Today's CPA Nov/Dec 2013 by The Warren Group

Today’sCPA NOV/DEC 2013

T E X AS S O C IET Y OF

C ERT I F I ED P U BL IC AC C OU N TANT S

Confidentially in the

Cloud

Form SD – Specialized Disclosure for Conflict Minerals IRS Equitable Innocent Spouse Relief Expanded Personal Financial Planning: An Expanding Practice Opportunity Segment Reporting: A Sum Greater than its Parts

Also: Use Your Accounting Skills to Give Back

WHAT CAN YOU EXPECT

FROM TSCPA BESIDES Personal and Career Development Cutting-Edge Professional Information and CPE

Featured Member Benefit Liberty Mutual As a TSCPA member, you are eligible to receive a discount up to 15 percent on already competitive rates for auto and home insurance through Liberty Mutual. For more information, call 1-800-5249400 and mention ID number 7026, or visit the Member Benefits Marketplace at tscpa.org.

Discount Sports Tickets TSCPA has arranged deals with the San Antonio Spurs, Houston Rockets and Dallas Mavericks. Visit the Member Benefits Marketplace at tscpa.org.

TSCPA Magazine Subscription Program Discounts on magazine subscriptions 800-603-5602

Texans Credit Union Full service financial institution 800-843-5295, www.texanscu.org

Paychex Partner Program

Save $600 per staff member off the cost of the full four-part CPA review course. www.beckercpa.com/tscpa.

CPA Exam Review Discounts For a complete list of exam review discounts available, visit the Member Benefits Marketplace at tscpa.org.

InterCall Exclusive rates on audio and web conferencing services. 1-800-636-2377

Payroll processing. 877-264-2615

CareerBank.com

ProPay

Online career center for accounting and finance professionals. tscpa.careerbank.com

Enhancing the Image of the CPA Profession

Discounts on credit card processing 888-227-9856

Recruiting New Members to the Profession

Discounts on computer and technical products 888-289-6424

Protecting the CPA Certificate

AntiSpam/AntiVirus Protection 214-446-0089

You can expect special deals and discounts

Becker CPA Review Direct Bill Program

Tech Depot

Infinet, Inc.

Accurate Forms & Supplies Discounts on computer supplies and tax forms 800-777-0072

Monroe Systems for Business

Framing Success Discounts on professional framing of all certificates. 800-677-3726

Marsh Affinity Group Services TSCPA Insurance Trust offering a variety of insurance plans, including TSCPA-sponsored professional liability insurance. 800-262-7689

Office Depot Discounts on office supplies 201-253-5215

AXA Equitable

Discounts on calculators and other supplies www.monroe-systems.com

TSCPA Members’ Retirement Program – Members are waived $25 enrollment fee. 800-523-1125, www.axa-equitable.com/mrp

Bank of America

Hertz

TSCPA credit card programs – Platinum MasterCard, CPA logo and other benefits. 800-932-2775

FedEx Office Discounted pricing on most services 646-302-9242

Discounts on car rentals ID number: 1041643 800-654-2200, www.hertz.com

La Quinta Inns and Suites Ten percent off standard room rates. Discount code: TXSCPA. 800-531-5900, www.lq.com

Quest Membership Program Save 50 percent on your next hotel bill 800-STAY450

Please visit the Member Benefits Marketplace at tscpa.org for complete information and links to each of our Member Discount Programs.

Questions? Contact the Member Benefits Administrator at 1-800-428-0272 ext. 216 or craffetto@tscpa.net.

Contents

CHAIRMAN

NOVEMBER/DECEMBER 2013

VOLUME 41, NUMBER 3

William Hornberger, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA

Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR Wayne Hardin whardin@tscpa.net

cover story

columns

Ali Allie, Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Judy Neathery; Catherine Raffetto; Katey Selph; Patty Wyatt

20 Confidentially in the Cloud

5 Chairman’s and Executive Director’s Message

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton

society features 12 Spotlight on CPAs

6 Tax Topics

CONTRIBUTORS

Design/Production/Advertising

Small Town Miracles

The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

18 Capitol Interest

CLASSIFIED

25 Using Your Accounting Qualifications to Give Something Back

Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas. © 2013, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

Today’sCPA

| NOVEMBER/DECEMBER 2013

The Race is On

TSCPA’s Strategic Planning Process Revenue Ruling 2013-17, DOMA and 2013 Returns

7 Business Perspectives

The Best Buy for the Buck

8 Accounting and Auditing

Expanding the Responsibility for Assessment of Going Concern

technical articles

9 Chapters

26 Form SD – Specialized Disclosure for Conflict Minerals

10 Emerging Issues

30 IRS Equitable Innocent Spouse Relief Expanded 34 Personal Financial Planning: An Expanding Practice Opportunity 40 CPE: Segment Reporting: A Sum Greater than its Parts

CPAs: The Next Generation Accounting Education 2020: A Stakeholder’s Perspective

departments 14 Take Note

Today’sCPA NOV/DEC 2013

Y OF TEX AS SO CIET

46 Classifieds

AC C OUNTANT S CERTIFIED PUBLIC

Confidentially in the

Cloud

Form SD – Specialized Disclosure for Conflict Minerals IRS Equitable Innocent Spouse Relief Expanded Personal Financial Planning: An Expanding Practice Opportunity

See the digital version of

Segment Reporting: A Sum Greater than its Parts

Also:

Back g Skills to Give Use Your Accountin

Today’s CPA online at tscpa.org. 3

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Chairman’s and Executive Director’s Message By William H. Hornberger, CPA | TSCPA Chairman & John Sharbaugh, CAE | TSCPA Executive Director/CEO

TSCPA’s Strategic Planning Process In today’s rapidly changing business and professional environments, organizations must utilize strategic planning to clearly define their objectives and assess internal and external conditions to ensure they can anticipate contingencies and prepare for the future. TSCPA develops a new strategic plan every three years, and the current plan ends on May 31, 2014. TSCPA’s strategic planning process involves gathering a considerable amount of input from leaders, volunteers, staff, chapters, and members at large. The Society has begun the process of drafting a new plan, and it is scheduled to conclude in April 2014 with a plan approved by the Executive Board. DEMOGRAPHIC AND PROFESSIONAL ISSUES One of the first steps in TSCPA’s planning is to look at the changing demographics and other conditions that impact the accounting profession both nationally and here in Texas. According to the U.S. Census Bureau and Texas Demographer’s Office, Texas is the second-largest state in terms of population (second to Calif.) and area (second to Alaska), and the state is growing. The growth in the Texas population led to the addition of four additional seats to our representation in the U.S. Congress. From 2000 to 2010, the population increased 20.6 percent, which is more than any other state. Of this increase, 65 percent, or 2.8 million, can be attributed to growth of the Hispanic population. The counties of Harris, Bexar, Dallas, Tarrant and Travis are the most populated; Collin, Denton, Fort Bend, Hidalgo and El Paso counties also have significant population concentrations. Many counties west of Interstate 35 are more sparsely populated. So Texas is growing, becoming more urban and more diverse. These

variables must be considered as city and state planners make decisions that impact improvements to infrastructure, economic development, and access to health care and transportation, among other public policy areas. One such area is ensuring there is an adequate supply of water. In the 83rd Texas legislative session this spring, legislators established (subject to approval by voters) a revolving loan program for local water projects and dedicated $2 billion from the state’s Rainy Day Fund to finance the program. It will be on the November ballot this year as Proposition 6 for voters to approve. Another area is funding for transportation projects. In a road funding proposal, half the revenue from oil and gas production currently going to the Rainy Day Fund would instead go to the State Highway Fund, which will boost transportation spending by $1.2 billion a year. The Legislature will be required to set a minimum balance for the Rainy Day Fund every two years. This will be on the ballot in November 2014 for voters to approve. There are also professional issues that TSCPA is evaluating to assist in determining future trends. AICPA conducted extensive research to create the CPA Horizons 2025 report. In the report, AICPA identified a list of the top 10 issues that will impact the profession. They include: changing demographics; increased globalization; technological revolution; information security, privacy and data integrity; shift to consumer and employee power (from push to pull); changes in the way we communicate; work-life challenges or conflict; information overload; increasing complexity of rules and standards (IFRS, GAAP, PCAOB, SEC, IRS); and economic uncertainty.

In the area of hiring trends, a recent AICPA Trends study found that in 2001, 17 percent of new accounting bachelor’s and master’s degrees graduates hired by CPA firms were ethnic minorities; in 2010, that number had increased to 25 percent. TSCPA has a Diversity and Inclusiveness Committee that focuses on three key areas: recruiting a diverse population to the CPA profession in Texas; increasing membership and participation in TSCPA by all CPAs; and helping our members serve a diverse public in Texas. Two TSCPA members also serve on a National Commission on Diversity led by AICPA, which brings together minority professional advocacy groups, along with employers from all size firms and businesses. DRAFTING A NEW PLAN TSCPA will assess the impact of these demographic changes and professional issues, and will continue gathering feedback to use in the development of the new strategic plan. In addition to input from chapter and TSCPA leadership and volunteers, a comprehensive survey will be sent to a random, representative sample of the Society’s members across the state. If you receive the survey, we hope that you will participate. After all of the information from these various groups is received, the Strategic Planning Committee and Executive Board will be brought together for a two-day strategic planning retreat where the new plan will be developed and prepared for the Executive Board’s final approval at their April meeting. This strategic planning effort will help produce fundamental decisions and actions that will shape and guide TSCPA in the next several years. ■

Willie Hornberger can be contacted at whornberger@jw.com. John Sharbaugh can be contacted at jsharbaugh@tscpa.net.

Today’sCPA

| NOVEMBER/DECEMBER 2013

Tax Topics By Greta Hicks, CPA | Column Editor

Revenue Ruling 2013-17, DOMA and 2013 Returns The contents of Revenue Ruling 2013-17 may affect the preparation of 2013 income tax returns and may require that prior year returns be amended. After the Supreme Court struck down Section 3 of the federal Defense of Marriage Act (DOMA) as unconstitutional in the case of United States v. Windsor, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17 to clarify the tax treatment of same-sex couples who were legally married in a state allowing the marriage of same-sex individuals. The ruling also answers the question, “What if they now live in a state that does not issue marriage licenses to same-sex couples?” In defining “marriage,” the IRS follows the law of the state where the marriage took place and allows all tax benefits of marriage even though the couple may now live in a state that does not have a marriage provision for same-sex couples. All Internal Revenue Code (IRC) provisions that apply to opposite-sex couples also apply to same-sex couples. Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an individual retirement account (IRA), and claiming the earned income tax credit or child tax credit. If the couple decides to file separately, all married filing separately limitations and provisions would apply, such as limitations on capital loss carryovers and claiming the earned income tax credit or child tax credit. IRA contributions will be affected if the spouse participates in a plan. In reading through Revenue Ruling 2013-17, it appears that just as the IRS follows state law regarding separate or community property for opposite-sex couples, the IRS applies that same reasoning to same-sex couples living in separate/ community property states. A mountain of information is available on the IRS website under FAQs, such as “Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law.” However, the IRS has a separate set of FAQs for individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions or other similar formal relationships that are not marriages under state law. See “Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions.” These changes may also cause a potential ethical problem for the return preparer. Are we now put into the position

of determining who is “legally” married, and what type of documentation, if any, do we request from our clients? Typically when an opposite-sex couple announces their marriage to the return preparer, the response is “what date?” We normally do not require a copy of the marriage license. For same-sex couples, asking for a marriage license seems appropriate, but do the tax preparation ethics rules require us to go farther and determine the legality of “marriage” in the state issuing the license? The American Institute of CPAs (AICPA) Statement on Standards for Tax Services No. 3.6 states, in part: The preparer’s declaration does not require a member to examine or verify supporting data; a member may rely on information furnished by the taxpayer unless it appears to be incorrect, incomplete or inconsistent. … Although a member has certain responsibilities in exercising due diligence in preparing a return, the taxpayer has the ultimate responsibility for the contents of the return. Statement on Standards for Tax Services No. 1.5.a states, in part: A member should not recommend a tax return position, or prepare or sign a tax return taking a position, unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged. There is also a potential ethical problem regarding any needed amended returns. Statement on Standards for Tax Services No. 6.5 states: If a member is requested to prepare the current year’s return and the taxpayer has not taken appropriate action to correct an error in a prior year’s return, the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer. If the member does prepare such current year’s return, the member should take reasonable steps to ensure that the error is not repeated. Hopefully, we will have more guidance regarding “marriage” before the filing season arrives. Stay tuned. ■

Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.

Today’sCPA

| NOVEMBER/DECEMBER 2013

Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor

The Best Buy for the Buck Demographic changes, advances in technology, unhealthy lifestyles, rising drug costs, the uninsured – these are some key factors that have contributed to rapidly rising health care expenditures in the United States. These expenditures have accounted for an estimated 17 percent of the nation’s gross domestic product today and are expected to exceed a staggering 20 percent by the year 2017. The Patient Protection and Affordable Care Act (PPACA) was the biggest expansion of health care since the creation of Medicare and Medicaid in 1965. It was signed into law in March 2010 as a way to reshape the present health care state – to help reign in the steep climb in health care costs, to expand coverage to the uninsured, and to help reshape the way health care is delivered. This law places consumers in charge of their health care. And a new patients’ “bill of rights” gives American consumers the flexibility to make informed choices about their health. The October 1 roll out of governmentoperated health insurance purchasing exchanges – a significant first step of PPACA – makes us begin to seriously think about health care. True, if you receive health insurance through your employer, Medicare or Medicaid at the present time, there isn’t any action to take. But it is important to carefully study what others have done or plan to do, as a few companies, such as Walgreens, UPS, IBM and Time Warner, have made recent headlines with changes to their benefits plans for next year. Buying insurance to protect against property damage, professional liability, umbrella liability, etc., is a thought-out, cost-benefit process. Health insurance is different, in that we don’t invest the time necessary to understand the nuances as the benefit is provided to us through our employer or via a retiree government health plan. Unfortunately, if an illness strikes, it is only then that we may try to figure out what lays ahead.

Understanding health insurance requires financial forecasting (planning) and risk management (control/feedback) skills! First, assess the “need” or the “what one must have.” Then, search for available plans that “fit” the identified need. Third, compare the features, preferences and costs of those plans to make the final selection. And after investing, constantly monitor the plan for modifications and actual expenditures within the plan year. Planning or “need” involves asking the following questions: What is the state of health, excellent or chronic? Excellent means annual checks only; chronic means many physicians and specialists’ visits (example: diabetes/blood pressure). Are there special needs, such as outpatient therapy for prolonged periods? Any future life changes expected, such as marriage or child birth? Are there any plan features that worked in the present or past, and were there features that did not? Plans to relocate/travel in the future? The present plan cost and total out of pocket paid in the current/past year? A projected affordable maximum out of pocket possible, going forward? Any need for specific providers in the plan network? Upon assessing the need, look for plans that closely fit this need. Keep in mind that similar plans and/or services may not have the same cost, as they could change by geography and by payer. Now that we have the need and fit, compare these plan features, preferences and costs across payers. Do they have your choice of physicians, hospitals and specialists? Does the drug formulary offer medications prescribed by the

physicians of choice? Which drugs are on the preferred list and which are not? Does the patient pay a fixed fee or percent of price when a drug is purchased? Do plan networks have many specialists, across as many specialties, and within your geography, so that there is no significant wait time for treatment? Do these plans offer lower cost/narrow choice plans and higher cost/broader choice plans? What is the maximum out of pocket per plan? And do these plans offer out-of-network provisions and at what cost? After you make the final selection and invest, closely monitor plans for changes, such as new providers and institutions joining or any that are leaving the plan. Compare total actual out-of-pocket expenses to expected plan outlays. Look for additional wellness/preventative screenings added to the plan menu, and scan the drug formulary for changes in generic/brand alternatives, as well as for any changes between preferred, non-preferred and special medication interchanges. Regardless of what happens to PPACA, we know that health care reform is needed. The present model is dysfunctional, costly and unsustainable. Observed economic pressures will accelerate changes to health care cost, access, delivery and quality over time. Hopefully, some of the keys listed above will provide an incremental means to evaluate choices, as these challenging times represent an opportunity for finance leaders to provide valuable insight and guidance to the health care consumer. ■

Mano Mahadeva, CPA, is Chief Financial Officer with Solis Health in Addison, Texas. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com.

