuant to the safe harbor provisions of Internal Revenue Service (IRS) Rev. Proc. 2005-25. ***No known current taxable event; unclear whether the underwriting concession has taxable value. N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

Generate strategies of a life insurance policy in a qualified plan are: • Plan surrenders policy. • Plan annuitizes policy. • Plan distributes policy. • Participant purchases policy. • Purchase policy after taking maximum loan. • Roll out policy into a new plan. • Pension transition provision. The chart on page 26 describes plan participants’ options and the advantages and disadvantages of each strategy. The net death benefit is received income tax free (the total death benefit minus policy cash values), and the insured pays an annual cost. The cost equals an annual renewable term cost for death benefits. (Costs are outlined in IRS Table 2001-10). These payments increase the insured’s plan basis, so less of the plan assets will ultimately be subject to income tax. The income-tax-free death benefit could be a source of liquidity to potential inheritors of the participant’s plan assets. The insurance proceeds could be received estate tax free if the life insurance is owned by a trust. Life insurance proceeds can be an effective way to pay inheritance costs, which are comprised of income tax and potential estate taxes that could range from 50 to 70 percent of plan assets (net of the income in respect of a decedent). Insurance proceeds provide another funding source allowing other assets with greater appreciation potential to remain intact for future generations.

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Kenneth A. Horowitz, CLU, ChFC, is a registered representative and financial advisor of Park Avenue Securities, LLC, and principal of Integrated Benefit Consultants. Contact him at 914-288-8896. N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

tOdaY!

TAX

talk

The Landscape of Environmental Remediation Costs BY KAREN A. SCHIRMACHER, CPA, WILKIN AND GUTTENPLAN, P.C. CPAS

“I

think the environment should be put in the category of our national security. Defense of our resources is just as important as defense abroad. Otherwise, what is there to defend?” said actor/activist Robert Redford in 1985. While protecting the environment was important 30 years ago, green initiatives have grabbed the spotlight more than ever, and the focus on preserving our environment has increased dramatically. Along with this increased focus has come additional federal and state environmental regulations. This heightened awareness has caused an increase in mandatory and voluntary environmental remediation efforts by businesses. Environmental remediation costs are expenses that are associated with the curing of environmental contamination. As environmental remediation costs are usually significant, the tax consequences of these costs have become a topic of increased interest. Under current law, the tax treatment of these costs is generally governed by Internal Revenue Code (IRC) Section 162, which requires they be ordinary, necessary and incurred in carrying on a trade or business in order to be currently deductible. However, taxpayers also need to consider IRC Section 263, which requires capitalization of costs that increase the property’s value, useful life or adapt it to a different use. Taxpayers should also consider whether deductible costs must be included in inventory costs under IRC Section 263A. Over recent decades, there have been several court cases and revenue rulings dealing with the treatment of environmental remediation costs. One such ruling, Revenue Ruling 94-38, deals with a very specific set of facts in which an accrual-basis taxpayer owned and operated a manufacturing business on land that was uncontaminated when purchased. Through the company’s normal operations, hazardous waste was discharged and subsequently buried on the land. Years later, in order to comply with various governmental environmental requirements, the company voluntarily decided to remediate the contaminated soil and groundwater. The contaminated soil was removed and replaced with clean soil. Additionally, the company constructed a groundwater treatment facility to extract, treat and continuously monitor the contaminated groundwater. In this ruling, the Internal Revenue Service (IRS), citing INDOPCO, Inc. v. Commissioner, 112 S. Ct. 1039 (1992), held that costs incurred in the initial and ongoing remediation of the soil and water were currently deductible, as they did not

improve the land nor provide significant future benefits. Instead, the effect of the cleanup was to restore the land to its original, uncontaminated state. On the other hand, the costs incurred in constructing the groundwater treatment facility were required to be capitalized, as they had a useful life that extended beyond the end of the taxable year in which it was constructed. The holdings in other rulings and cases were based on similar principles. The Sixth Circuit Court of Appeals in United Dairy Farmers, Inc. v. United States, 2001-2 USTC 50,680, held that taxpayers could currently deduct environmental remediation costs provided a three-pronged test was met. Under this test, costs are permitted to be deducted provided the following three conditions are met: (1) the taxpayer contaminated the property by its own business operations; (2) the taxpayer incurred costs to return the property to its original clean state; and (3) the cleanup did not allow the taxpayer to use the property in a new way. While this “restoration principle” is generally respected by the IRS, its position is that costs incurred to fix environmental problems not created by the taxpayer are generally required to be capitalized, even if the taxpayer was unaware that the land was contaminated when purchased. Prior to 2012, the treatment of certain qualified environmental remediation costs requiring capitalization under IRC Section 263 were permitted to be deducted under Section 198, if so elected. This provision expired at the end of 2011 and has not been retroactively extended. Despite the absence of any special provisions under the IRC for environmental remediation costs, expenditures for environment cleanup should be carefully evaluated as there is no one-size-fits-all approach to determine the most favorable tax treatment. Karen A. Schirmacher, CPA, is a principal at Wilkin and Guttenplan, P.C. CPAs. She is also a member of the New Jersey Society of CPAs. Contact her at kschirmacher@ wgcpas.com or 732-846-3000.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