Today’sCPA

| NOVEMBER/DECEMBER 2013

Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor

Expanding the Responsibility for Assessment of Going Concern In June 2013, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update titled “Disclosure of Uncertainties about an Entity’s Going Concern Presumption.” Before that date, U.S. Generally Accepted Accounting Principles (GAAP) offered no guidance regarding management’s duty to assess and disclose going concern issues. Therefore, by default, the primary responsibility for assessment of going concern was left to the auditors. (See American Institute of CPAs Professional Standards AU-C 570, and the Public Company Accounting Oversight Board AU 341 The Auditor’s Consideration of the Entity’s Ability to Remain a Going Concern.) The issuance of this proposed standard thus signals a shift in the primary responsibility for assessment of going concern from auditors to management. Under GAAP, it is presumed that a reporting entity “will continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business.” This “going concern presumption” is the foundation upon which the historical cost principle of measurement and reporting is based. Whenever going concern does not apply, it is assumed that liquidation of the entity is imminent, and the liquidation basis of accounting must be followed rather than GAAP. Not coincidentally, FASB also recently issued a proposed accounting standards update on use of the liquidation basis of accounting. (See this column in the September/October 2013 issue of Today’s CPA for a summary.) According to the exposure draft, FASB believes that this update will increase uniformity in footnote disclosures along with increased timeliness and quality of those disclosures. The proposed accounting standards update would add a new subtopic (205-40) to FASB’s Accounting Standards Codification (ASC) requiring that going concern uncertainties be assessed by management at every interim and annual reporting period. Footnote disclosures would be necessary when either of the following conditions are met: 1. It is more likely than not that the entity will be incapable of settling its obligations within 12 months after the financial statement date without resorting to actions outside the ordinary course of business; or 2. It is known or probable that the entity will be incapable of settling its obligations within 24 months after the financial statement date without resorting to actions outside the ordinary course of business.

FASB decided that preparers of information understand the phrases more likely than not and probable, and will therefore be able to meet the objective of reducing diversity in the timing of disclosures. To establish whether disclosures are required, an entity would evaluate the conditions and events that exist when the financial statements are issued. Mitigating events and conditions that are not outside the ordinary course of business should also be taken into account. When an entity has decided that disclosures are necessary, the following details must be included in the footnotes: 1. the primary conditions and events that have caused the entity’s probable inability to settle its obligations; 2. the potential ramifications those conditions and events could have on the entity; 3. management’s assessment of the magnitude of those conditions and events; 4. mitigating conditions and events; and 5. management’s plans to deal with the entity’s possible incapacity in regards to meeting obligations.

These disclosures are similar to the required considerations for going concern that auditors have to follow. However, the dual requirements for “more likely than not” and “known or probable” conditions, as well as the 12- and 24-month time periods, are more stringent than those in the auditing standards. The proposed amendments would apply to all entities. In addition, Securities and Exchange Commission (SEC) registrants must also assess whether there is substantial doubt about the entity’s ability to continue as a going concern, and must disclose that determination in the financial statement footnotes. The comment period for this update ended Sept. 24, 2013. It has not yet been determined when the proposed standard would become effective, if adopted. ■

C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

Today’sCPA

| NOVEMBER/DECEMBER 2013

Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative

CPAs: The Next Generation CPAs are generating high-energy advocacy for accounting education in the Houston Chapter. Mix chapter volunteers who have high school-aged children and a CPA who has made a second career as a high school accounting teacher, and you’ve got a force for good. They have observed first-hand the educational needs of the community and the potential impact on the accounting profession in the future. Now the action begins.

CPAs Rebecca Parish and Stephen King

In Kingwood, a community in the Houston Chapter, CPAs Stephen King and Mark Micheletti participated in Principal for a Day and Career Days at their children’s middle and high schools in 2008. They learned of the challenge in getting students interested in the accounting class. The Northeast Satellite Committee of the Houston Chapter, chaired by King, was focused on improving financial literacy in the schools. This group met with Rebecca Parish, CPA, the accounting teacher at Kingwood High School, and school district employees. The high school graduation plan in place at the time required each graduate to have four years of both math and science. This left less time for students to take electives such as accounting. In 2009, King brought Parish’s suggestion to the Houston Chapter Board that TSCPA lobby the Texas Education Agency (TEA) to accept accounting classes as a math credit under the new high school graduation plan. The intention was to increase enrollment in that class, which would lead to greater awareness of a career as a CPA and to more accounting majors. With the chapter board’s blessing, King approached Bob Owen, CPA-

Dallas, TSCPA’s managing director of Regulation and Legislation. Owen spoke with staff at the Texas State Board of Education about accounting as a math credit. He then brought the issue to the TSCPA Executive Board, which commended Houston for its efforts. After learning more about the Kingwood accounting classes, King became part of an effort to convince the local community college to grant credit for high school accounting. Greg Mayer, CPA, a Houston Chapter board member, shared information about the program at Kansas State University that is supported by the American Institute of CPAs (AICPA) and several other accounting organizations. Parish contacted KSU accounting professor Dr. Dan Deines, CPA, to learn more about his program and a three-day workshop to help high school accounting teachers update their knowledge of accounting and to understand the new curriculum. Parish attended a Deines training session in Kansas City, Mo., in 2010. With the support of the Career and Technology Education director at Humble ISD and her Kingwood High School principal, she received approval to adopt the pilot curriculum at Kingwood – the first high school in Texas to do so. Accounting classes there were approved for honors credit beginning in the fall of 2011. “In support of our involvement with the pilot project, the school district has granted an additional grade point to my students,” explains Parish. “Parents love it because their teens get a chance to try accounting without harming their GPA. It allows students to clarify their direction to a college major before they

have to pay for the class in college.” She adds: “Accounting is the language of money and a great life skill. I always tell my students that even if they choose not to major in accounting, they will have to talk with accountants – so they might as well learn the terminology. It’s a winwin situation for everyone.” In 2012, TSCPA sponsored the KSU three-day workshop for the Accounting Pilot and Bridge Project led by Deines and held at the Houston Chapter Training Facility. Thirty-five teachers from around the state participated. By the 2013 school year, the measurable results were dramatic. Kingwood High School accounting enrollment had grown to 138 from 19 students in 2008. Furthermore, the class was attracting the top-ranked students. With House Bill 5, the 83rd Texas Legislature changed the high school graduation criteria to require students to select a career pathway. Business is one of the tracks offered and accounting is a component of that route. The future for the CPA profession looks bright. Micheletti shared this update about his son, who was in Parish’s class at Kingwood High School and received a Houston Chapter scholarship. “Michael graduated from Trinity with an accounting degree and is completing his masters at the University of Houston this academic year. He has accepted a position with a Big Four firm. My son might not have chosen this as his career without the high school accounting class.” Want information about the process of working with educators to get the pilot curriculum adopted at a high school in your area? Visit www.accountingpilot.com. ■

Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at rledbetter@tscpa.net.

Today’sCPA

| NOVEMBER/DECEMBER 2013

Emerging Issues By James F. Reeves, CPA | Column Editor

Accounting Education 2020: A Stakeholder’s Perspective Part 1 in a Series: Selected Trends Impacting Accounting Education CPAs currently find themselves in an enviable position relative to many other professions and vocations: demand for talent is at an all-time high and should continue for the foreseeable future. The Bureau of Labor Statistics expects the profession to experience “much faster than average” employment growth in the coming years, estimating a 22 percent increase in the number of accounting and auditing jobs by 2018. On the supply side of the equation, U.S. colleges and universities are enjoying record enrollment and number of degrees awarded in both undergraduate and graduate accounting programs, and in a growing number of cases are actually turning students away, due to both limited physical space and a shortage of doctoral faculty. And while schools do not expect an increase in enrollments at the BA level over the next two years, they are forecasting strong growth in both MBA in Accounting and Masters in Taxation programs, according to the AICPA study.

Hiring of accounting graduates by public accounting firms is at a record level and nearly 90 percent of firms are expecting to at least maintain, if not increase, current hiring levels going forward according to the American Institute of CPA’s (AICPA’s) 2013 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits. Texas CPAs in particular are well positioned relative to the rest of the country in terms of demand. Not only is the Texas economy doing well relative to other states, but Dallas and Houston lead the nation in job prospects for accountants according to a recent Accounting Today survey.

THE NEED FOR SPECIALIZED KNOWLEDGE The volume and velocity of regulatory change and the related complexity show no signs of abating anytime soon. While some practitioners bemoan the growing complexity of accounting standards and tax laws, others believe it creates new service opportunities. In any event, the growing body of standards, laws and regulations is driving a key trend affecting firms of all sizes – specialization, or in some observers’ view – hyperspecialization. There is no single model for specialists; they might reside within a firm, within a firm’s association of firms, or within informal networks of specialists who can be called upon as needed. INFORMATION ACCESS AND KNOWLEDGE SOLUTIONS The fast-changing regulatory environment has created a premium on anywhere, anytime access to information, and in some situations, that access can be more critical than experience or a working knowledge of a topic. CPAs now have access to information on demand, from a variety of devices that, practically speaking, eliminate geography as

James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at jim.reeves@thomson.com, or visit his blog at http://jamesfreeves.blogspot.com.

Today’sCPA

| NOVEMBER/DECEMBER 2013

a barrier and create expectations for real-time solutions. The emergence of eBooks, with key word searching, hyper-linking and cloud-based features such as automatic updating, and saving notes and annotations to the cloud and transferring them from edition to edition, could be a gamechanger. In addition to eBooks, we are beginning to see the convergence of information and software in the form of decision tree applications, document assembly tools and mind-mapping software employed by a wide range of professionals, including accountants. These “intelligent” applications generally provide a systematic methodology and framework for understanding a problem, identifying and evaluating options, and reaching a decision, forming a conclusion, creating a document, customizing a workflow, or making complex calculations. These tools don’t replace judgment and professional intuition. They force the user to focus on the relevant variables at the right moment and in the proper sequence, and for CPAs, are driven by the underlying tax laws and accounting standards. We’ll be able to drill down into a tax topic or accounting standard within a framework that easily separates the relevant from the irrelevant and enables us to focus on the key elements, avoiding information overload and analysis paralysis. EVOLVING EDUCATIONAL FRAMEWORK Very few young CPAs today expect or desire to spend

the majority of their careers with a single employer in a single role and retire with the gold watch at age 65. With the frenetic pace of change today, young CPAs can expect to reinvent themselves multiple times over their careers. A recently completed grassroots visioning initiative by AICPA called “CPA Horizons 2025” identified 10 key themes and examined their impact on the profession over the next 15 years, among them accounting education. The project concluded that while education will remain a cornerstone both as preparation for certification and as an ongoing activity throughout a CPA’s career, what CPAs learn and how they learn will have to evolve beyond technical accounting knowledge. Problem solving, communication and collaboration, and leadership skills will be increasingly important, and increasing globalization will require CPAs to become more knowledgeable about the international marketplace. Further, the educational framework will have to change – CPAs will have to engage in education wherever and whenever it is needed. Once a need is identified, the CPA will have to locate a course, podcast or webcast and participate without leaving his/her desk. The education will also need to be consumed in smaller units, as opposed to spending eight hours in a classroom, as information consumption habits have evolved significantly in the Internet age. Fortunately, online learning platforms are evolving in a way that will facilitate this evolution. ■

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Call A Texas CPA Today! North Texas The Holmes Group Toll-Free 1-800-397-0249 ryan@accountingpracticesales.com Central & West Texas Bill Anecelle Toll-Free 1-866-809-8705 bill@accountingpracticesales.com Southeast Texas Gary & Wade Holmes Toll-Free 1-888-847-1040 garyh@apsleader.com www.AccountingPracticeSales.com

Spotlight on CPAs By Anne McDonald Davis, ABC

Small Town Miracles

West CPA and Family Rebuild, Chapter Reaches Out

Jeff Holloman, CPA-Central Texas, was pulling in his driveway after work a little past 7 p.m. on April 17 when he noticed smoke at the nearby fertilizer plant. “Being the good redneck I am,” he admits freely, “I backed out again and headed in the direction of the fire.” As Jeff drew closer, however, he became uneasy and returned to his block to discuss the situation with a neighbor and good friend. As he returned home again, his buddy went back inside his house. But Jeff and Becky, high school sweethearts married 17 years, stood outside gazing anxiously toward the plant in the front yard of the home they shared with their 11-year-old triplet daughters – Ally, Abby and Audrey – and their 7-year-old son, Brett. Ally was inside watching television, having stayed home that evening with a stomachache; the others were at Bible study with their grandmother. Jeff recalls: “All of a sudden, the smoke turned white. I wondered … ‘What does white smoke mean’?!” What happened next would be chronicled on news stations around the clock for days as a horrified nation watched, as the people of West struggled to survive, as those in nearby neighborhoods 12

and towns rushed to their aid, and some brave souls laid down their lives in rescue attempts. In that moment, the Hollomans had a single laser-focused reaction: their children. One screaming child was alone in the house as a shock wave hit that Jeff explains, his voice shaking, was actually visible advancing over the treetops. The mother and father scrambled to their feet after being flung back and to the ground by the blast, and raced inside. Ally was under debris, including a ceiling fan, but miraculously emerged with only scrapes and bruises. “We just huddled together under the front porch as flaming debris fell from the sky,” Jeff remembers, eyes tearing. “Sorry … you’d think I would be past this.” In fairness, even a small-town Texas tough guy isn’t likely to ever forget those feelings. As the explosion died down, Becky saw that the back of Jeff ’s head was bleeding. In the rush to save Ally, neither noticed that he’d been hit by debris, and it was pitchblack outside at that point. “So we jumped in my truck and headed for the hospital in Hillsboro. I keep a rag in there for when the kids spill stuff and I was Today’sCPA

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holding that against my head. Looking back … I probably shouldn’t have been the one driving,” Jeff grins ruefully. Once at the small hospital, Jeff tried to explain to the staff what was happening, that wounded people would soon begin pouring through the doors. Then he saw his neighbor brought in, blinded by exploding glass. After that, Jeff more or less forgot about his own injury. In fact, once he dragged a doctor over to minister to his friend, he tried to return to West to join in rescue efforts, despite the staff ’s protests. “We couldn’t even get near,” he explains. “It would be many days before we did.” The hours and days ahead for the Holloman family would be a blur of struggle and uncertainty, but also of hope and gratitude. For starters, there was the 15-minute miracle. Jeff ’s mom was leaving for home with the three other children just before the blast. Instead of heading directly into the path, she stopped for 15 minutes to talk to the class director about ordering Bibles. Just long enough. Then there was the three-foot miracle. When Becky and Jeff were finally able to return to their house to salvage all they could, which turned out to be primarily clothing and precious family photos and videos, the debris path was discernable. Large chunks of concrete and a massive cast iron auger (lodged in his mother’s house next door) had flown half a mile to within a few feet of where Jeff had been standing. Suddenly the head wound, eventually treated at Waco’s Hillcrest Baptist Medical Hospital, didn’t seem so bad. And as the country watched, there was the miracle of community, the generous outpouring of support and help as people stood together. That support included TSCPA’s Central Texas Chapter, which spearheaded fundraising to distribute to the West CPAs affected by the tragedy. For the relief fund, the chapter received $30,600, with contributions froqm 15 chapters, TSCPA and 120 individuals. Eight TSCPA members, including Jeff, were assisted by the relief fund. Jeff ponders: “At first, all we had were the clothes on our backs and a hotel room. I remember pushing a cart down the aisles of the Bellmead Walmart in Today’sCPA

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my bloody shirt, shopping for contact lens solution and pajamas for everyone. I didn’t even think what I must have looked like. … But my wife’s sister has opened her home to us for as long as we need it. … And then the check that Michael Brown presented to us from the chapter. I was overwhelmed. I will never be able to say ‘thank you’ enough.” Truth be told, “thank you” was kind of a tough proposition for Jeff. “I’m a giver,” he says. “I’m used to being the one in charge. It took me a while to turn down the volume on my pride and become a gracious receiver.” In the end, all the Holloman’s family and friends survived, and Jeff thinks that’s all that really matters. “It was a wild night,” he sighs. “There are so many stories.” Becky, a special education teacher, is taking the year off while they put their life back together. Jeff, the CFO of Fashion Glass & Mirror, is still commuting to DeSoto while they rebuild. Yes, in West. “I was born and raised in West,” proclaims Jeff proudly. “I was the first baby born at the [now closed] West Texas Hospital. My mom lives here and works down at Baylor [Jeff ’s alma

mater]. My dad lived here, until he died from complications of juvenile diabetes at 49.” That’s a big reason why the Juvenile Diabetes Foundation is one of the organizations Jeff supports. In addition, he was treasurer and on the board of the Cameron Park Zoological & Botanical from 2004-2012; currently on the board of directors and finance committee for the Family Abuse Center in Waco; and has 13 years’ volunteer service with the Knights of Columbus Council 2305. Jeff adds, “I also coach my children’s youth sports teams in baseball (Brett), softball (Abby, Ally and Audrey) and football (Brett).” Of the harrowing experience on April 17, Jeff offers a positive thought: “This brought to light that there is a lot of good in the world. One of my favorite sayings – and my kids always say the second part before I can – is ‘do the right thing, even if nobody is watching.’ This experience has reminded me that I’m not in control, that our world can be turned upside down. But the story could have ended differently. We are blessed. “Please make sure you give the Texas Society of CPAs members a huge THANK YOU from me and my family.” ■ 13

Take Note

TSCPA Member Recruitment Campaign: Responsibility of Individuals TSCPA is made up of thousands of individuals who have all made the decision to be responsible. They are responsible to their profession, responsible to their clients and companies, responsible to their communities, families, and themselves. Invite your nonmember colleagues to join in meeting your responsibilities through your professional community and contribute to making TSCPA more effective for all Texas CPAs. TSCPA’s membership campaign encourages nonmembers to join and share their stories to connect with others. For more information, please go to www.tscparoi.org to see the ways TSCPA is working on connecting, protecting and advancing you.