TECH

center

Is Your Social Media Policy Street-Legal? B Y JA MES CEL ENTANO, E X T E NSI S GRO U P

espite potential workplace pitfalls, electronic communications – particularly social media – are becoming increasingly important in conducting business. It is critical to be acutely aware of how employees communicate in the electronic realm and how such communications are monitored, managed and archived. Anyone who has experienced legal discovery firsthand can attest to the nightmares that poorly managed email can cause when dealing with litigation or regulatory requests. Companies have wasted billions of dollars cleaning up email policy and social media messes. Today’s rapidly changing landscape of integrated social media poses a serious challenge to existing corporate policies and deserves a periodic review as technologies evolve. Most companies provide an employee with a corporate email address to use for company business. It should be well-understood by all employees that company email is company property. With social media, however, the lines between personal use and business begin to become vague. The very strength of social media is the ability to connect at the individual level, with the potential to bypass corporate spin and control. Very few employees create two social media personas – one for work and one for a personal life. The resulting mixture of corporate and private life is what drives the need for a comprehensive social media policy. The National Labor Relations Board (NLRB) does offer some guidance on policy creation. According to the NLRB, employer policies “should not be so sweeping that they prohibit the kinds of activity protected by federal labor law, such as the discussion of wages or working conditions among employees.” The NLRB also states that company policies must be specific and should include clear examples. A general policy that prohibits employees from posting sensitive company information is not as good as a specific policy that prohibits posting trade secrets and then offers an example of what a trade secret might be. An effective social media communications policy should include: • A clear, working definition of social media. • A clear definition of which employees can directly promote or represent the company. • Proper use of company logos on profiles, web pages, etc. • Acceptability of posting purely personal social media updates. • Clear definition of confidential information, trade secrets and information, such as pricing, insider information and product releases.

• Affirmation of the company’s right to control and restrict access to confidential information or trade secrets, such as client data. • Ownership and restrictions of social media profiles that are work related. • Privacy expectations while using company Internet access. • Acceptability of expressing political, religious or other potentially controversial topics. • The acceptability of using social media to screen new and existing employees, clients and prospects. • Clear ramifications and enforcement of policy violations. It is also important to not infringe on employees’ rights under Section 7 of the National Labor Relations Act. Section 7 focuses on the right of self-organization and collective bargaining. It also lets employees discuss work-related topics with each other, such as wages or other working conditions. One employer discharged an employee for violating a company policy that stated that “insubordination or other disrespectful conduct” and “inappropriate conversation” would be subject to disciplinary action. The NLRB found that this policy “would reasonably be construed by employees to preclude Section 7 activity.” Due to the fast-changing nature of social media, it is often far better to set clear guidelines and make the employees self-regulate their activities. Creating a well-considered social media policy – with input from legal counsel – will minimize headaches later on. The tools for collecting, preserving, monitoring and managing social media content are evolving. But becoming increasingly important is crafting policies that will hold up under regulatory scrutiny and allow employees to use social media in ways that benefit the company and are actually enforceable. James Celentano is the human resources vice president for the Extensis Group, a professional employer organization that provides clients outsourced human resource and risk management services, payroll and tax administration, insurance, benefits and regulatory compliance. Contact him at 888-473-6398.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

SOCIETY

pages

CPE Offerings and Events Upcoming Education Foundation Events Date

Event/Code

Location

CPE Credit

1/17

Audits of 401(k) Plans (E1301051)

Iselin

8/AA

1/17

Effective and Efficient Senior-Level Review of Tax Returns in Busy Season (E1301021)

Roseland

8/TX

1/17

Business Valuation Roundtable, "Reasonable Compensation for Business Valuations" (E1301250)

Roseland

2/CS

1/18

Surgent McCoy's 1040 Tax Season Survival Guide (E1301011)

Roseland

8/TX

1/18

FASB Review for Industry: Targeting Recent GAAP Issues (E1301063)

Iselin

8/AA

1/21

The Best Individual Income Tax Update Course by Surgent McCoy (E1301211)

Iselin

8/TX

1/22

Advanced Technical Tax Forms Training – Form 1040 Issues (E1301221)

Iselin

8/TX

1/23

Advanced Technical Tax Forms Training – LLCs, S Corporations and Partnerships (E1301231)

Voorhees

8/TX

1/24

Accounting Services, Compilations and Reviews: Effective Risk Management (E1301071)

Roseland

8/AA

1/24

Current Tax Events in California (E1301277)

Roseland

2/TX

1/25

Internal Control Essentials for Financial Managers, Accountants and Auditors (E1301083)

Roseland

8/AA

2/5

Disaster Recovery and Backups Webinar (E1302044)