Students Win Tuition/Book Reimbursements In a random drawing of 2013-14 student members majoring in accounting, four student members recently won $250 tuition/book reimbursements provided by the Accounting Education Foundation of TSCPA, Inc. TSCPA congratulates these four students: Melissa Thompson, Corpus Christi, Texas A&M University-Kingsville Paloma Gante, San Antonio, Texas A&M International University Laura Ham, Rio Grande Valley, University of TexasBrownsville Deanna Gonzales, Houston, University of Houston-Clear Lake

Succession Planning Resource – The Practice Management Institute

TSCPA Seeks Awards Nominations As you’re participating in your professional events and activities during the 201314 year, be sure to consider those members you might want to nominate for TSCPA awards. Is there someone making a difference in your chapter or local community? Do you know a member who makes considerable contributions as an outstanding committee chairman or is doing great work promoting the accounting profession? TSCPA’s Awards Committee is seeking nominations for Meritorious Service to the Profession, Distinguished Public Service, Outstanding Chairman, Honorary Fellow, Honorary Member, and Young CPA of the Year. Nominations are due April 25, 2014. All criteria details are available online. For more information, go to TSCPA’s website at tscpa.org/eweb/DynamicPage.aspx?webcode=ABTawards or contact Melinda Bentley at mbentley@tscpa.net; phone 800-428-0272, ext. 279 or 972-687-8579 in Dallas.

Succession planning is one of the most important practice management issues, and TSCPA is here to assist members by offering the Practice Management Institute. Developed in partnership with the Succession Institute, LLC, the Practice Management Institute provides TSCPA members with free material and content on succession planning. There are also CPE selfstudy course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more and utilize this members-only resource, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management under Tools and Information. Today’sCPA

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Accountants Confidential Assistance Network

TSCPA’s Accountants Confidential Assistance Network (ACAN) is a program dedicated to helping Texas CPAs, CPA candidates and accounting students who are addressing alcohol, chemical dependency or mental health issues. The program provides a 24-hour hotline – 1-866-766-ACAN – or you can also contact Craig Nauta at cnauta@tscpa.net. If you know someone who would benefit from the assistance of the ACAN program, you can refer them to a video TSCPA created about ACAN that describes how the program can help. The video is available in the ACAN area of TSCPA’s website. To view it there, go to the website at tscpa.org, select Resource Center, and then scroll down and click on Accountants Confidential Assistance Network.

Members Expelled The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • Donald B. Browning, Bryan; • Rene P. Dartez, Sugar Land; • Michael G. Shoup, Brenham.

Today’sCPA

Notice of Midyear Board of Directors Meeting Hilton Garden Inn, South Padre Island

The Midyear Board of Directors Meeting will be held Friday, Jan. 31, and Saturday, Feb. 1, 2014, at the Hilton Garden Inn in South Padre Island. The Hilton Garden Inn is located on the north side of the island across from the South Padre Island convention/ visitor bureau and the Birding and Nature Center. Complimentary WiFi! Hilton Garden Inn South Padre Island 7010 Padre Blvd; South Padre Island, TX 78597 To make reservations, call 956-761-8700 The room block is listed as Texas Society of CPAs The reservation code for our block is C-TSC Rate: $119 + occupancy tax Overflow rooms blocked at two additional hotels: La Quinta Beach Resort 7000 Padre Blvd; South Padre Island, TX 78597 Rate: $99 + occupancy tax To make reservations at La Quinta, call 956-772-7000 Holiday Inn Express Hotel & Suites Rate: $85 + occupancy tax 6502 Padre Blvd; South Padre Island, TX 78597 To make reservations at the Holiday Inn Express, call 956-761-8844 Cancellations must be made 72 hours in advance to avoid being charged one night’s room and tax Registration cut-off date for each hotel: December 30, 2013 * Rooms may be sold out at the Hilton and the La Quinta. It’s possible that some rooms may become available due to cancellations. A block of rooms has been added at the Holiday Inn Express. Each hotel has registration policies specific to that hotel, which may include requiring a deposit to hold your reservation equal to the first night’s room and tax, an early departure fee and cancellation fees. Ask the reservationist to explain the hotel’s registration policies.

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Take Note

Leadership Nominations Results for 2014-15 Positions Terms Commence June 1, 2014

TSCPA’s Nominating Committee recently chose the slate of candidates for 2014-15 leadership positions, directors-at-large and Nominating Committee members. In accordance with TSCPA Bylaws Article IX, the candidates’ election will be conducted through a secure electronic ballot on a TSCPA website area approved by the Executive Board. The electronic ballot will be open to all eligible members to vote. The voting is planned to take place in mid-November through mid-December 2013. TSCPA will send communications to members regarding the electronic voting and will post information about it on the website at tscpa.org. The following persons were nominated for terms beginning in fiscal year 2014-15 and have consented to serve if elected by the members. Chairman-elect: Allyson B. Baumeister (Fort Worth), Chairman in 2015-16 Treasurer-elect: Brenda (Roxie) R. Samaniego (El Paso), Treasurer in 2015-16 Secretary: Melanie C. Geist (San Antonio), Beginning June 2014 and expiring May 2015

Executive Board Members

Nominating Committee

Randy L. Crews (Rio Grande Valley)

James M. Larkin (Brazos Valley)

Toni McBee Joyner (Brazos Valley)*

Sally W. Wolfe (Central Texas)

(Three-year term beginning June 2014 and expiring May 2017)

Director at Large

(Three-year term beginning June 2014 and expiring May 2017) Jennifer (Fox) Mabe (Brazos Valley) Michelle R. Downs (Central Texas) Jason B. Freeman (Dallas) Royce E. Read (East Texas) Jennifer Hennessey (El Paso)

(Beginning June 2014 and expiring May 2015)

Koshy Alexander (East Texas) Kym Anderson (El Paso) E. Leroy Bolt (Abilene) Matthew G. Malcom (Austin) Terri E. Hornberger (Dallas) Susan I. Adams (Fort Worth) Benjamin C. Simiskey (Houston)

Kelly R. Hein (Fort Worth)

Martha C. Perez (San Antonio)

Benjamin C. Simiskey (Houston) Blaise C. Bender (San Antonio)

As immediate past chairman in 2014, Willie H. Hornberger (Dallas) will automatically serve as the chair of the 2014-15 Committee on Nominations, and E. Leroy Bolt (Abilene) was selected as vice-chair.

Wendi C. Taber (Southeast Texas)

AICPA Council

Carol B. Collinsworth (Rio Grande Valley)

Phillip C. Davis (Permian Basin) Sheri K. DelMage (Southeast Texas) *NOTE: Lisa M. Ong (Dallas) was selected as a replacement Director at Large to fill a one-year remaining term (2014-15) for Toni McBee Joyner, who was selected as a three-year Executive Board member and automatically serves as a Board member. ** Anthony B. Ross (Austin) was selected as a two-year replacement (2014-15/2015-16) for Tracy B. Stewart (Brazos Valley), who resigned from the Board of Directors.

(Three-year term beginning October 2014 and expiring October 2017) The following names will be submitted to the AICPA Nominating Committee as recommendations from Texas to serve on the AICPA Council: Willie H. Hornberger (Dallas) Kenneth D. Sibley (Dallas) Lei D. Testa (Fort Worth)

AICPA Council – One-Year Designee

(Beginning October 2014 and expiring October 2015) Mark D. Lee (Houston)

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Management Accountants: Delivering Value Beyond the Numbers Few organizations, regardless of size or industry, have escaped the shadow of uncertainty that has long hovered over the business community. This uncertainty has exhibited itself in ways ranging from intensified competition and market volatility to complex regulatory requirements and widespread digitalization. In spite of the inherent challenges of this environment, a reengineered formula for organizational success has emerged, and finance teams are transforming and reenergizing themselves in its wake. Bridging the talent divide. The finance team’s evolving remit is largely due to its greater role as a trusted partner with senior leadership and the higher demand for a specific combination of skills needed to guide the organization. Key decision makers are looking for financial professionals who combine analytical and financial expertise with strategic, management and decisionmaking insights. An American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA) study, Rebooting Business: Valuing the Human Dimension, supports business savvy’s more prominent footprint in corporate America, with nonfinancial senior executives stating that 68 percent of the value provided to the organization is nonfinancial. However, according to Deloitte’s 2013 Global Finance Talent Survey, there is growing concern among many finance executives over recruiting, retaining and developing finance employees with such an in-demand combination of skills. Management accountants, specifically those awarded the Chartered Global Management Accountant (CGMA) designation, are setting themselves apart from other professionals in fulfilling this unmet need. With their proven talent in both financial and management areas, coupled with their business acumen, management accountants are advancing into key advisory roles that are critical to operations and strategy. In the process, they are filling a talent void that, if not met, could undermine sustainable growth and progress. Similar to many of their peers from other leadership disciplines, management accountants’ contributions span the full range of activities, making a measurable impact on executive decisions, performance and competitive position. Whether managing risk across a portfolio of projects, formulating strategy

or initiating and leading innovation and change, management accountants are helping finance departments more proactively respond to leadership’s call for deeper, more hands-on collaboration and partnership. Further building management accountants’ value is a skill set that extends beyond domestic operations. “Management accountants and CGMAs are also making tremendous contributions to global and non-U.S. operations, especially in long-term strategic planning, short-term business planning, and monitoring and control,” said Hiroshi Miyamasu, CPA, CGMA, finance director at Nike Japan. “Among the benefits of their strengthening, multifunctional role has been a measurable improvement to the top- and bottom-lines at a time when organizations of all types need to be at their competitive best.” As the new business mandate moves beyond core financial accounting skills, management accountants are using a wide range of financial processes to move business operations forward. Management accountants are increasingly preparing and being recognized for their expanded organizational role at a time when their contribution is strongly felt at all levels. According to a CGMA survey, New Skills, Existing Talent, 75 percent of global finance executives reported that when finance professionals support management, the organization better meets its objectives. In fact, there are few innovative organizations today that are genuinely successful without the influence of management accountants and other finance professionals. The New Skills, Existing Talent Survey also provides insights into management accountants’ potential influence on future leadership initiatives. When finance professionals and business managers were asked whether finance provided an appropriate training ground for future business leaders, the majority of each group responded that it was equal to, or greater than, other parts of the organization. Building sustainable momentum. Looking ahead, management accountants will further identify new opportunities to broaden their scope of responsibilities, grow their capabilities and deliver even greater value. The result will be an organization that not only maximizes and benefits from the full potential of the finance team, but is also poised for long-term success. You can access additional valuable resources and information on this topic and more on the CGMA website at CGMA.org. Not a designation holder? Find out more about the designation and eligibility requirements at cgma.org/BecomeACGMA.

Disciplinary Action

As a result of a decision by the Executive Board of the Texas Society of CPAs, the following member had his TSCPA membership: Expelled – • William Raymond Zweifel of The Woodlands effective Sept. 26, 2013. The action was based on the revocation of Zweifel’s certificate by the Texas State Board of Public Accountancy. On Mar. 8, 2013, the Department of Justice announced that Zweifel pleaded guilty to two counts of willfully aiding and assisting in the preparation and presentation of false tax returns. Zweifel was later sentenced to 37 months imprisonment and ordered to pay $250,000 in restitution to the Internal Revenue Service. Today’sCPA

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Membership Suspensions The following people have had their membership in TSCPA suspended by the Executive Board for non-compliance with TSCPA Bylaws Article III, Section (4A)(1) for non-compliance with the Texas State Board of Public Accountancy’s continuing professional education requirements. Suspended for a period of three years – • Gregory L. Brown, CPA, Houston; • Ansel H. Smith, Jr., CPA, Plano.

Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

The Race is On It’s official – you’ve read it in the mainstream news, the online blogs and on all things media: State Sen. Wendy Davis (D-Fort Worth) is running for governor. The announcement came on Oct. 3, 2013, to the surprise of almost no one.

Davis was catapulted to statewide fame when she successfully filibustered against an abortion regulation bill causing Gov. Rick Perry to call a second special session this past summer where the filibustered bill eventually passed. Davis was featured in the press throughout the state and went from “Wendy who?” to a ray of hope for Texas Democrats, who haven’t had many rays for the last 20 years. There has not been a Democratic governor in Texas since 1994 when Anne Richards served one term between Republicans Bill Clements and George W. Bush. Richards was only the second female governor of Texas; could Davis be the third? Texas Attorney General Gregg Abbott is the anticipated Republican nominee and most pundits today predict Abbott will continue the Republican domination of the governor’s office. Now Abbott has someone to run against besides President Barack Obama. As of this writing, Abbott does have four primary opponents, but most prognosticators say he will win the nomination easily. Most of Abbott’s campaign output has been anti-Obama without even mentioning opponents. Democrats claim they can win and if they can raise enough money to be competitive (which some say needs to be about $40 million), we are all in for a barrage of political ads. To raise that kind of money, Harvey Kronberg, writing in the Quorum Report, says, “Out-of-state money is likely to be more important in this race than any time in decades.” But not all Democrats expect a Davis win. In an interview with the Dallas Morning News, San Antonio Mayor Julian Castro (a Democrat who was once mentioned as a possible

gubernatorial candidate) said of Davis: “She will close the gap. The question is, how much can she close that gap?” The next question: Will out-of-state money be available to fund a race just to “close the gap?” In subsequent interviews, Castro has been more positive about Davis’ chances. Nate Cohn, writing in The New Republic, opines that “Davis has no chance to become Texas’ next governor … there isn’t a pathway to victory … because of the demographics.” Regardless of the prognosticators’ views, if $40 million is needed for the campaign, Abbott already has a $20 million head start. Look for it to be a rough and tumble campaign, with all skeletons coming out of the closet. The biggest winners will likely be those that sell political advertising! Media outlets are drooling and voters are dreading $80 million of campaign ads. Pundits are already speculating on the campaign issues and strategies. The right to life vs. the right to choose will likely be front and center, especially since that’s the issue that made Davis famous. In a University of Texas/Texas Tribune poll conducted May 30, 2013, 62 percent of respondents said they would support “prohibiting abortions after 20 weeks,” which was a central part of the bill opposed by Davis. The poll also reported that 85 percent of Republicans favored the ban and almost 40 percent of Democrats did too. In fairness, the legislation opposed by Davis did much more than prohibit abortions after 20 weeks, instituting additional regulatory requirements on clinics and the doctors who perform abortions. The poll indicated much less support for those features of the bill. But can Davis successfully make that distinction? One Democratic consultant, Jason Stanford writing a guest column for Politico, thinks the abortion issue will help Davis, because it will highlight what he sees as Abbott’s draconian stand on the issue. Others have suggested Davis will run on “Perry’s failures,” even though she is running against Abbott. While those failures might be in the eye of the beholder, education stats that continue to show Texas at the lower end of the education spending and achievement scale will likely be characterized as one of those failures. An October 2012 UT/TT poll indicated 52 percent of Texans believe the state underfunds education. The seemingly everlasting lawsuits against the state’s education funding system continue with the latest hearings to be held in an Austin court in January 2014. A ruling in the case before

Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at bowen@tscpa.net.