N/A

1/CS

3/20

Cooperation with Bankers Breakfast (E1303020)

Iselin

N/A

Upcoming Chapter Events Date

Chapter

Event/Code

Location

CPE Credit

1/16

Atlantic/Cape May

Financial Planning – Cooper Levenson (E1301099)

Northfield

2/CS

1/21

Southwest Jersey

Sales Tax Update (E1301119)

Voorhees

2/TX

1/24

Monmouth/Ocean

Invite an Attorney Night (E1301269)

Neptune

N/A

2/5

Union County

Fraud and Forensics (E1302019)

Union

2.5/AA

2/5

Hudson

Federal Tax Update (E1302039)

Jersey City

2/TX

2/7

Bergen

Tax Season 2013 Hot Issues (E1302059)

Paramus

4/TX

4/18

Passaic County

Wills, Trusts, Gifts and Generational-Skipping Transfers (E1304089)

Paterson

2/TX

4/23

Mercer

CFO/Controllership Update (E1304039)

West Windsor

4/CS

4/24

Morris/Sussex

New Jersey Law and Ethics (E1304079)

Mount Olive

4/PE

4/24

Atlantic/Cape May

Accounting and Auditing Update (E1304019)

Somers Point

2/AA

4/24

Middlesex/Somerset

Social Security, Medicare and Pension Optimization Considerations (E1304059)

Somerset

4/CS

4/25

Hudson

QuickBooks (E1304069)

Jersey City

2/CS

4/26

Southwest Jersey

Health Care Act and Fiduciary Responsibility in Retirement Plans (E1304029)

Berlin

4/TX

4/26

Essex

Information Technology Audit and Compliance (E1304049)

East Hanover

4/AA

KEY AA – Accounting & Auditing MT – Management

CS – Consulting Services PD – Personal Development SK – Specialized Knowledge

EC – Economics PE – Professional Ethics TX – Taxation

njscpa.org/catalog

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

MC – Multiple Categories PM – Practice Management

6 12

Across

1. James Cain wrote the book that was the basis for this film noir (goes with seven down) 6. Bad girl who played Gilda (goes with 36 across) 10. The Salton ___ neo-noir film from 2002 starring Val Kilmer 11. Address book number 13. It’s ___ negotiable 14. The 40s and 50s were the film noir ___ 15. The insurance investigator in The Killers 16. Femme fatale, ___ Gardner 17. Film spool 18. 2006 crime drama, End ___ 20. ___ noir (modern versions) 23. Partner in crime 25. Kill Kill Faster Faster star, ____ Ray 27. School of thought 28. Little bit 29. Detective in The Maltese Falcon (two words) 30. Authorship word 31. Direction indicator 33. High demand for 36. Goes with six across 39. The _____, Hitchcock thriller (goes 41 across) 40. Angry 41. See 39 across 42. Over there, old way

14 16 17

18 19

22 25

24 27

26 28

29 31 33

32 37

40 41

See the answers on njscpa.org/newjerseycpa.

Down

1. Femme fatale from the film noir genre, Phyllis ______ 2. Habitual practice 3. Hamlet verb 4. ____ Turner in The Postman Always Rings Twice 5. Tommy __ Jones 7. Goes with one across 8. Extremely 9. Writer Rice 11. Hitchcock’s Strangers on a Train 12. John Huston’s Key _____ 19. Underground burial chamber 21. Make smooth 22. The ___ from Shanghai, directed by Orson Welles 24. Kiss Me Deadly PI, Mike ____ 26. Spurs city initials 27. Creative spark 30. Philistine 31. The Guilty character 32. ____ Preminger’s Laura 34. Farm animal 35. Wyatt’s holiday 36. __ Wells 37. Nicholas ____’s They Live by Night 38. Rooster’s mate

NJSCPA Advocacy at Your Service Navigating the often-confounding regulatory landscape in New Jersey can be an overwhelming task for any CPA, but it is critical to the success of your practice and professional livelihood. The NJ Divisions of Taxation, Labor and Revenue and licensing boards are regulatory bodies in particular that CPAs, and future CPAs, have to contend with and, unfortunately, don’t always meet with success. Because of the deep knowledge of processes and professional relationships that the New Jersey Society of CPAs has with various regulatory bodies, we can provide a service to members that helps alleviate the stress, time and unnecessary expense when dealing with regulatory matters. To illustrate, one Society member was being considered for a partnership in a firm, but a reciprocal license was needed before she could be considered. Obtaining a reciprocal license was taking longer than expected at the New Jersey State Board

of Accountancy, but the NJSCPA was able to petition the state board on the CPA’s behalf to expedite the process. All of the legal requirements were met by the member, but the Society helped the CPA gain a reciprocal license quicker by navigating the red tape and connecting her to the right people. The NJSCPA is also keenly aware of all legislative issues important to New Jersey CPAs, such as appeal bond caps, mandatory audit firm rotation and license reciprocity. By being an active participant in the conversations held with legislators and the various regulatory agencies, the Society works to create a positive work environment for CPAs today, tomorrow and going forward. To discuss a regulatory matter, contact Jeffrey T. Kaszerman at jkaszerman@njscpa.org or 973-226-4494 x210. For more information about the bills we are tracking, visit njscpa.org/news/ legislative-news.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