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the November elections could provide political fodder for either candidate, depending on what the ruling says. Education as an issue is a two-edged sword. Jim Henson and Joshua Banks, writing for the Texas Tribune, point out that if education is an issue, Republicans will undoubtedly try to focus the debate on school choice. They write, “In the February 2013 UT/TT Poll, we found Texans to be supportive of school choice by a margin of 63 percent to 36 percent.” The poll indicated this view was pervasive across most demographic segments, including those that tend to vote more Democratic than Republican. The same poll also indicated that “68 percent of liberals expressed opposition to school choice.” How does Davis deal with an issue supported by most Texans, but opposed by her base supporters? Who knows what other claims and counterclaims will be made, but the race is on! AN INDEPENDENT CANDIDATE? Just before deadline, Republican Debra Medina, who ran unsuccessfully against Perry in the 2010 Republican primary, announced she was considering leaving the Republican Party and running for governor as an independent candidate. Medina previously announced she would run for state comptroller as a Republican (see below). Medina tried to prove she was more conservative than Perry in 2012 and she got 18.5 percent of the votes. A Medina independent candidacy might be Abbott’s worst nightmare. Would it split the conservative vote enough for Davis to have a real chance to win? Medina indicated a final decision on which race to run would be made in November. In addition to a possible Medina run, Libertarian Party candidate Kathie Glass has announced for governor. She was the Libertarian candidate in 2010. DOWN BALLOT RACES With Davis running for governor, her Fort Worth Senate District 10 seat is now open. Although Davis is a Democrat, the demographics of the district are slightly Republican. Without the incumbent, Republicans see the opportunity to pick up another Senate seat and hope to have a 20-11 majority in the 2015 session, still not two-thirds. Other state senators who will not be returning include Dan Patrick (R-Houston), who is running for lieutenant governor, and Ken Paxton (R-McKinney), who is running for attorney general. The Republicans expect to keep those seats in the fold. In a surprising move, CPA and TSCPA member Sen. Tommy Williams (R-The Woodlands) announced he would be resigning his state Senate seat before the start of the next legislative session. As chairman of the Senate Finance Committee, Williams was arguably the most powerful state senator. The governor will call a special election after Williams names his resignation date. Republicans will likely hold on to the Williams’ seat. There could be as many as seven new senators serving in the 2015 session (see below), even if all incumbents win reelection. The only Democrat to announce as a statewide candidate at our copy deadline was Michael Collier for state comptroller (see below). Many were urging state Sen. Leticia Van de Putte Today’sCPA

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(D-San Antonio) to run for lieutenant governor and if she decides to run, you will probably know by the time you read this. She does not have to give up her seat to run for higher office. State Sens. Carlos Uresti (D-San Antonio) and Jose Rodriguez are considering running for attorney general. Uresti promised a decision by early December. Neither senator would have to give up his seat to run. The race for state comptroller has an interesting aspect for CPAs. There has never been a CPA serve as state comptroller and I’m not sure there has ever been a CPA as a candidate for the office. It looks like there will be two CPAs in the running in 2014. On the Republican side, former state Rep. Raul Torres, a CPA from Corpus Christi, has announced and already has a campaign website, ewctraultorres.com, including a campaign video and social media activity. Torres is the owner of Raul Torres, CPA, a full-service accounting and financial services firm since 1993. He is a member of TSCPA. Michael Collier, a Houston CPA, has announced for the Democratic nomination for comptroller. His website is collierfortexas.com. He was a partner at PriceWaterhouseCoopers for a dozen years and left PWC to become chief financial officer for an energy company. After he helped sell the company two years later, he began to explore running for office. Collier is also a member of TSCPA. There are others running for the state comptroller’s office. State Sen. Glenn Hegar (R-Katy), State Rep. Harvey Hilderbran (R-Kerrville) and Republican Debra Medina (maybe – see above) have all announced. Hegar’s Senate term does not expire until 2016, which means he does not have to give up his Senate seat while he runs for comptroller. Hegar is the chairman of the Senate Nominations Committee and the Finance Subcommittee on Fiscal Matters. Hilderbran has chaired the House Ways and Means Committee for the last four years. Hegar and Hilderbran have more money on hand than any of the other candidates and handicappers name them as the front runners most likely to win both the Republican primary and the general election. TAKE ADVANTAGE OF ELECTIONS Of course, all CPAs should vote in the primary and general elections, but CPAs should also take advantage of election campaigns to form or cement relationships with candidates. Help the candidate of your choice with his/her election campaign and he/she will not forget you. Contribute, hold a reception for the candidate or meet and greet in your home, put out signs, etc. TSCPA CPA-PAC If you don’t want to be involved in political campaigns, but recognize the importance of legislators to the CPA profession, the easiest way to help is by making a contribution to the TSCPA CPA-PAC. You can contribute online at https://secure. tscpa.org/cpapac/donate.asp or you can just send a check to TSCPA CPA-PAC, 14651 Dallas Parkway, Suite 700, Dallas, TX 75254-8887. If you give $100 or more, you will be eligible to receive the weekly email newsletter Last Week in the Legislature every Friday during each legislative session. ■ 19

Feature By Richard Pitre, Ph.D., CPA; Carlton Perkins, LLM, MBA, CPA; and Fannie L. Malone, Ph.D., CPA, CITP

y l l ia t n e e d h t fi in Con

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For CPA practitioners, cloud computing raises challenging issues. When practitioners engage in cloud computing, they place a high level of trust in the cloud provider. Practitioners are responsible for client information that is sensitive and valuable. This information needs to be protected from unauthorized publication or tampering. Do you and your clients have a means of verifying the confidentiality and integrity of the data you are storing in the cloud? How do you decide which kinds of data to store in the cloud and remain compliant with professional and government regulations, and maintain control and protection of client data in a cloud-based environment? The purpose of this article is to determine if participation in cloud computing is subjecting practitioners to violation of accounting rules such as the following: • Internal Revenue Code (IRC) §7216 is a criminal provision enacted by the U.S. Congress in 1971 that prohibits preparers of tax returns from knowingly or recklessly disclosing or using tax return information. A convicted preparer may be fined not more than $1,000 or imprisoned not more than one year or both, for each violation. The Secretary of the Treasury

is permitted to grant exceptions to this general prohibition by issuing regulations. Treas. Reg. §301.7216 had been substantially unchanged for over 30 years and did not address the modern return preparation marketplace, particularly electronic filing and the cross-marketing of financial and commercial products and services during the return preparation experience. • IRC §6713 imposes a civil penalty of $250 on any person who is engaged in the business of preparing, or providing services in connection with the preparation of tax returns, or any person who for compensation prepares a return for another person, and who discloses any information furnished to him/her for, or in connection with, the preparation of any such return, or uses any such information for any purpose other than to prepare, or assist in preparing, any such return. Imposition of the penalty under IRC §6713 does not require that the disclosure be knowing or reckless as it does under IRC §7216. • “The ethics ruling under AICPA Rule 102, Integrity and Objectivity, requires that, prior to sharing confidential client information with a service provider (cloud computing), member should inform the client, preferably in writing, that he or she may be using a third-party service provider when providing professional services.” • Texas Administrative Code, Title 22, Part 22, Texas State Board of Public Accountancy (TSBPA), Chapter 501, Rules of Professional Conduct, Subchapter C, Responsibilities to Clients,

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Rule §501.75, Confidential Client Communications. “Except

by permission of the client or the authorized representatives of the client, a person or any partner, officer, shareholder, or employee of a person shall not voluntarily disclose information communicated to him by the client relating to, and in connection with, professional accounting services or professional accounting work rendered to the client by the person. Such information shall be deemed confidential.” WHAT IS CLOUD COMPUTING? For the purpose of this article, cloud computing is defined as the sharing or storing of data on off-site servers owned or operated by others and accessible through the Internet in real time. The National Institute of Standards & Technology (NIST) defines cloud computing as a “model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.” (Computer Security Division, Information Technology Laboratory, NIST, Gaithersburg, MD, September 2011). When using cloud computing, CPAs store client data on the Internet and third-party providers maintain that information on remote servers owned or operated by the provider. They do not own the technology; instead, they rent time or space from the cloud provider. Professional services firms are moving to the cloud. According to a 2011 In-Stat report, cloud computing and managed hosting spending by U.S. businesses will surpass $13 billion in 2014, up from less than $3 billion. “The professional services and health care organizations will experience the largest growth in spending on cloud computing services, growing over 124 percent between 2010 and 2014.” (In-Stat research, US Business Spending by Size of Business and Vertical, 2009–2014: Cloud Computing and Managed Hosting Services, December 2010.) A significant advantage of using cloud computing is increased efficiency when it comes to IT operations, support and security. Small CPA practitioners have problems affording the critical resources needed for senior level engineers to operate.1 Additionally, they would experience serious financial problems acquiring the most advanced Internet security software packages. These packages are very expensive and are cost effective only when spread over systems much larger than a small CPA practitioner would need or could afford. This trend is spurred by the increasing ubiquity of diverse mobile devices. Traditionally, CPAs owned a desktop, and possibly a laptop; today, they also own a smartphone and a tablet computer, and would like to be able to access files on all these devices, without having to copy data to each device individually. The primary focus of this article is the professional responsibility of practicing CPAs related to confidentiality when storing client data in the cloud. Several articles and white papers have dealt with the pros and cons surrounding cloud computing.2 Today’sCPA

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There are very few questions as to the cloud computing model being the prevailing style of delivery over the coming decade. What is of concern is the impact of factors such as security/ compliance, application architecture, integration, the pattern of demand and operational maturity.3 This article’s focus is that of security/compliance and professional responsibility. DATA BREACH A putative class action complaint filed on June 22, 2011, in the United States District Court for the Northern District of California, Cristina Wong vs. Dropbox Inc., Case No. 11 3092, alleges that the popular cloud-based storage provider, Dropbox, failed to secure users’ private data or to notify the vast majority of them about a data breach. According to the complaint, Dropbox announced in a blog post on its website that it had “introduced a bug” on June 19, 2011, which allowed users logged in to its system to log into other users’ accounts and access those users’ data stored on Dropbox. The complaint further claims that Dropbox did not notify most, if not all, of its 25 million users that their information had been compromised. Dropbox is a service that allows users to move their files from their personal computers to the company’s Internet-accessible servers. Dropbox advertises its service as allowing users to access their files from anywhere using practically any device, including a laptop, tablet or smartphone. According to the complaint, one of the most highly touted benefits of Dropbox’s service is its security. Pursuant to complaint, Dropbox asserts that it is secure enough for users to feel comfortable storing confidential, personal and business information. Wong v. Dropbox, Inc.

Cloud-based file storage service Dropbox faces a consumer class-action lawsuit over the company’s June 2011 security debacle. Plaintiff: Defendant: Case Number: Filed: Court: Office: County: Presiding Judge: Nature of Suit:

Cristina Wong Dropbox, Inc. 4:2011cv03092 June 22, 2011 California Northern District Court Oakland Office San Francisco Laurel Beeler Torts - Property - Property Damage Product Liability Cause: 28:1332 Diversity-Product Liability Jurisdiction: Diversity Jury Demanded By: Plaintiff

Do you know what your liability would be if you were storing client information in a situation as above? What are the professional and legal issues associated with cloud computing that should be of concern to the small CPA practitioner? The first line of protection for the CPA practitioner would be guidance from the following organizations. continued on next page

Confidentially in the Cloud continued from page 21

Internal Revenue Service (IRS)

Tax return preparers must obtain consent to disclose tax return information before returns are provided to the taxpayer for signature and before tax return information is disclosed. The rules for obtaining consents are found in Treas. Reg. 301.7216-3 and Revenue Procedure 2008-35. Consents to disclose tax return information are paper or electronic documents that contain certain specific information, including the names of the tax return preparer and the taxpayer and that specify the nature of the disclosure(s), to whom the disclosures will be made, and details on the data to be disclosed. Consents are valid only if they are made by the taxpayer knowingly and voluntarily, and are signed and dated by the taxpayer in penand-ink or electronically. Consent forms must include certain language and warnings. Refer to Treas. Reg. §301.7216-3(a)(3) and Revenue Procedure 2008-35 for complete information. The provisions of section 7216(a) and §301.7216–1 shall not apply to any disclosure of tax return information if such disclosure is made pursuant to any other provision of the Code or the regulations thereunder. Thus, for example, the provisions of such sections do not apply to a disclosure pursuant to section 7269 to an officer or employee of the IRS of information concerning the estate of a decedent or a disclosure pursuant to section 7602 to an officer or employee of the IRS of books, papers, records or other data that may be relevant to the liability of any person for the income tax. Treasury Reg. 301.7216-1(b)(2) strengthens taxpayers’ ability to control their tax return information by requiring that tax return preparers give taxpayers specific information, including who will receive the tax return information and the particular items of tax return information that will be disclosed or used, to allow taxpayers to make knowing, informed and voluntary decisions over the disclosure or use of their tax information by their tax return preparer. A tax return preparer is defined in this code section as “… any person who prepares tax returns or assists in preparing tax returns, … whether or not the person charges a fee for tax return preparation services.” The regulations apply to disclosures or uses of tax return information occurring on or after Jan. 1, 2009. The term “tax return information” means any information including, but not limited to, a taxpayer’s name, address or identifying number that is furnished in any form or manner by a taxpayer for, or in connection with, the preparation of a tax return of such taxpayer. Information furnished by a taxpayer includes information that is furnished on behalf of the taxpayer by any person; for example, any person required under section 6012 to make a return for such taxpayer, such as a guardian for a minor, by a duly authorized agent for his/her principal, by a fiduciary for an estate or trust, or by a receiver, trustee in bankruptcy, or assignee for a corporation. American Institute of CPAs (AICPA)

“In response to your inquiry, I believe that the situation here is a matter of record storage for the practitioner. Accordingly, 22

the appropriate guidance regarding this matter is in ethics ruling no. 1 under ET Section 391 since the practitioner should consider Rule 301 regarding this matter.” Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support Services to the Member: .001 Question – A member in public practice uses an entity that the member, individually or collectively with his/her firm or with members of his/her firm, does not control (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation) or an individual not employed by the member (a “third-party service provider”) to assist the member in providing professional services (for example, bookkeeping, tax return preparation, consulting or attest services, including related clerical and data entry functions) to clients or for providing administrative support services to the member (for example, record storage, software application hosting or authorized e-file tax transmittal services). Does Rule 301, Confidential Client Information [ET section 301.01], require the member to obtain the client’s consent before disclosing confidential client information to the third-party service provider? .002 Answer – No. Rule 301 [ET section 301.01] is not intended to prohibit a member in public practice from disclosing confidential client information to a third-party service provider used by the member for purposes of providing professional services to clients or for administrative support purposes. However, before using such a service provider, the member should enter into a contractual agreement with the third-party service provider to maintain the confidentiality of the information and be reasonably assured that the thirdparty service provider has appropriate procedures in place to prevent the unauthorized release of confidential information to others. The nature and extent of procedures necessary to obtain reasonable assurance depends on the facts and circumstances, including the extent of publicly available information on the third-party service provider’s controls and procedures to safeguard confidential client information. In the event the member does not enter into a confidentiality agreement with a third-party service provider, specific client consent should be obtained before the member discloses confidential client information to the third-party service provider. As noted above, if the member is using a third-party service provider for administrative support services, the member is not required to inform his/her clients. However, the member should enter into an agreement with the service provider to ensure that the client’s confidential information is not disclosed. In addition, the member should make sure that the service provider has proper procedures in place to protect the client’s confidential information. Regarding the scenario in Wong v. Dropbox, Inc., if the member implemented the above safeguards, the member might not be in violation of Rule 301. However, the member might want to consider informing his/her clients of the service provider’s “data breach.” As noted in the ethics ruling 112, Rule 102 requires a member to be “honest and candid” (AICPA, Email interview). Today’sCPA

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TSBPA

“Texas State Board of Public Accountancy rules and the Texas Public Accountancy Act do not prohibit the use of off-site servers (cloud servers) in maintaining client records. Therefore, it is the staff ’s opinion that using cloud servers is permitted under Board rules and regulations, so long as the CPA complies with Board Rule 501.75. Board Rule 501.75 requires licensees not to “voluntarily disclose” client information to third parties unless certain limited exceptions apply. It should be understood that the CPA has a duty to exercise due diligence when using cloud servers to assure that the files are placed in the hands of someone who has adequate security measures to protect the file’s confidentiality. Failure to do so could result in a determination by the Board that the files were voluntarily disclosed” (TSBPA, email interview). PROTECTION FOR CPAS We live in a litigious society and people sue for many reasons. The question is what protection(s) would be afforded the CPA (outside of the above professional guidance) should any action be brought against him/her? If the client were to bring action of negligence against the CPA, related to the case presented above, the client would have to prove (1) the accountant owed a legal duty to the plaintiff; (2) the accountant breached that duty; and (3) the breach proximately caused the harm (Western Investments, Inc. V Urena, 162 S.W. 3d 547, 550 (Tex. 2005)). It would be difficult for the client to establish any of the three elements, even more for all three.

Based on the facts presented, it does not appear that the CPA’s recommendation to use a vendor such as Dropbox would rise to the level of a legal duty. If it did not, there is no negligence; if it did, the plaintiff must prove that the accountant breached that duty. The Dropbox Company touted its security. In this instance, the CPA should not be liable because of the actions of another not under the control of the CPA. Assuming the plaintiff can establish elements 1 and 2, the plaintiff must prove that the breach proximately caused the harm. The compromise of the data was beyond the control of the CPA, so the CPA’s actions should not be a proximate cause. RECOMMENDATION The CPA should obtain consent to disclose tax return information from the client prior to any disclosure not required by law. Consents are valid only if they are made by the taxpayer knowingly and voluntarily, and are signed and dated by the taxpayer in pen-and-ink or electronically. The CPA should exercise good faith compliance with Generally Accepted Auditing Standards (GAAS) and Generally Accepted Accounting Principles (GAAP). The United States Supreme Court has recognized that these standards apply and are relevant. U.S. v. Arthur Young & Co., 465 U.S. 805, 811, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). Therefore, demonstrating that an accountant or auditor has adhered to these standards can prove to be a strong defense against a professional liability claim. See Monroe v. Hughes, 31 F.3d 772, 774 (9th continued on next page

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Confidentially in the Cloud continued from page 23

Cir. 1994) (“[A]n accountant’s good faith compliance with [GAAP] and [GAAS] discharges the accountant’s professional obligation to act with reasonable care”). Other authoritative sources bearing on an accountant’s duties include the Code of Federal Regulations, various Treasury Department circulars and regulations, and state and federal statutes. Prior to shifting to the cloud, the CPA should take a careful look at the following: • Where is your data stored physically? • What if the data center is hit by a disaster? • Is your data protected under intellectual property rights? • Third party access? (The Legal Issues Around Cloud Computing: www.labnol.org/internet/cloud-computinglegal-issues/14120) • Circular 230 (IRS). • IRS Publication 1075 (IRS). • Frequently Asked Questions About Privacy Services (AICPA). • Outsourcing and Privacy: 10 Critical Questions Top Management Should Ask (AICPA). • InformationWeek 2012 State of Cloud Computing Survey (www.informationweek.com/news/services/ business/232600176). Data security should be a huge concern for any businesses that use cloud computing and have compliance issues such as those of the practicing CPA. Choosing the right cloud vendor is important. Reputable cloud computing vendors often host their systems in facilities that have much stronger physical security controls with meaningful certifications that many small-to-midsized companies cannot provide on their own. Many industries require IT systems and facilities maintain certain types of information security and/or privacy certifications. For example, compliance with the Federal Information Security Management Act (FISMA) is required for the federal government, while Health Insurance Portability and Accountability Action (HIPAA) compliance is required for the health care industry. These certifications can be prohibitively expensive for smaller organizations to achieve; however, many cloud vendors provide access to systems and facilities that are already certified.4 POTENTIAL VERSUS PRIVACY Cloud computing has great potential advantages to the practicing CPA. The main advantages are significant economies of scale and efficiency, particularly in the areas of operations, support and security. Small CPA practitioners have problems affording the critical mass of senior-level engineers needed to operate in these three critical technology

areas. Additionally, they would experience serious financial problems acquiring the most advanced Internet security software packages. The major down side of cloud computing is the issue of privacy. You are entrusting potentially highly sensitive and private information to a third party. When you have private confidential information, you have certain privacy interests and corresponding legal protections for that information so long as you maintain its privacy and secrecy. If you give that same information to a third party, you effectively lose those protections. United States v. Miller provides evidence of such. In Miller, the Supreme Court said, “The Fourth Amendment does not prohibit the obtaining of information revealed to a third party and conveyed by him to the government authorities even if the information is revealed on the assumption that it will be used only for a limited purpose (United States v. Miller, 425 U.S. 435 (1976).” One of the main concerns of cloud computing is entrusting communications and data management to others. Careful analysis of the professional and legal responsibilities and the concept and application of cloud computing suggest that, for the CPA practitioner, cloud computing is an advantageous solution if the CPA exercises good faith compliance with GAAS and GAAP. Due to the advantages of the significant economies of scale and efficiency, particularly in the areas of operations, support and security, it is almost impossible for the small CPA practitioner to provide superior in-house data security and protection. The AICPA rules and similar state board rules would suggest that should practicing CPAs find themselves in a Dropbox-type situation, they would be protected if they followed the professional rules of conduct. Permission to use the AICPA and TSBPA emailed answers was granted by those organizations. FOOTNOTES 1. G. E. Morris, “Cloud Computing Has Dark Lining,” Advertising & Marketing Review, March 2009. 2. See O.M. Amundsen retrieved from http://olemortenamundsen.wordpress. com/2011/10/13/pros-and-cons-in-house-servers-vs-cloud-computing/; Forrester Research retrieved from http://fm.sap.com/data/UPLOAD/files/ Forrester%20-%20The%20Evolution%20Of%20Cloud%20Computing%20 Markets.pdf; J. Hanshaw retrieved from http://blog.hcd.net/cloud-computingshould-your-business-use-it/; and Hewlett-Packard retrieved from http:// h20195.www2.hp.com/V2/GetPDF.aspx/4AA3-4550ENW.pdf. 3. E. White, “Cloud – Vision to Reality,” 2012, September 4. Cloud Computing Journal, retrieved from http://cloudcomputing.sys-con.com/node/2342658. 4. J. Wood and R. Tracy, “Security Advantages of Cloud Computing,” Modern DC Business, January 25, 2011. ■

Richard Pitre, Ph.D., CPA, is Professor of Accounting in the Jesse H. Jones School of Business at Texas Southern University. Carlton Perkins, LLM, MBA, CPA, is Associate Professor of Accounting and Taxation in the Jesse H. Jones School of Business at Texas Southern University. Fannie L. Malone, Ph.D., CPA, CITP, is a retired Professor of Accounting in the Jesse H. Jones School of Business at Texas Southern University.

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Society Feature By Neil Jennings

Using Your Accounting Qualifications to Give Something Back When people consider volunteering overseas, they often think of teaching English, handing out supplies or building orphanages. However, these activities can only happen if funding is effectively managed, and the vital and transferable skills that CPAs possess open up a whole world of volunteering opportunities. If a school in a deprived part of Kenyan hasn’t created a realistic budget for its projects or established workable monitoring systems, it could easily run out of funds unexpectedly. This might lead to a lack of trust from its donors and an inability to cover vital running costs, such as school meals and staff wages. The school might even have to close. If a women’s refuge in Cambodia doesn’t make effective use of its limited income, it might have to turn away vulnerable women and girls. And if a health clinic in rural El Salvador isn’t able to produce clear and transparent financial reports, its international donors might have to withdraw vital funding. Such problems are well known in the international development sector, and the volunteer organization Accounting for International Development (AfID) was set up to deliver an effective solution. Accounting skills are a globally accepted language that transcends many barriers. Accounting skills are just as useful at a Ugandan children’s home as they are in a firm or business. AfID supports hundreds of groups, from tiny orphanages to social enterprises to international organizations. Assignments vary in length from two weeks to 12 months and focus on developing the skills, confidence and potential of local people. This creates the local financial management capacity needed to deliver more effective and sustainable programs to their many beneficiaries. By passing on professional skills through mentoring and coaching, volunteer accountants empower local staff and avoid creating an aid dependency. Local staffs in Africa, Asia and South America are highly aware of the need for financial management capacity building. “Our AfID volunteer arrived at the exact time needed in our organization’s development,” says Helen, managing director of Epic Arts, a performing arts and education charity in Cambodia. “Having a professional spend time with our finance team and look at the details in our financial processes, and make recommendations for improvement, was such an enormous gift!” Accountants can also use volunteering as a platform for career change. More than one in 10 of AfID’s volunteers go on to work permanently in the charity and international development sectors. Bryan Mundy volunteered as a mentor at peace building charities in the Democratic Republic of Congo, where he coached local staff in the use of Quickbooks and set up new reporting systems and processes. Once back in the U.K., Mundy drew on his experience to move his career to the international development sector. Mundy summed up his experience volunteering as “lifechanging, challenging, thought-provoking, stimulating,

satisfying, motivating and career developing.” His experience helped him to secure a position at Partners in Health, one of the world’s most prestigious health care organizations. “I spent six weeks in Congo, [with] no hot showers and basic living, but I made new friends and proved my skills in an NGO environment, which enabled me to secure the position of finance director for Partners in Health’s flagship hospital in Haiti.” So what is volunteering overseas actually like for an accountant? John Kruger recently returned from IDinsight, an organization that develops effective HIV and AIDS programs in Zambia. “Overall, I really valued my experience at IDinsight. My work was the establishment of basic cash and expense controls, to learn their new simple accounting software and develop an accounting process for their specific business to match Quickbooks capabilities and processes.” In addition, Kruger found he was contributing to numerous other aspects of the financial management of IDinsight. “I was also involved in the recruitment of an internal auditor, the establishment of contract terms and development of a plan for the internal auditor’s reviews and management’s reviews.” However, Kruger found the gratitude a just reward for his efforts. “These seemingly basic actions were really appreciated, which was enormously satisfying.” There are other reasons that make volunteering abroad worthwhile in addition to utilizing your skills to help those less fortunate. Kruger sums up his experience by saying, “Living in Zambia, I made new friends and learned a lot about their culture. I managed to visit Victoria Falls – both beautiful and eye opening. My impression is that the charities really appreciate it and that it is extremely valuable to them. For accountants, it’s a wonderful way to see the developing world and add more visible value. I have and will continue to recommend it to all of my colleagues and hope to do assignments again and again.” There should be little doubt that accounting skills are not only useful, but critical in the international development and charity sectors, and there is a huge demand for CPAs both as volunteers and employees. For finance professionals looking for both challenging but enormously rewarding assignments, there are many opportunities available all over the world. For more information about the Accounting for International Development organization, visit its website at www.afid.org.uk. To learn more about volunteering, contact Khushboo Koutu, marketing and communication officer, at khushboo@afid.org. uk or +44 (0) 208 741 7000. ■

Neil Jennings is the founder of Accounting for International Development. He can be reached at neil@afid.org.uk.

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Feature By Josef Rashty, CPA

Form SD – Specialized Disclosure for Conflict Minerals The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or Act) focuses mostly on the financial services sector. However, there are a number of secondary provisions in the Act that may impact the corporate governance and compliance programs of any non-financial publicly held company.

One of these secondary provisions is Section 1502 of the Act, which deals with the use of certain minerals extracted by, and imported from, certain geographic locations. Section 1502 of the DoddFrank Act intends to curb the violence and exploitation in the Democratic Republic of the Congo (DRC) and the neighboring countries (covered countries)1 by requiring issuers to disclose any use of minerals derived from this region. This article will discuss the provisions of Section 1502 of the Dodd-Frank Act and will focus on reporting and disclosure requirements for publicly held companies under the new SEC promulgation (www.sec.gov/rules/ final/2012/34-67716.pdf).

SECTION 1502 OF THE ACT The goal of Section 1502 of the Dodd-Frank Act is to promote peace and security in the DRC and covered countries. Congress and the Securities and Exchange Commission (SEC) both recognize that the implementation of this Act may provide a significant advantage to foreign companies that are not registered for filing in the United States and do not have to comply with this Act, but are competing with their U.S. counterparts. The requirement of the Act affects most electronics, aerospace, communication, automotive, jewelry, healthcare devices, and industrial machinery. Even some private companies may be affected if they are part of the supply chain for these conflict minerals to registrants.

CONFLICT MINERALS Section 1502(e)(4) of the Act defines “conflict minerals” as tin, tantalum, tungsten and gold; these metals are also collectively referred to as “3TG.” However, the U.S. Secretary of State is authorized to expand the list of minerals and derivatives constituting conflict minerals upon finding that such minerals and their derivatives finance the conflict in the DRC and covered countries. SEC PROMULGATION Section 1502 amended the Securities and Exchange Act of 1934 by adding new Section 13(p), which requires the SEC to promulgate disclosure and reporting rules regarding the use of conflict minerals. On Aug. 22, 2012, the SEC after several delays and postponements adopted a conflict minerals rule (Section Today’sCPA

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1502 of the Dodd-Frank Act) by a twoone vote. The SEC rule applies to all issuers that file under Section 13(a) or Section 15(d) of the Securities and Exchange Act of 1934. The issuers are all publicly held corporations (other than registered investment companies), including domestic companies, foreign private issuers, small reporting companies and voluntary filers (including debt-only filers). The Exchange Act Section 13(p) (1)(A)(ii) requires that issuers file a Conflict Minerals Report for products that they manufacture or contract to be manufactured. The rule does not consider an issuer engaged in extracting and mining of conflict minerals within its scope unless the issuer is engaged in manufacturing in addition to extracting and mining. The final rule excludes the conflict minerals used for purposes of ornamentation and decoration. The rule generally applies to manufacturers and excludes the mining industry. The following is a summary of the SEC rule and its requirements. First, the issuers should determine whether 3TG is

within the products they manufacture. If not, no disclosure or audit is required. Second, if 3TG is in the products that they manufacture, issuers need to conduct a reasonable country of origin inquiry (RCOI). If it is determined that 3TG is sourced outside the DRC and the covered countries, the issuers are conflict free, but they are still required to file Form SD (Specialized Disclosure for Conflict Minerals). Third, if based on the result of RCOI, the issuers determine that 3TG is sourced within the DRC or the covered countries, they need to not only file Form SD, but also a Conflict Mineral Report and an audit report. An independent private auditor must conduct the audit, and the independent qualification of the auditor is based on Rule 2-01 of Regulation S-X (17 CFR 210.2.01). FORM SD The SEC requires issuers to comply with the conflict minerals rule beginning with the calendar year ended Dec. 31, 2013. All issuers must report on a calendar year base for conflict minerals reporting purposes (even if their fiscal

year is not a calendar year). The issuers should disclose their conflict minerals on the new specialized disclosure form (Form SD) by May 31, 2014. However, the SEC does not require that the issuer’s chief executive officer and chief financial officer certify the Form SD, but nevertheless the filing is subject to liability under Section 18 of the Securities and Exchange Act of 1934. The SEC believes that a separate filing event for Form SD will remove the conflict mineral information from the scope of the certification requirement of principal executives and financial officers under Section 302 and 906 of the Sarbanes-Oxley Act, and at the same time reduces the burden of annual filing and reporting for issuers. The final rule’s filing requirements differ from those published in the proposed rule. Under the proposed rule, the issuers needed to provide disclosures about conflict minerals on Forms 10-K, 20-F (foreign issuers) and Form 40-F (a Canadian issuer that files under the Multijurisdictional Disclosure System), along with the Conflict Mineral Reports continued on next page

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Disclosure for Conflict Minerals Continued from page 27

or conclusion as to whether the issuer’s processes were effective or if conflict minerals used in manufacturing of its products (or contract for manufacture products) are “DRC conflict free.” The engagement to perform the audit of the Conflict Minerals Report is a “nonaudit service” subject to pre-approval requirements of Rule 2-01 of Regulation S-X and is classified as “All Other Fees” in the issuer’s proxy statement.

as an exhibit to their annual reports. However, the final rule only requires the issuers to file the information in the Specialized Disclosure Form (Form SD). Furthermore, the issuers are required to post conflict mineral disclosure reports on their websites until the subsequent annual report is filed. For the first two calendar years following the effective date of the new rule, and for the first four calendar years for a smaller reporting company (a public company with a public float of $75 million or less), an issuer, which is required to file a Conflict Minerals Report with its Form SD, will not be required to submit an independent private sector audit of the information it provides in the Conflict Minerals Report with respect to those products that it has not been able to determine if they are “conflict minerals free” after conducting its initial due diligence. If an issuer acquires another company that conflict minerals are necessary to the functionality or production of its product, and the company was not previously required to disclose information regarding its use of conflict minerals, the issuer can delay its reporting until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition. Thus, if an acquisition occurs after April 30 of a given year, the issuer’s Form SD for that particular acquisition will not be due until the second calendar year following the acquisition. 28