SOCIETY

pages

Get Involved DOL Work Group Gets Answers from Trenton By Marlene P. Snedaker, CPA, and Steven B. Shaiman, CPA, Department of Labor Work Group Co-Chairs Each year, the New Jersey Society of CPAs State Taxation Interest Group’s Department of Labor Work Group organizes meetings in Trenton with the NJ Department of Labor and Workforce Development. The first meeting was with the Division of Employer Accounts, a division that determines if an employer is subject to New Jersey’s unemployment compensation and temporary disability laws, collects the taxes used to fund the unemployment, temporary disability and workforce development programs, as well as conducts periodic audits to ensure legal compliance. The work group can submit agenda items prior to these meetings and have its concerns addressed by key representatives. Division Director of Fraud and Risk Management Charles Walkowiak provided insight into the new fraud prevention tactics. It is estimated that 11 percent of benefit payments nationally are improper. The division analyzes data on new hires and claims, and targets scams utilizing computer analysis. Whether a claim is filed over the Internet or by phone, the claimant must answer a series of questions relating to background. No unemployment insurance benefits will be issued until a person’s identity has been properly verified. If the individual does not answer the questions or answers incorrectly, he or she must report in person to one of the unemployment offices with the documents necessary to verify his/ her identity. Director of the Division of Employer Accounts Stan Davis discussed the tax web-enabled system (TWES), which provides employers 24/7 access to their accounts. Due to updates being performed, only current users have access to it. In the future, employers will be able to obtain all rate experience information online, rather than by mail. Davis will notify the Society when the changes are complete and explain the impact they will have. TWES is accessible at nj.gov. The Society’s work group also met with the NJ Division of Wage and Hour Compliance whose primary function is investigating complaints about the underpayment of wages, late payment of wages or possible violations of wage and hour laws and regulations. In responding to our inquiry about industries targeted for audits, General Enforcement Section Chief David Schraeger noted that audits are generally made as a result of wage and hour claims. The most frequent audits are of gasoline stations, office cleaning companies and garment manufacturers. While no specific industry is targeted for audit, audits are conducted in retail stores, supermarkets and any industry with a vulnerable workforce. In central and southern New Jersey, the division occasionally conducts surprise visits along the boardwalk in retail establishments and at nail salons and blueberry farms. In north Jersey, the division will visit apparel outlets and

manufacturers that do not register by February 1. Members can contact Steven B. Shaiman, CPA, at stevenbshaiman. cpa@comcast.net or Marlene P. Snedaker, CPA, at msneda911@ verizon.net with any questions or concerns. For more information, join the NJSCPA State Taxation Interest Group at njscpa.org/getinvolved.

Tubes, a Journey to the Center of the Internet Reviewed by Beth S. Brilliant, CPA As CPAs, we are protectors of client information. Now that much of that information is in the cloud, we have an obligation to our clients to understand how the Internet works. Tubes, a Journey to the Center of the Internet, written by Andrew Blum, is for the curious or techie reader who wants more than just the basics. When a squirrel bit through a wire connecting the Internet to Blum’s home, it sparked endless questions in his mind: “A squirrel could impact the Internet? Where did that wire come from or connect to? Where are all the computers, cables and routers that power the Internet? Who runs the companies that maintain them?” Blum set out to get the answers. Blum, a correspondent at Wired magazine and a contributing editor at Metropolis, has written about architecture, design, technology, urbanism, art and travel – all stemming from his interest in the relationship between place and technology. This comes through in this jargon-free technical explanation and travelogue of Blum’s quest to gain an understanding of the physical aspects of the Internet. He traveled across the world to see the Internet’s infrastructure and visited Internet networking conferences, data centers and companies that manufacture equipment. Each chapter describes Blum’s visits to several different locations where the Internet has a significant presence. He connects with employees to gain a better understanding of what the company does, how it does it and how the people feel about their contributions. One cold night, Blum observed two members of the International Brotherhood of Electrical Workers install fiber optic cable in New

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

ENTERPRISE

York City. He also visited the three hubs in New York City and on the coast of Portugal where a new, transatlantic undersea cable was being placed as he mapped out the geography of the Internet. Blum discovered that “the Internet wasn’t a shadowy realm, but a surprisingly open one” and concluded that it is “definitely a series of tubes,” referencing the late Senator Ted Stevens (R-AK) who was ridiculed in 2006 for making the same statement. While I enjoyed most of the book and learned a great deal, Blum made many literary and philosophical references that really didn’t add to the text. I also felt it needed illustrations to more clearly convey many of the connections he was trying to make.

A QUARTERLY FOCUS ON THE PEOPLE AND THE ISSUES THAT DRIVE NEW JERSEY BUSINESS

THE OFFICIAL PUBLICATION OF THE NEW JERSEY CHAMBER OF COMMERCE

Read by 13,000 business leaders in more than 1,800 different organizations throughout the state. NEW JERSEY STANDS

Now is the time to gain market share and impress the decision makers of your clients and prospects across

Beth S. Brilliant, CPA, CITP, teaches accounting at Kean University and is a member of the NJSCPA Technology Interest Group. She also assists her brother at Brilliant Accounting.

RENEW JERSEY

Volunteer opportunities are available throughout the year. Here are a couple of activities that need your support now. Let us know how you’d like to be involved at njscpa.org/getinvolved. Blog About Technology – Whether you love the latest gadgets or breaking technology news, the NJSCPA Technology Interest Group wants you to share your ideas, comments and reviews on the latest technologies through the monthly technology blog on Connect. Contact Carolyn Hook at chook@njscpa.org or 973-226-4494 x221. Tax-Season Call-In Program – The NJSCPA will be working with the media to offer tax-season advice to their viewers and readers. We are looking for Society volunteers to answer phone calls from the public for a few hours one day in February or March. The media will highlight the participants and the most common questions asked. This is a great opportunity to get exposure for your firm. Contact David Plaskow at dplaskow@njscpa.org or 973-226-4494 x228.

www.njchamb

er.com

a quarterly focus on issues that drive the people and the New Jersey business

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Audimation 15

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March/April Coming Attractions

Bollinger, Inc.

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Infrastructure/Logistics

Community Foundation of New Jersey

cfnj.org

n The CPAs Role in NJ’s Infrastructure

Fox Rothschild LLP

n Building a Personal Infrastructure

foxrothschild.com/taxseminarrsvp

n Helping Clients Make the Leap to Exporting

Rutgers 21

n Moving Human Capital

pmac.rutgers.edu/moreinfo N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

SOCIETY

pages

NJ State Board of Accountancy Report State Board Budget Explanation Offers Interesting Insights Public

Newark (October 18)

New Jersey Society of CPAs Government Relations Director Jeffrey T. Kaszerman mentioned that legislation regarding reciprocity has temporarily stalled due to concerns in the bill’s language from realtor and funeral director associations. The Financial Accounting Foundation appointed members to the Private Company Council (PCC). The PCC is a new body that will work with the Financial Accounting Standards Board to determine whether and when to modify U.S. generally accepted accounting principles.

Miscellaneous

The budget officer for the NJ Division of Consumer Affairs gave the board an overview of the board’s revenues and expenses. The board is required to cover expenditures, while also not having a large surplus. Should large surpluses ensue, a credit could be given back to licensees, albeit this scenario appears unlikely for the near future. In an interesting paradox, fines and penalties have been used to cover budgetary inflation. However, should licensee compliance drastically increase, this would decrease revenue and possibly lead to an increase in licensee fees. A question arose as to whether the board could use any excess funds to provide licensee compliance programs, to which the answer was yes.

Committees

Newark (November 15) Committees

Peer Review Oversight – It was reported that there exists a general misunderstanding as to the difference between a sponsoring organization and who actually performs the peer review. Also, firms are often not including all forms, such as the peer reviewer’s report and a letter of acceptance of the sponsoring organization. Finally, there are still questions as to exemptions. A firm can only file a form for exemption if it does not offer any of the six listed services. Based on the aforementioned, the committee feels more effort must be made to educate licensees on the peer review process.

Statutes/Rules/Regulations – The board approved proposed changes to the regulations as follows: • 13:29-1A.3 – Candidates to sit for the CPA Exam will need 24 hours of college baccalaureate-level accounting and auditing and 24 hours of business courses. • 13:29-3.1 – Language was changed to conform to the American Institute of CPAs standards for independence. • 13:29-5.3(b) – The board will provide a general organizational website containing peer review standards and a list of sponsoring organizations. • 13:29-5.4 – The deadline for filing firm exemptions for peer reviews is no later than June 30. • 13:29-6.2 – The term “didactic instruction” was eliminated; however, self-study is still limited to 60 credits and other limitations in place still apply. • 13:29-6.5 – The board has the option to

use the AICPA/National Association of State Boards of Accountancy (NASBA) word count method to compute selfstudy credits. The revised regulations will now go through the appropriate governmental channels before they are published in the New Jersey Register for public comment. Monitoring Profession – The committee chair suggested that more members of the state board become involved in the NASBA.