CONFLICT MINERALS REPORT The SEC rule requires that if the issuer has determined that the conflict minerals are present in its products, and they are not from scrap or recycled sources and are sourced either from the DRC or covered countries or their source is undeterminable, it must provide a Conflict Minerals Report. The report should encompass a description of the due diligence that the issuer has performed. It should also disclose the products that contain 3TG and may have financed or benefited the armed groups in DRC or the covered countries. There may be additional product-level disclosures required as well, such as a description of the country of origin of these minerals and the efforts that issuers have taken to determine the mine or the country of their origin. INDEPENDENT AUDITOR REPORT If the issuer determines that conflict minerals are present in the products that it manufactures, or contracts to be manufactured, it must provide an audit report by an independent private auditor (a CPA). The CPA must conduct the audit, and the independent qualification of the auditor is based on Rule 2-01 of Regulation S-X (17 CFR 210.2.01). The SEC rule limits the scope of the audit only to the sections of the Conflict Mineral Report that discusses the design of the issuer’s due diligence framework and processes. The auditor is not required to express an opinion

AICPA CONFLICT MINERALS TASK FORCE The American Institute of CPAs (AICPA) formed a Conflict Minerals Task Force in October 2012, and it includes representatives from the accounting profession and the Government Accountability Office (GAO). The goal of the task force is to review SEC rule requirements and provide practical guidance on addressing the audit provisions of the rule. The task force also interacts with the SEC and with industry bodies, such as the Electronic Industry Citizenship Coalition (EICC). Its current areas of focus include developing sample Conflict Minerals Audit Reports, application of independence requirements for auditors, and developing guidance focused on the audit objectives and scope. XBRL FILING REQUIREMENT The SEC requires that Form SD and its exhibits be tagged by eXtensible Business Reporting Language (XBRL) interactive data format. The 2013 draft of Form SD XBRL taxonomy is available on the SEC’s website at www.sec.gov/ info/edgar/edgartaxonomies_d.shtml. SUPPLY CHAIN RISKS Form SD, conflict mineral disclosures and the potential business impact of such disclosures have made supply chains a potentially more risk area than before. When there is a problem with the supply chain, whether it is related to conflict minerals or any other issues, it quickly becomes the problem of the issuer rather than the supplier. Today’sCPA

| NOVEMBER/DECEMBER 2013

It is important for issuers to identify the conflict minerals risk to the supply chain as early as possible. Management should have a plan to react quickly, and be able to sidestep the problem, if needed. Most importantly, management should have a plan for the possible shutdown of the supply chain and being able to bounce back quickly from any disruptions. There must be controls in place for the issuer to track and monitor the supply chains governance structure and policies. It is equally important to work closely with the supply chain organization to instill a trust-based relationship. LATEST DEVELOPMENT The SEC originally estimated that it would cost issuers about $71 million to implement the rule, but it increased its estimate to $4 billion for the final rule, based on the input that it received from its constituents (Colleen Cunninghum, www.cpa2biz.com/Content/media/ PRODUCER_CONTENT/Newsletters/

Articles_2012/CorpFin/ConflictMinerals). A legal challenge was filed with the Court of Appeals regarding the legality of the provisions of the Dodd-Frank Act and conflict minerals. However, on July 23, 2013, the federal court upheld the SEC’s controversial conflict minerals promulgation. In a 63-page ruling, Judge Robert Wilkins of the United States District Court for the District of Columbia wrote that the plaintiff’s claims “lack merit” (www.complianceweek.com/courtrejects-legal-challenge-to-secs-conflictminerals-rule/article/304305/). QUESTIONS TO CONSIDER During the comment period for the proposed rule, many constituents noted that their supply chains run deep, and it may be extremely difficult in some cases to trace the minerals all the way back to the point of extraction. To prepare for the new reporting requirements and disclosures, issuers need to think about their supply chains.

How deep do the supply chains run? Can their suppliers provide the appropriate certifications regarding the use and origin of conflict minerals? Do contracts with suppliers provide for the ability to obtain such certifications? What are the legal implications if the contracts conflict with the SEC rule? What are the issuers’ sourcing policies? Do they conflict with the SEC rule? Do they need to be revised to accommodate the SEC rule? The Conflict Minerals Report requires transparency with regard to such policies. Its implementation could be a very time consuming and expensive process. FOOTNOTE 1. The term “covered country” is defined in Section 1502(e)(1) of the Act as a country that shares an internationally recognized border with the DRC, which presently includes Angola, Burundi, Central African Republic, The Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. ■

Josef Rashty, CPA, has held managerial positions with several publicly held technology companies in the Silicon Valley region of

California. He is a member of the Texas Society of CPAs and can be reached at jrashty@mail.sfsu.edu or j_rashty@yahoo.com.

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| NOVEMBER/DECEMBER 2013

Feature By David Gair

IRS Equitable Innocent Spouse Relief Expanded – IRS Revenue Procedure 2013-34 Significantly Expands Grounds for Equitable Innocent Spouse Relief Various forms of relief for “innocent spouses” are found in the Internal Revenue Code (IRC), but only §6015(f) relieves filers from responsibility for underpayments of tax shown on the face of a jointly filed income tax return, as distinguished from audit deficiencies later determined by the Internal Revenue Service (IRS). Section 6015(f) provides for “equitable relief” if, based on the facts and circumstances, it would be inequitable to hold the individual liable for such taxes.

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In January 2012, the IRS issued IRS Notice 2012-8 containing a proposed revenue procedure that, according to the IRS, is “designed to provide relief to more innocent spouses requesting equitable relief from income tax liability.” IRS Notice 2012-8 significantly expanded the facts and circumstances (previously set out in Rev. Proc. 2003-61) that the IRS will consider in determining whether §6015(f) relief should be granted. On Sept. 16, 2013, the IRS issued Revenue Procedure 2013-34, which largely adopted the procedures proposed in Notice 2012-8 with a few taxpayer-favorable changes. The IRS also issued proposed regulations on Aug. 13, 2013, [Reg-132251-11] related to limited aspects of innocent spouse relief. The proposed regulations generally relate to the time period for making a request for equitable relief – that is, the request can be made any time within the statute of limitations on collection. The IRS previously issued notices regarding this change of position. BACKGROUND ON INNOCENT SPOUSE RELIEF In 1971, Congress amended the IRC by the addition of Sec. 6013(e), which provided that “innocent spouses” filing joint returns could be relieved from tax liability for omissions from reported gross income attributable to their partners under certain circumstances. The innocent spouse rules were significantly changed as part of the 1998 Reform Act to expand the possibilities for relief (including the possibility of equitable relief). The proposed revenue procedure in IRS Notice 2012-8 is one of the most significant changes to equitable innocent spouse relief since the 1998 Reform Act. SOURCES OF JOINT LIABILITY IRC § 6013(d)(3) provides that married taxpayers who file joint returns will be jointly and severally liable for the income tax liabilities arising from that joint return. “Joint and several liability” covers not only the tax liabilities expressed on the face of the return, but also any deficiencies for taxes, penalties or interest that may subsequently be determined by the IRS. Filing a joint return is the rough equivalent of a married couple signing an open-ended promissory note acknowledging that either party is fully responsible for all income taxes or additions to tax for the tax year in question. The IRS need not collect the taxes equally from each party. It can collect all of the taxes (or any portion thereof) from the husband; or all taxes (or any portion thereof) from the wife. Divorce documents that purport to lay all responsibility for the payment of taxes on one party or the other are not binding upon the IRS. Second, community property laws also operate to create joint liability. Laws can also give rise to a type of joint responsibility, since (absent a partition agreement or similar document) community property laws can cause half of the income earned by one spouse to be considered income of the non-earning spouse. But this is different from joint and several liability that arises from filing of a joint income tax return. If a Texas married couple files “married, filing separately,” each party will be liable for one-half of the community’s total income, and therefore also liable for income taxes attributable to such one-half share. In contrast, if the same couple files a joint return, each party is liable for 100 percent of the taxes on 100 percent of the community’s income. Today’sCPA

| NOVEMBER/DECEMBER 2013

FIRST CONSIDERATIONS IN ALL CASES The initial consideration in all cases is to determine if there actually is a joint return. Was a joint return filed with a forged signature, or was it signed under duress? Was the couple legally married? There is no joint return if either individual did not intend to file a joint return or if it was not legal to file a joint return. TYPES OF INNOCENT SPOUSE RELIEF The IRC provides for several types of innocent spouse relief. It is important to evaluate your client’s facts and circumstances to determine what type of relief is applicable. 1) “Traditional” innocent spouse relief is provided by IRC § 6015(b). This provision type of relief is useful to eliminate liability for an innocent spouse where there has been an understatement of tax; i.e., an audit deficiency. IRC § 6015(b) does not provide for relief for an underpayment of taxes; i.e., where the amount of tax stated to be on the face of the joint return is not contested, but such taxes have simply not been paid over to the IRS. 2) “Separation of Liability” relief is provided by IRC § 6015(c). This type of relief can limit liability for understatements (not underpayments) to the portion of the deficiency properly allocable to individual earnings. Again, this provision is helpful only where there has been an understatement of tax, not an underpayment. Moreover, IRC § 6015(c) does not eliminate the force of community property laws. Relief from community property laws (i.e., limiting tax liability to income actually earned by the spouse in question) is made possible by IRC § 66, under circumstances that are parallel to the provisions of IRC § 6015(c). 3) “Equitable” relief is provided by IRC § 6015(f). This type of relief can be used to limit or eliminate liability for understatements and is the only type of innocent spouse relief that is effective to eliminate an underpayment of tax shown on the face of the return. According to IRC § 6015(f), relief is to be granted if based on the facts and circumstances, it would be inequitable to hold the individual liable. What “facts and circumstances” are necessary for the granting of innocent spouse relief is the focus of the article. GENERAL REQUIREMENTS FOR EQUITABLE RELIEF ACCORDING TO REV. PROC. 2013-34 The major changes to equitable innocent spouse relief under §6015(f) provided by Rev. Proc. 2013-34 are discussed below. First Step. To be considered for innocent spouse relief, there is a requirement that certain threshold conditions be met, as follows: a) Joint return was filed. b) Relief is not available through other provisions of IRC §6015(b) or (c). c) Request for relief was made timely (i.e., before collection or refund or credit statute expires). d) Assets were not transferred as part of a fraudulent scheme to avoid collection. e) Disqualified assets were not transferred. f) Requesting spouse did not knowingly participate in the filing of a fraudulent joint return. continued on next page

IRS Equitable Innocent Continued from page 31

g) The tax liability is attributable, in full or part, to the non-requesting spouse. Several exceptions to this general rule exist: i) attribution solely due to the operation of community property law; ii) nominal ownership; iii) misappropriation of funds; iv) abuse; and v) fraud of non-requesting spouse. Additionally, relief under IRC § 66 requires the taxpayer to meet these conditions as well, except conditions a and b above. Second step. If the threshold conditions are satisfied, the IRS will make a “streamlined” determination and will ordinarily grant relief if: a) The spouses are: i) no longer married; ii) legally separated; iii) one spouse is a widow/widower; or iv) the spouses have not been members of the same household during the past year; and b) The requesting spouse will suffer economic hardship if the IRS does not grant relief; and c) The requesting spouse did not: i) know of, or have reason to know of, the deficiency; 32

ii) know or have reason to know that the non-requesting spouse would not or could not pay the underpayment; or iii) know or have reason to know of the item of community income. Note that the existence of abuse or financial control by the non-requesting spouse can satisfy this requirement even if the requisite knowledge exists. Third Step. If “streamlined” relief is not available, the IRS will go on to consider other facts and circumstances to determine if it would be inequitable to hold the requesting spouse liable for all or part of the liability. The factors include: a) Marital status (i.e., being divorced weighs in favor of relief). b) Economic hardship (unable to pay reasonable living expenses based on rules similar to those provided in Treas. Reg. § 301.6343-1(b)(4)). c) Knowledge i) Understatement cases – Issue is whether the spouse had knowledge or reason to know of the item giving rise to the understatement or deficiency at the time the requesting spouse signed the joint return.

ii) Underpayment cases – Issue is whether the spouse knew or had reason to know at the time the requesting spouse signed the joint return that the nonrequesting spouse would not or could not pay the tax liability at the time the joint return was filed or within a reasonably prompt time after the filing of the joint return. iii) Section 66 cases – Issue is whether the spouse knew or had reason to know of an item of community income that should have been included into gross income. iv) Similar to streamlined relief, if abuse or financial control exist, this factor can weigh in favor of relief even if the requisite knowledge exists. d) Legal obligations (i.e., one spouse has agreed to pay the liability in a divorce decree or other legally binding agreement. Note: clients are often surprised to learn that a court decree requiring the other spouse to pay is not binding on the IRS. e) Significant benefit beyond normal support (lavish lifestyle, such as owning luxury assets and taking expensive vacations). f) Good faith efforts to comply with tax laws (in the years following the year to which the request relates). g) Physical or mental health status when the return was filed or at the time the requesting spouse requested relief. SIGNIFICANT CHANGES TO EQUITABLE RELIEF RESULTING FROM IRS NOTICE 2012-8 AND REV. PROC. 2013-34 IRS Notice 2012-8 and Rev. Proc. 2013-34 very significantly alter the standards for relief as set out in previous IRS guidance, such as Rev. Proc. 2003-61. Change #1: Greater deference is given to the presence of abuse than Rev. Proc. 2003-61. Existence of abuse can outweigh or negate other factors. Today’sCPA

| NOVEMBER/DECEMBER 2013

Change #2: Request for equitable relief can be filed any time before the collection statute runs. Previously, the rule was that relief had to be requested within two years of collection action. This change actually happened in 2011 (IRS Notice 2011-70). Change #3: Threshold conditions previously required that the income tax liability must be attributable to the non-requesting spouse. New exception exists if the item stems from the nonrequesting spouse’s fraud and thus gave rise to the understatements of tax. Change #4: Streamlined determinations now apply to understatements of tax, underpayments of tax and claims for equitable relief under IRC § 66(c). Change #5: No one factor or majority of factors controls a determination – it all depends on the facts and circumstances. Change #6: Standards for economic hardship are revised. A lack of economic hardship will now be viewed as a neutral factor. Change #7: A finding of actual knowledge of an item giving rise to an understatement will no longer be weighed more heavily than other factors. Abuse or financial control by the non-requesting spouse causing fear of retaliation will result in the knowledge factor to weigh in favor of relief. Change #8: Similar to change #7 above, in a situation where the spouse had knowledge that the non-requesting spouse would not pay liability within a reasonably prompt time frame, the existence of abuse or financial control causing a fear of retaliation, will cause this factor to weigh in favor of relief. Change #9: The IRS clarifies that the legal obligation of the requesting spouse is a consideration (not just whether the non-requesting spouse has an obligation to make payment to the IRS). Change #10: The significant benefit factor will not weigh against relief if the non-requesting spouse abused or maintained financial control over the non-requesting spouse and the nonrequesting spouse made the decisions

about living a more lavish lifestyle. Change #11: Subsequent compliance with income tax laws will now weigh in favor of relief, instead of just being viewed as a neutral factor. Change #12: Refunds are now available in deficiency cases for payments made other than through an installment agreement. WHEN CAN INNOCENT SPOUSE RELIEF BE REQUESTED? Generally, an innocent spouse request is made by filing an application for administrative relief (Form 8857) with the IRS Collection Division within the appropriate time period (within two years after the IRS begins collection activities for IRC 6015(b) & (c) and within the collection statute of limitations for 6015(f)). It can also be raised in other ways, for example, as a defense in a Tax Court Petition in response to a statutory notice of deficiency, or as a defense in a collection due process hearing. TAKING EVERYTHING INTO ACCOUNT The IRS appears to have come to the conclusion that equitable relief really should take into account all the facts and circumstances, as IRC § 6015(f) requires. No longer do we have arbitrary requirements like the two-year filing deadline for IRC § 6015(f) relief. It is absolutely vital to work diligently to understand the new rules and to work hard with your client to gather as many facts as possible to support the various factors. At the same time, it is important to neutralize unfavorable facts if at all possible. Innocent spouse relief cases can be a lot of fun and a chance for you to be an advocate for your client – likely someone who really needs your help. Anecdotally, since the time period that Notice 2012-8 was published in February of 2012, the changes have been a very positive development for taxpayers. The administrative process seems to be fairer, and appropriate requests for relief are being granted with greater frequency. ■

David C. Gair, is Board Certified in Tax Law by the Texas Board of Legal

Specialization. He is a shareholder with the law firm of Looper Reed & McGraw, P.C. in Dallas, Texas.