Public

New Jersey Society of CPAs CEO & Executive Director Ralph Albert Thomas, CGMA, inquired as to the effective date of the proposed regulation changes: Would it be as of the sign-off date or retroactively to the beginning of the triennial? It was indicated the sign-off date, but candidates who have an issue with didactic/nondidactic courses will be evaluated on a reasonable case-by-case basis. Thomas had inquired as to the impact of Hurricane Sandy and practitioners having difficulty reaching CPE requirements resulting in an audit. He was again told that practitioners will be evaluated on a reasonable case-by-case basis. Thomas mentioned that the Society had undergone its peer review oversight in October and that everything had gone well and the Society was just awaiting a confirmation letter from the AICPA. Finally, Thomas reiterated a need for increased oversight of New Jersey Law and Ethics courses. He is concerned that some providers are deviating from the curriculum, which would have a negative impact on practitioners and consumers.

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

CLASSIFIEDS Mergers/Acquisitions

Professional Services

Growing CPA firm with a first-class marketing culture in central NJ is looking to expand its practice. Ideal merger candidates are sole practitioners or small firms with established niche focus and strong business development skills and/or in need of a succession plan. Reply in confidence to dcowan@cowangunteski.com.

Peer Review – Do you need a practical system or engagement reviewer? Obtain a free quotation at bbertscha@yahoo.com. Audits – Does your client need an audit, but you don’t provide audit services? You do the tax work, and I’ll do the financials; contact bbertscha@ yahoo.com.

We are a well-established CPA firm in Essex County with a diverse client base and wonderful support staff. We have an opportunity for retirement-minded practitioners looking for a merger/succession plan or outright sale of their practice. Practices with $200K-$750K in business clients are welcome to call 551-655-1600. We can offer your clients the continuity and great service they deserve.

Real Estate Florham Park, NJ, two rooms with use of reception and library. Utilities included, except phone. $600 a month. Contact either Don at 973-966-0160 or Parmelie at 973-377-3722. Real estate appraising – Tax assessment appeals, eminent domain (condemnation), unique properties; consulting; business valuations. Contact Charles A. McCullough, CPA, M.B.A., State Certified General Real Estate Appraiser, American Society of Appraisers member; cmccullough@camcpavalue.com, renwickandassociates.com, 856-779-7050, 609-923-5879.

Goldstein Lieberman & Company LLC, one of the region’s fastest growing CPA firms, wants to expand its practice and is seeking merger/acquisition opportunities in northern NJ and the entire Hudson Valley region, including Westchester. We are looking for firms ranging in size from $300,000 to $5,000,000. To confidentially discuss how our firms may benefit from one another, please contact Phillip Goldstein, CPA, at philg@glcpas.com or 800-839-5767.

Accounting office space available immediately in Washington Township. Two offices available in a beautiful, professionally decorated office. Old-world-style décor. Includes an 800-square-foot conference room and 300 square feet of storage space. Call Ted Harrington at 856-275-3256 for more information.

Small Clifton CPA firm looking to buy out retirement-minded practitioner over 2-4 years. Will pay top dollar with large down payment. Let’s discuss over coffee. File 80612S Established, northern New Jersey and New York City, mid-sized CPA firm seeks to merge with another like-minded CPA firm for mutually beneficial growth. We are seeking firms in the $500,000 to $2,000,000 size in northern or central New Jersey or New York. This is your opportunity to expand without being gobbled up by one of the big guys. To confidentially discuss this opportunity, please contact nynjcpas@gmail.com.

Classified Advertising Replies to ads with file numbers should be sent to: File________________________ New Jersey CPA Classifieds 425 Eagle Rock Avenue, Suite 100 Roseland, NJ 07068-1723

Central Jersey CPA firm seeks an individual, preferably with a small practice, for future partnership with retirement-minded partners. Email bam4711@yahoo.com.

To see additional classified listings or to place an ad, visit njscpa.org/classifieds.

The Curchin Group, LLC, a central NJ, Monmouth County firm is seeking to merge-in near-retirement sole practitioners and small firms needing succession planning. Other individuals seeking growth and expansion are welcome to inquire. Initial practice continuation also an option. Reply in confidence to Peter Pfister, CPA, at 732-747-0500 or ppfister@curchin.com. Want to sell or merge your accounting practice? Accounting Practice Sales has qualified buyers waiting and financing available to sell your practice quickly and get you the best deal possible. For information regarding our risk-free and confidential services, call Bradley Holmes at 800-397-0249. Buyers see listings and register for free email notifications at accountingpracticesales.com. New Jersey – CPA firm wishes to acquire or merge with progressive, small to mid-sized firms. File 0701

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STUDENT

outlook

Life Begins Anew with an NJSCPA Scholarship B Y PAT RICK F. CHONG, C PA, K PM G LLP

hen asked how the New Jersey Society of CPAs Scholarship has impacted my life, I initially thought, “It helped pay for school, school is the foundation for a career and a career leads to success.” It sounds simple, but it goes way beyond that. When thinking about where I was 15 to 20 years ago versus where I am today, I’ve concluded that the scholarship was not only life altering for me, but for those loved ones who struggled with me.

time, I lost my aunt to cancer. It was a wake-up call of sorts that propelled me to rededicate my efforts to my education.

Life A.S. (After Scholarship)

Life B.S. (Before Scholarship) I grew up in a one-bedroom apartment in Jersey City with my 89-year-old grandmother. As most of my blood relatives lived in South Korea, my grandmother took care of and supported me from the time I was born until I went off to college. We lived off of food stamps and welfare, as our annual household income was at or below the Census Bureau’s threshold for poverty. I recall wearing plenty of hand-me-downs and occasionally purchasing certain necessities with rolls of pennies. But no matter our struggles, my grandmother always made sure I was loved and provided for. In addition, there were two significant close family friends, whom I called my aunt and uncle, who impacted my life. They were role models who looked after me as if I was one of their own kids. This support system encouraged me to get an education by studying hard, with the goal of a college education. Thanks to their invaluable support and my determination to not let them down, I enrolled in Rutgers University in 2006. I was just an average student but made it into the Rutgers Business School my junior year. Around that

I did extremely well my first semester in Rutgers’ accounting program and was invited to interview for the NJSCPA Scholarship. I received the scholarship, and that’s when doors really started opening. Not long after receiving the scholarship, I became an intern with KPMG LLP during the summer of 2009, which ultimately led to a fulltime position. I am now a senior audit associate, work with a wide variety of clients and have the privilege of interacting with CEOs, CFOs and other business leaders. The learning experiences I’ve had over the past two years have been nothing short of phenomenal. So, to come full circle, I look at where I am today, and I’m grateful for everything I have. My position at KPMG LLP has allowed me to live near my grandmother and look out for her in her golden years the same way she cared for me in my formative years. I visit her often, and we have dinner and catch up on what’s going on in our lives. It is an amazing feeling to be able to buy her some flowers and take her to her favorite restaurant simply because it’s a Tuesday and for no other reason. I enjoy spending time with my uncle and his kids, helping him with errands and taking them out to dinner or an occasional movie. But all things considered, it’s not so much about the money and possessions as it is the freedom a good job and an education gives you. It’s the freedom from worry – worrying about the

N E W J E R S E Y C P A • J A N U A RY • F E B R U A RY 2 0 1 3

Patrick F. Chong, CPA, and his grandmother. real possibility of not having food or shelter. And this freedom wouldn’t have been possible without the NJSCPA Scholarship I received. So, if you’ve ever donated to the scholarship program, thank you. I’m living proof you’ve made a difference. And if you haven’t, please give it some thought. Who knows, there might be a youngster out there right now whose life – and the lives of those around him – will dramatically change for the better. Patrick F. Chong, CPA, is a senior audit associate with KPMG LLP and an NJSCPA member. Contact him at patrickchongnj@gmail.com. The views and opinions expressed are those of the author and do not necessarily represent the views and opinions of KPMG LLP.

LEGISLATIVE

views

A Minimum Wage Debate A Constitutional Guarantee

Constitutional Wage Increase Is Reckless

B Y STEVE S WEENEY, NJ LE GI SLATU R E

B Y TO M K E A N J R . , N J L E G I S L AT U R E

parents. Imagine trying to feed a family, pay rent and keep gas in the car on less than $16,000 a year. Many families are struggling at incomes twice that. Inflation continually eats away at the buying power of $7.25 an hour. I recently asked the people of New Jersey to amend the state constitution to increase the minimum wage to $8.25 and tie it to the inflation rate. Not only would this provide a much-needed increase, but it would ensure the ability of families living on the edge of poverty to meet a rising cost of living. Most importantly, it would take politics and politicians out of the discussion. Indexing the minimum wage to inflation and taking it out of the hands of legislators and governors is something I had hoped to do in 2005, only to see it stripped from the final law. Consider this: If we had indexed the minimum wage from the start, it would today be $9.20 – nearly a dollar more than I am now proposing. Those opposed to taking the minimum wage out of the political arena have already begun to voice their opposition. Governor Christie even called it “stupid and truly ridiculous.” The governor and I have worked together on several important initiatives, but he is out of touch on this fundamental issue important to working-class New Jerseyans. Just as our federal constitution is famously dedicated to “promote the general welfare,” our state constitution’s overarching goal is to ensure a basic standard and quality of life for residents. For the past 65 years, the people have amended it to ensure their economic security. Amending it to guarantee a livable minimum wage is part and parcel of that great tradition.

he proposal put forth by Senate Democrats to write the state’s minimum wage, and subsequent automatic increases based on inflation, into the state constitution is probably the most profoundly bad idea I’ve encountered in 11 years of public service. It’s not just bad policy, it’s reckless. Let’s be clear: I am not reflexively opposed to any minimum wage increase. I believe any increase should be of a reasonable amount and take into account the economic climate at the time and employers’ ability to afford the higher wage for workers. It’s not always a bad idea to raise the minimum wage, but it’s not always a good idea either. We should never set economic policy on autopilot, reality be damned. Writing the minimum wage into the state constitution does not take reality into consideration. Unlike a regular law, writing minimum wage increases based on inflation into the state constitution would make them functionally permanent, unable to be changed even if the economic circumstances require it. And therein lies the problem: We cannot predict what our economy will be like next year, much less several years or decades down the road. The state constitution is not intended to be the forum to address public policy matters that must be responsive to the times. The state constitution addresses the issues that never change with time – our rights and privileges as citizens of the state. The minimum wage, like the state budget or tax rates, must be managed according to the needs of any given moment in time. Sometimes, businesses cannot afford an additional expense even if inflation is increasing. Sometimes, that wage increase can cost people their jobs. Senate Democrats are proposing to use the state constitution to achieve an increase because it is too hard for them to do it the right way, by negotiating legislation with the governor and, yes, minority Republicans. That’s a shoddy way to make any policy, but particularly one with such a substantial impact on our fragile economy. The minimum wage does not belong in the New Jersey Constitution.

Steve Sweeney is New Jersey Senate President.

Tom Kean Jr. (R-21) is the State Senate Minority Leader.

t’s easy to dismiss the minimum wage as the domain of teenage burger-flippers, but it is not. There are whole families trying to scrape by on a salary of just $7.25 per hour. A 2011 analysis found that among the 307,000 workers who earned between $6.52 and $8.50 an hour, only 20 percent were teenagers, nearly half worked full-time and one-quarter were

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MEMBER

profile

A Chip Off the Old Block BY DAVID PLASKOW, NJSCPA PUBLIC ATIONS EDITOR

“M

y dad was a Marine who served in WWII,” says Bernard R. Gingras, CPA. “I grew up in a household of eight people with one bathroom where you said ‘yes sir, no sir.’” That same sense of discipline and respect has served the younger Gingras well over the years. Gingras grew up in Saddle Brook and married his high school sweetheart, Irene. While attending Upsala College in East Orange, Gingras thought about majoring in political science. “After a year, I felt with that degree my options were secretary of state or McDonalds,” jokes Gingras. So, he took some business courses and did well. “One long-time, well-respected accounting professor ‘conscripted’ me into accounting. He decreed that ‘from now on, you’re an accounting major until you change.’” Well, he never did change, and he graduated with a B.A. in accounting in 1973. “I had a low draft number, so once I had left school I probably would have gone to Vietnam,” says Gingras. “So, I was accepted into a special program with the Marines that would have made me a second lieutenant. But the war ended and so did the program.” During his senior year at Upsala, Gingras became an intern at John J. Eccelston & Company in Paramus. “I became a partner in 1976 and basically have since forgot what it’s like to work for someone else,” notes Gingras. The firm grew from four people to nearly 50, and by 1989 he felt it was time to go out on his own. “My firm is like the old country doctor, we do a lot of the basics and do them well,” says Gingras. While at Eccelston, Gingras obtained his CPA certificate. “I actually passed two parts while I was in college,” remarks Gingras. “It was part of a

special program because a lot of people were graduating and then going straight to the war.” Gingras talks about the CPA designation and wanting to be involved at a high level, achieving a degree of excellence and becoming prepared to lead others. Not long after achieving the CPA credential, Gingras joined the New Jersey Society of CPAs. “The managing partner at my firm said ‘there’s a chapter meeting on Tuesday and you should go,’ so I went,” comments Gingras. That led to years of Society involvement and leadership positions, culminating in his presidency in 1994. “It was exciting being a guy from a small firm leading 15,000 colleagues. A couple of the big issues of the day were tort reform and privity,” recalls Gingras. “It’s pretty amazing where technology is today and the role it plays as opposed to just 20 years ago. I also notice that there’s much more practice specialization and product offerings now versus then.” After Gingras’ term as NJSCPA President, he found himself with quite a bit of disposable time. Not to suggest that he was driving Irene crazy around the house, but she bought him two months of tuition at the American Woodcarving School in Wayne. He practiced and honed his woodcarving skills at the school and in his basement studio to the point where he now has a website featuring a multitude of pieces. “I loved cowboy

and Indian movies as a kid, so I do a lot of western-themed sculptures,” notes Gingras. The website, losthighwaycarving. com, is merely for display; it’s not a commercial site. “I don’t sell them, I do it for myself or to give sculptures as gifts,” says Gingras. “I’ve won a number of awards at shows, and that’s very gratifying.” Gingras works in a variety of woods, typically bass wood, and each piece can take six to nine months to complete. “While woodcarving is clearly different than my day job, there’s a precision and creativity there that’s also present in accounting,” notes Gingras. “It’s been really interesting developing a part of me that wasn’t there before.” There’s one piece that stands out on Gingras’ website called “Hill 382” which captures the bloodshed, horror and fear that Gingras’ dad and many other servicemen endured during the battle for Iwo Jima. The carving comes from a photo of that battle. While it’s not confirmed, Gingras is pretty certain that one of bloodied and bandaged men in the photo is his dad. “I just hope my carving did those Marines justice,” says Gingras.

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