Today’sCPA

| NOVEMBER/DECEMBER 2013

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Feature By Robert A. Seay, DBA, CPA, and Dustin R. Davis, MBA

Personal Financial Planning: An Expanding Practice Opportunity The personal financial planning industry anticipates tremendous growth over the next several years. The imminent retirement of baby boomers, an ailing economy and little confidence in the survival of old-age benefits inspire individuals of all ages and incomes to seek professional financial advice. The U.S. Department of Labor projects a 32 percent increase (66,400 new jobs) in the demand for personal financial planners for the decade ending 2020.1 This forecast portrays an outstanding opportunity for CPAs who wish to become actively engaged in an expanding market.

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CPAs who have an interest in offering financial planning services should first consider joining the American Institute of CPAs (AICPA’s) Personal Financial Planning (PFP) Section. An annual fee of $200 includes a comprehensive library of materials and programs to help build, manage and develop a successful career in financial planning. Membership does not require a specialty credential in financial planning. However, those who possess financial planning certification hold a competitive advantage over those who do not. The achievement of specialized financial planning education and experience can lead to more mobility, career advancement and attractive compensation. This article discusses three prominent certification options for CPAs who plan to start or advance a career in personal financial planning. The Personal Financial Specialist (PFS), Certified Financial Planner (CFP) and Chartered Financial Consultant (ChFC) designations have unique education, examination, experience and cost requirements. However, all three represent a high level of professional competence and achievement in personal financial planning. THE PERSONAL FINANCIAL SPECIALIST AICPA issues the Personal Financial Specialist (PFS) credential. Candidates must be an AICPA member in good standing, hold an unrevoked CPA certificate, abide by the Code of Professional Conduct and should comply with the Statement on Responsibilities in Personal Financial Planning Practice. However, this designation does not require CPAs to maintain an active license to practice public accounting. This provision benefits AICPA members working in industry, education and government who often select inactive status to avoid unnecessary costs and mandatory continuing education that may be irrelevant to their current occupations. CPAs who hold the PFS credential enjoy a unique position from which to address complex financial planning problems. The common body of knowledge required of CPAs, coupled with additional expertise in personal financial planning, allows the PFS holder to address the needs of clients in a comprehensive manner. No other personal financial planning designation requires a comparable level of knowledge and skills. AICPA supports individuals who hold the PFS certification with market and media resources. These free services include guidance on how to market services, design brochures, build advertising campaigns and make presentations to prospective clients. AICPA also provides press release templates, guides on how to work with the media, talking points and exposure opportunities. The Association of CPA Financial Planners also provides substantial sponsorships, ranging from $200 to $600, for qualified individuals who would like to develop an expertise in personal financial planning. A downside to this credential is that the investing public may not recognize the PFS as a top-tier financial planning certification. The first PFS certificate was awarded in 1987 and only about 5,000 CPAs hold the designation today. AICPA and the Association of CPA Financial Planners have promotional programs in place to encourage and create awareness of PFS certification. However, CPAs may need to educate their current and prospective clients about how PFS certification enhances their qualifications to deliver value-added financial advice.

The Education Requirement

AICPA requires candidates to apply for the PFS credential once they satisfy all education, exam and experience requirements. Each candidate must earn 75 hours of financial planning education in the five-year period preceding the date of application. To support this requirement, AICPA offers a series of six selfstudy courses in partnership with The American College, which also manages and regulates the ChFC program. While similar to the ChFC curriculum, AICPA’s courses draw upon the unique knowledge and skill sets of a CPA. However, they do not satisfy the education requirement for the ChFC designation. AICPA also approves select college and university courses, relevant professional presentations and authorship of scholarly work in financial planning to satisfy the education requirement. Finally, the PFS has no specific college degree requirements except for those related to the issuance of a CPA certificate. The Examination Requirement

CPAs may choose to satisfy the exam requirement by passing the PFS exam, the CFP exam, or the ChFC exam. This may be done prior to or after completing the education and experience requirements. The only timing constraint is that the education, exam and experience mandates must be met prior to application. Candidates purchase the PFS exam directly from AICPA and schedule an exam date at one of several hundred participating Kryterion online test centers. The exam costs $500 and AICPA members receive a $100 discount. Membership in the PFP Section also qualifies for an additional $100 discount. The registration cost does not include study materials, but AICPA offers a selfstudy review course in partnership with Keir Education Resources and The American College. This program includes 32.5 hours of continuing education at a cost of $500. AICPA members who belong to the Tax Section pay $425 and individuals with membership in the PFP Section pay an even further discounted price of $375. The combined purchase of the review course with the exam qualifies for an additional 10 percent discount. Furthermore, candidates may qualify for an additional $200 reimbursement sponsorship provided by the Association of CPA Financial Planners. The net cost of purchasing the exam and review course could be as low as $407.50. Those who add a twoday live review class to the exam and the self-study review course may also benefit from substantial discounts and sponsorship reimbursements that could lead to a total cost as low as $851. Additional discounts may also be available for “early bird” registration. CPAs may take the PFS exam during the testing windows offered in the summer (June/July) and winter (November/ December). Six weeks before the exam window, registrants will receive a Notice to Schedule. It is important to schedule as soon as possible to get a preferred date and testing location. The one-day exam includes 160 multiple choice questions and lasts five hours, including a 30-minute break. One-half of the PFS examination includes stand-alone multiple choice questions and the other half consists of scenario-based cases with one to five multiple choice questions per data set and two comprehensive cases with 12 to 18 questions per case. Candidates receive pass or fail notification within two months of taking the exam. AICPA does not report numerical scores, and retakes cost $100 with an continued on next page

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Personal Financial Planning Continued from page 35

unlimited number available. Since a pass/fail grade accompanies the entire exam, there are no conditional credits for portions passed as in the case of the CPA exam. See AICPA’s website for the most recent update of exam topics and weights.2

of the credential holder to maintain and provide appropriate documentation upon request. See AICPA’s website and Table 1 for more details and contact information relative to this financial planning credential.3

Completing the Certification Process

THE CERTIFIED FINANCIAL PLANNER The Certified Financial Planner Board of Standards administers and regulates the CFP designation. Over 25 years ago, the Board of Standards created the CFP to elevate and promote the profession of personal financial planning. As with the PFS, the CFP requires minimum education, exam and experience achievements. Unlike the PFS credential, CFP certification does not require a candidate to first hold any other professional certification. Over 60,000 financial planning professionals currently hold the CFP certification in the U.S. The CFP trademark also has international appeal due to the successful marketing of the CFP Board and the delivery of high-quality services by those possessing this certification. This is especially important for those who plan to relocate or expand their financial planning practice outside the U.S.

Prior to applying for the PFS credential, each candidate completes a two-year or 3,000-hour experience requirement. Full-time business or teaching experience in personal financial planning qualifies as long as the experience occurs within a fiveyear period prior to application. Tax compliance employment satisfies up to 1,000 hours of the total experience requirement. Initial application for, and annual recertification of, the PFS credential costs $360. These charges provide membership in the PFP Section of AICPA and include a variety of marketing tools, education opportunities, practice aids and use of the CPA/PFS designation. AICPA members who work in government receive a $100 discount. Additional discounts apply to those who hold other AICPA specialty credentials. The PFS application also requires each candidate to sign a statement that they intend to comply with all re-certification requirements. This includes 60 hours of continuing professional education every three years. To monitor compliance, AICPA audits a sample of re-certifications each year. It is the responsibility 36

The Education Requirement

Prior to taking the CFP exam, all applicants must first satisfy an education requirement by completing a CFP Board-Registered Today’sCPA

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Program. Sanctioned programs, available at over 300 colleges and universities, include a minimum of 18 semester hours covering a common set of financial planning topics. Program providers offer courses with live classroom instruction, self-study format, and online presentation. CFP applicants may bypass the Board-Registered Program if they hold a Doctor of Business Administration or Ph.D. in Business or Economics. The education requirement also does not apply to CPAs, Chartered Financial Analysts, Chartered Financial Consultants, Certified Life Underwriters, and licensed attorneys. This exemption may attract CPAs to the CFP program since both the PFS and ChFC require additional education. The Board of Standards does not require a college degree to sit for the CFP exam. However, completion of the certification process does not occur until the candidate earns a degree. Candidates have five years, after passing the CFP exam, to earn a bachelor’s degree of their choice from an accredited college or university. An international degree may substitute for a U.S. degree with the approval of the National Association of Credential Evaluation Services (NACES). The Examination Requirement

The CFP exam tests a variety of financial planning topics that link to the Board’s Job Analysis Study. This research project, which occurs every few years, identifies contemporary competency areas in personal financial planning. Examples include investment, insurance, and tax planning. See the CFP website for current exam topics.4

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CFP candidates may choose from three test-date options and 50 Prometric testing locations in the U.S. Typical test dates include the third Friday and Saturday of March, July and November. Completed applications must reach the board no later than 5 p.m. Eastern Time on the published registration deadline. The board also establishes international testing sites on a case-by-case basis for a substantial fee. Day one of the two-day exam consists of a four-hour test and day two includes two, three-hour sessions. Each of the three sessions tests all certification topics with multiple choice questions. Scenario and case-based questions test the candidates’ ability to solve financial planning problems that require integration of multiple topics. Unlike the online PFS exam, the CFP is a pencil and paper examination. The CFP program also does not accept substitutes for the CFP exam as is the case with the PFS credential. PFS candidates who hold a CFP or ChFC designation are exempt from additional examination requirements and this encourages multiple certifications. The CFP does not offer this feature. The CFP Board releases exam results five weeks after the exam date. Exam results are posted to the candidates’ secure online accounts. The exam may be attempted a maximum of five times within an individual’s lifetime, with a limit of three attempts in a 24-month period. The exam fee of $595 must be paid each time a candidate retakes the exam. No study materials accompany the exam fee, but the board’s website includes a sample of questions from prior exams. See instructions for the online exam application at the CFP website.5 continued on next page

Personal Financial Planning Continued from page 37 Table 1 - Personal Financial Planning Certification Options Certification

Personal Financial Specialist (PFS)

Certified Financial Planner (CFP)

Chartered Financial Consultant (ChFC)

Education

CPA required and 75 hours of personal financial planning coursework

Completion of CFP Board Registered Program and Bachelor's degree in any discipline

Completion of The American College's 7 required courses and 2 elective courses

Exam

PFS Exam, CFP Comprehensive Exam, or ChFC Exam

CFP Comprehensive Exam

Complete Course Exams

Experience

2 Years Full-Time Business or Teaching Experience in Financial Planning

3 Years Full-Time Relevant Financial Planning Experience or 2 Years Apprenticeship Experience

3 Years Full-Time Business Experience (Bachelor's degree counts as 1 year experience)

Continuing Education

60 hours every three years

30 hours every two years

Exam/Program $500 plus cost of study materials (AICPA Cost members receive discounts)

$595 plus cost of study materials

$145 plus cost of course fees

Initial Certification Fee

$360

$125

None

Renewal Fee

$360 Annual

$325 Annual

$250 Biennial

Sponsoring Organization

AICPA

Certified Financial Planner Board of Standards, Inc.

The American College

Phone

888-777-7077

800-487-1497

888-263-7265

Fax

800-362-5066

202-379-2299

610-526-1300

URL

www.aicpa.org

www.cfp.net

www.theamericancollege.edu

financialplanning@aicpa.org

initialcert@CFPBoard.org

ProfessionalEducation@TheAmericanCollege.edu

Completing the Certification Process

CFP certification requires three years of full-time relevant financial planning experience. A candidate has up to 10 years before or up to five years after the exam date to meet this requirement. Delivery, supervision, support or teaching of financial planning qualifies as acceptable professional experience. This experience requirement is comparable to the ChFC program, but is longer than the PFS prerequisite of two years. This may tilt CPAs in the early stages of their career to the PFS. However, seasoned professionals with many years of experience would not likely consider this a discriminating factor. Near completion of the certification process, the board performs a background check and requires candidates to disclose past events that might negatively impact their ability to serve as reputable financial planners. Felony convictions for theft, tax fraud and violent crimes, as well as revocation of a financial professional license constitute unacceptable conduct and always prevent a candidate from achieving CFP certification. The board also identifies other conduct that a candidate may submit to the Disciplinary and Ethics Commission (DEC) for consideration. Conduct subject to review by the DEC includes multiple bankruptcies, felony convictions for non-violent crimes and revocation of a non-financial professional license. See the CFP fitness test for a complete list of unacceptable events and a description of the appeals process.6 Prior to and after certification, a CFP candidate must agree to abide by the boardâ&#x20AC;&#x2122;s Code of Ethics and Professional 38

Responsibility, Rules of Conduct and Financial Planning Practice Standards. Upon payment of the $125 one-time certification fee and the annual fee of $325, the candidate receives authorization to use the CFP designation. To remain certified, the board mandates 30 hours of continuing education every two years. Two hours must relate to ethics and professional responsibilities. The 30-hour requirement, which also applies to the ChFC, is less than the PFS mandate of 60 hours every three years. An average difference of five CPE hours per year is, at best, a marginal advantage for the CFP option. See Table 1 for a summary of CFP certification facts and contact information. CHARTERED FINANCIAL CONSULTANT The American College, a private distance learning university, oversees the ChFC certification. Over 45,000 financial planning professionals have this designation with the original certification dating back to 1982. This certificate is mostly held by financial planners who have expertise in the insurance industry. CPAs who anticipate the package and sale of insurance products in their practice should strongly consider this designation. The Education Requirement

The ChFC does not require a college degree. However, candidates must complete a program of seven required and two elective courses. Candidates must pass an exam at the conclusion of each course and there is no comprehensive exam covering all Todayâ&#x20AC;&#x2122;sCPA

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nine courses. CPAs do not receive an exemption to the education requirement as in the case of the CFP. This may encourage CPAs to pursue other financial planning certifications. The American College has total control over all course materials, offerings and pricing. Each new student must pay a $145 start-up fee upon entry into the ChFC program. At that point, candidates have several learning options from which to choose when planning their curriculum. Self-study texts, video courses and online materials cost $640 per course. Webinars (live online sessions) cost $775 each and run two and a half hours per day, twice a week, for three weeks. Participants also pay a $25 shipping and handling fee for each course. These options offer maximum flexibility with a variety of price points. The Examination Requirement

The ChFC program does not require a certification exam upon completion of the nine-course curriculum. However, candidates who pass a final exam for each course receive contingent credit for up to five years. Credit becomes permanent when candidates pass all nine exams within a five-year rolling window. Failure to comply with this rule results in loss of credit on a first-in-first-out basis. The American College allows transfer credit for individuals who hold the CFP designation. These candidates receive credit for six courses with a transfer fee of $69 per course. To satisfy the ChFC education requirement, CFPs must complete three additional courses within five years. The American College also offers the Accelerated Success Program and a prepaid “On Your Time Package” to those who wish to complete the program faster and cheaper than traditional methods allow. Candidates have up to five months to complete a course. Upon earning a passing score, they receive materials for the next course. This continues until candidates complete all nine courses. The prepaid option costs $4,698, which includes the start-up fee and shipping costs. The Accelerated Success Program requires a monthly payment of $145 for 40 months. Advantages to these programs include locked-in tuition and no interest charges. The American College does not extend transfer credit to CFPs for this option.

This is the same as required by the CFP program, but less than the number of hours required for those with the PFS credential. A certification renewal fee of $250 becomes due every two years and ChFCs must also comply with The American College’s Code of Ethics. See The American College website and Table 1 for details and contact information.7 CERTIFICATION OPTIONS PROVIDE OPPORTUNITIES FOR CPAS The excellent prospects for significant growth in financial planning serve as welcome news to CPAs searching for ways to diversify their service offerings. Professionally recognized individuals offer the investing public assurance that its financial planning needs are met with appropriate levels of knowledge and service. The exclusive availability of the PFS to CPAs makes this an attractive option. The resources provided by AICPA and the Association of CPA Financial Planners also make the PFS a credential that deserves serious consideration. The distinguished and highly regarded CFP and ChFC credentials also provide CPAs with an opportunity to differentiate themselves professionally from other personal financial planners. The Certified Financial Planner Board supports the CFP and over 60,000 credential-holders benefit from a highly structured program that emphasizes high-quality financial planning services. The American College oversees the ChFC and the number of certified professionals exceeds 45,000. This well-respected designation has participants actively engaged in all facets of financial planning, including the insurance segment. CPAs benefit from having an outstanding variety of potential certification options from which to select. Differences in education, examination, experience and cost requirements provide opportunities that allow CPAs to tailor their professional development in the most efficient, economical and effective way. The PFS, the CFP and the ChFC credentials demonstrate exceptionally high levels of professional competence and achievement. CPAs who earn these credentials should find it well worth the investment. FOOTNOTES

Completing the Certification Process

Applicants must, as in the case of the CFP, complete three years of full-time business experience within five years leading up to the date of certification. Even though a college degree is not a requirement for certification, an undergraduate or graduate degree counts as one year of experience. Since CPAs have a degree, they benefit from this provision. Acceptable professional experience includes insurance and health care, financial services and employer benefits, and university/college teaching. Individuals working as CPAs, attorneys, and investment advisors also qualify for acceptable experience. After certification, ChFC credential-holders must meet a continuing education requirement of 30 hours every two years.

1. Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2012-13 Edition, Personal Financial Advisors, on the Internet at www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm 2. www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Membership/Pages/ PFSExam.aspx 3. www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Membership/Pages/ OverviewofthePersonalFinancialSpecialist%28PFS%29Credential.aspx 4. www.cfp.net/become-a-cfp-professional/cfp-certification-requirements/ education-requirement/principal-topics 5. www.cfp.net/become/examdetails.asp 6. www.cfp.net/become/fitness.asp 7. www.theamericancollege.edu/financial-planning/chfc-advanced-financialplanning ■

Robert A. Seay, is Associate Professor of Accounting at Tennessee Technological University, Cookeville, Tennessee. He holds a doctorate from Mississippi State University and is a Tennessee CPA. Dr. Seay may be contacted at rseay@tntech.edu. Dustin R. Davis is an accounting assistant to the Chief Financial Officer at Progressive Savings Bank, Jamestown, Tennessee. He is a graduate

of Tennessee Technological University and may be contacted at dustind@psbgroup.com.

Today’sCPA

| NOVEMBER/DECEMBER 2013

CPE Article By Bradley Lail, Ph.D., CPA

SEGMENT REPORTING: A SUM GREATER THAN ITS PARTS The reporting of disaggregated operations as required by Statement of Financial Accounting Standards (SFAS) 131 provides a uniquely interesting reporting environment, combining a highly sought after financial disclosure with a high degree of reporting discretion and limited external monitoring. Segment reporting has improved measurably under SFAS 131. Issued in 1998 and now included in Accounting Standards Codification (ASC) Topic 280, the standard adopts a “through the eyes of management” approach to segment reporting.1

Curriculum: Management Level: Intermediate Designed For: Managers of financial reporting Objectives: Understand the development of the segment reporting environment and standards, the importance of segment disclosures, and the informational demands of those using segment disclosures Key Topics: Segment reporting under ASC Topic 280 (Statements of Financial Accounting Standards 14 and 131), “through the eyes of management” reporting, Financial Accounting Foundation (FAF) post-implementation review, and auditor monitoring of segment reporting Prerequisites: None Advanced Preparation: None 40

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Thus, regardless of how outside decision makers view the disaggregated operations of a company, management is allowed to disclose results of these operations in a way that mirrors the company’s internal structure. Under SFAS 131, management discretion alone determines two critical segment reporting components: (1) the segments to disclose and (2) the earnings measure that best represents the various segments’ performance. The approach prescribed by SFAS 131 provides a win-win for financial managers, both internally and externally. The standard has eased the burden of segment disclosures given the alignment of externally reported information with the internal management of the company. From an external perspective, SFAS 131 is intended to enable financial statement users to “make more informed judgments about the enterprise as a whole.”2 Because some financial statement users rely heavily on segment information, the success of SFAS 131 rests on its ability to encourage managers to use their knowledge of the company to convey useful segment information to investors, analysts and others. The reaction to SFAS 131 by these external parties has remained strongly positive as significant improvements in the quantity and quality of segment disclosures has enhanced the perceived usefulness of segment information. In a continuing effort to improve the standard-setting process, the Financial Accounting Foundation (FAF) released its post-implementation review of SFAS 131 in December 2012. The FAF review concluded that the standard has been implemented as intended and is a definitive improvement over the previous segment reporting standard (SFAS 14). The result is more relevant and reliable financial statements not only at the segment level, but also at the entity level. Although the FAF review is generally complimentary with regard to the components of SFAS 131, it also notes several areas of needed improvement. As a result, the Financial Accounting Standards Board (FASB) is considering an additional review of segment reporting. Continuing to look towards convergence, FASB intends to coordinate its response with that of the International Accounting Standards Board (IASB), which is currently reviewing IFRS 8, Operating Segments. This article summarizes the advancements made in segment reporting in recent years to illustrate the importance of providing disaggregated financial information to users. Financial statement preparers and reviewers should reflect upon these advancements and add insight into the segment reporting process as FASB considers additional enhancements to the segment reporting environment. THE SEGMENT REPORTING ENVIRONMENT If management disaggregates the operations of the company, they are required to provide footnote disclosures enabling investors to evaluate the various reporting segments. Three particular developments make the segment reporting environment an interesting setting: (1) growth in the importance of segment information to users; (2) a large amount of discretion granted by segment disclosure requirements; and (3) a limited level of external monitoring of segment disclosures by auditors. Today’sCPA

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One of the most desirable traits for financial statements is that they provide relevant information, and a large amount of research has illustrated the usefulness of segment information to financial statement users. Segment information is in high demand because analysts and others can better predict future performance and future cash flows for the entity as a whole. As a result, the precision of entity-level valuations improves as the quality of segment disclosures increases. To that end, multi-segment companies are encouraged to provide detailed information about each segment. Until 1998, SFAS 14 governed segment reporting disclosures, but provided little reporting discretion. Under this standard, companies were required to disclose segments separately by line-of-business using an industry approach with limited focus on geographic information. Thus, a link between the disclosed segments and how the company was managed internally was weak or missing. Further, segment measures of performance were required to be some form of Generally Accepted Accounting Principles (GAAP) net income that often required an arbitrary allocation of corporate-level expenses, rendering segment earnings less relevant. The outcome was managers disclosing more aggregated segment information that provided little transparency into how managers disaggregated their organization. As a result, the relevance of segment information under SFAS 14 was called into question. Analysts’ organizations, investment groups and the American Institute of CPAs (AICPA) argued for segment disclosures that were based upon the internal organization of the company and which also corresponded to those segments discussed in the MD&A of the annual report and other interim segment information. Greater transparency of segment disclosures is important to financial statement users, such as analysts. Analysts believe that indepth knowledge of multi-segment companies is critical to the complete understanding of a business and will adopt a bottomup approach to construct earnings forecasts from the segment disclosures. In total, SFAS 14 failed to meet these demands and created reporting challenges. The standard’s restrictions limited manager ability to exercise discretion and judgment to disclose critical product lines and key segments driving performance. The ultimate transition from SFAS 14 to SFAS 131 was a result of investor and analyst demands for greater information. Standard setters responded to informational demands with SFAS 131 that afforded management the discretion necessary to convey more relevant segment information. The new regulation relied on management judgment (i.e., through the eyes of management) to disclose operating segments that reflected those evaluated by key decision makers within the company. Of equal importance is how SFAS 131 changed the selection of segment performance measures. The standard permits management to select the most appropriate operating performance measure (e.g., operating income, earnings before extraordinary items) as long as it is specifically defined. No longer were managers forced to arbitrarily allocate corporate costs to the operating segments, which greatly improved the relevance of segment performance measures. continued on next page

CPE Article continued from page 41

and regulators with the combination of granted reporting discretion and limited external monitoring.

Exhibit 1: Conclusions of the FAF Post-Implementation Review of SFAS 131 Successes of SFAS 131

Ongoing Concerns

Provides more information than the previous standard and segment disclosures better align with the internal structure of companies.

Some companies are not disclosing enough operating segments.

Improvements in the relevance of segment disclosures â&#x20AC;&#x201C; investors better understand the disaggregated components of companies and are able to make better judgments regarding companies as a whole.

Users of segment information continue to demand more segment information in terms of number of items disclosed.

Ease in implementation has led to the standard being applied as intended and has resulted in more reliable financial information.

Due to growth in technology and the principle-based nature of the standard, the aggregation of operating segments has grown more challenging.

The costs and benefits to companies from implementing the standard are as expected and remain beneficial to financial statement preparers and users.

Growing proprietary costs have led to reduced transparency as companies are hiding segments for competitive (and possibly other) purposes.

While granting greater reporting discretion, segment reporting receives limited external monitoring from the auditors. To assess compliance with SFAS 131, auditors are expected to understand the nature and operations of the business, how that correlates to business segments, and whether segment disclosures are consistent with how management examines the internal performance of the company.3 Recent research suggests that current audit guidance on segment disclosures may be deficient, and conversations with auditors suggest that they give little attention to segment reporting beyond reconciling segment information to the consolidated financial statements.4 As a result, many are concerned that compliance across companies is inconsistent, which makes comparability a lingering but significant concern. While auditor monitoring of segment reporting may be lacking, regulators have recently shown an increased interest in segment disclosures. The 42

Users also desire more consistency amongst companies both in types of items disclosed and how they are measured.

Securities and Exchange Commission (SEC) has expressed concerns that the disaggregation process and footnote disclosures are inconsistent with segment reporting standards.5 Over one-quarter of all SEC comment letters regarding accounting rule violations specifically discuss segment disclosure problems. In many cases, the SEC is concerned with inconsistencies between what management discusses in the MD&A and how segment performance is disclosed in the footnotes. The SEC has also been known to request internal performance reports that are reviewed by either senior management or the board of directors to verify compliance with segment reporting rules. In total, the external monitoring for segment reporting appears to be more reactionary than proactive. The lack of monitoring is not necessarily a reporting issue when the discretion granted to managers is utilized appropriately. SFAS 131 has proven to be a success by financial statement preparers, users

EVIDENCE OF SUCCESS The FAF post-implementation review concludes that the collaborative efforts of regulators and management have enhanced the relevance of segment disclosures under SFAS 131. The major points of the review are summarized in Exhibit 1. First, SFAS 131 has been considered a substantial improvement over SFAS 14 in terms of quantity of information. The relevance of segment disclosures has also improved given the alignment of segment disclosures with the internal structure of the organization. Because the standard is perceived to be easily understood, the standard has been applied as intended, making comparability across companies easier. In total, investors have the ability to make better judgments regarding the company as a whole due to the improved segment information. The FAF summarizes its assessment of SFAS 131 by stating that the efforts put forth by managers to improve the standard have been worthwhile to financial statement users. In essence, the costs put upon preparers for compliance are substantially less than the benefits of improved financial reporting transparency. To provide some sense of the significance, Exhibits 2 â&#x20AC;&#x201C; 4 illustrate how the standard has resulted in improved financial disclosures. Each exhibit illustrates the time trend from 10 years prior to the standard through 2011. Exhibit 2 shows the annual average number of segments disclosed by multi-segment companies. Under SFAS 14, the line-of-business (or industry) approach limited the disclosure of geographic information; however, to the degree that managers review a combination of geographic and line-of-business segments internally, they must be separately disclosed under SFAS 131. Prior to SFAS 131, the number of segments was fairly constant, but two Todayâ&#x20AC;&#x2122;sCPA

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Exhibit 2: Annual Average # of Segments Disclosed (1988 – 2011)

Source: Compustat Fundamental Annual database provided by WRDS.

Exhibit 3: Annual % of Single-Segment Companies (1988 – 2011)

Source: Compustat Fundamental Annual database provided by WRDS.

years after the new standard, the total number of segments disclosed grew from 3.6 to 4.4 (1997 to 1999). While seemingly small, the growth of 0.8 segments (or 22 percent) per company is quite significant given (1) not all companies necessarily had to adapt its segment disclosures after SFAS 131, and (2) an increased disclosure of almost one segment across all publicly traded companies results in thousands of additional segments for the entire market. Most of the increase in segments came from line-of-business Today’sCPA

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segments that were previously “hidden” – a growth from 1.4 to 2.1. Of equal importance is the continued gradual growth in the number of disclosed segments per company since 1998. The average number of segments disclosed in 2011 is 5.4, another one segment increase since 1999. The lasting impact of SFAS 131 is an encouraging sign that provides positive feedback to regulators regarding the strength of compliance 14 years after SFAS 131’s enactment. Similar evidence can be found in Exhibit 3, which shows a significant

decline in single-segment companies over the same time period. From 1997 to 1999, the percentage of companies that reported only one segment fell from 82 percent to 64 percent. The new standard compelled managers to disaggregate their operations from one to multiple segments at quite a large rate. The impact was sudden and most likely beneficial to financial statement users. The rate of single-segment companies has remained relatively flat since 1999. The over-arching theme of SFAS 131 was to increase the transparency of the disaggregated operations of the company. Much of the success of SFAS 131 is related to the loosening of bright lines and allowing greater reporting discretion. Not only did the number of segments disclosed increase, but so did the number of financial items disclosed, as shown in Exhibit 4. These items represent financial statement measures from the balance sheet and/or income statement that have been further allocated or measured at the segment level. In 1997, geographic segments included 3.5 items, but that grew to 7.6 by 1999. The same is true for line-ofbusiness segments, which grew from 5.4 to 6.3. The number of items has continued to grow since 1999 for both types of segments. FUTURE CONSIDERATIONS The demands that led to the development of SFAS 131 appear to have been mostly satisfied, and Exhibits 2 – 4 quantify the positive impact of the standard on segment reporting. However, as time passes and new trends in business develop, a re-examination of the standard is appropriate. Along with the successes, Exhibit 1 summarizes the corresponding future concerns that the FAF would like FASB to consider. Many of the newfound concerns are the same issues that initially motivated SFAS 131. Not surprisingly, demands from financial statement users for more information persists both in terms of the number of segments disclosed, as well as the desire for more financial items. The trends continue to grow in these areas, but the more information disclosed, the continued on next page

CPE Article continued from page 43

Exhibit 4: Annual # of Segment Financial Items Disclosed (1988 – 2011)

Source: Compustat Fundamental Annual database provided by WRDS.

clearer the understanding of an entity’s operations. Concerns are also growing regarding companies hiding segments for competitive purposes. This corresponds with research that suggests that managers with particular incentives (i.e., strong performance in less competitive industries) will conceal information through segment aggregation.6 Such manipulation can be achieved by managers re-defining how the internal operations are reviewed by chief decision makers. While seemingly an inefficient approach to managing operations, there is some evidence to believe that such behavior is occurring. Other concerns not identified by the FAF also exist. As opposed to hiding strong performance, managers may be motivated to conceal poor performance. Such concealment can be done via intersegment transfers of revenues and costs. Interestingly, much of this shifting can go undetected because SFAS 131 provides little guidance with respect to cost allocations, and any such manipulation would not alter bottom-

line net income. Further, managers may prefer segment manipulation over other manipulative reporting strategies such as accruals because segment manipulations do not reverse in the subsequent years and will not negatively impact the long-term performance of the company. A BIG SUCCESS OVERALL All signs indicate that SFAS 131 has been an overwhelming success, and the FAF post-implementation review corroborates this assessment. Much of the success can be attributed to the regulatory approach by FASB. The circumstances leading to the current status of segment reporting illustrate how a facilitative-based regulation granting latitude to managers has improved the financial reporting environment. Yet, because of the unique amount of discretion granted to managers by SFAS 131 corresponding with limited external monitoring, it is appropriate for financial statement users and standard setters to consider changes in the business climate and

how this would impact segment disclosures. Such developments provide worthwhile feedback to standard setters as they consider future enhancements to segment reporting. The same is true for financial statement preparers. Motivations to conceal strong and poor performance are obvious, but in total, the increased amount of disclosures brought about by SFAS 131 has been positive for all companies and the market as a whole. Preparers should consider these positive developments as they relate to segment reporting. Lastly, the importance of financial statement users such as investors and analysts in the development of reporting standards is further highlighted by SFAS 131. Despite the continued positive trends in segment reporting since 1998, these groups are encouraged to continue to voice their needs to financial statement preparers and regulators. FOOTNOTES 1. While the Codification has replaced the reference to standards, the FAF review motivating this article is focused specifically on SFAS 131, hence the reference to the particular pronouncement throughout. 2. From paragraph 3 of “Disclosures about Segments of an Enterprise and Related Information. Statement of Financial Accounting Standards 131.” 3. Specific auditor guidelines relating to segment reporting can be found under PCAOB AU Section 9326.28 - .41: “Applying Auditing Procedures to Segment Disclosures in Financial Statements.” 4. Libby, R. and T. Brown, 2013. “Financial statement disaggregation decisions and auditors’ tolerance for misstatement.” The

Accounting Review 88 (2): 641-665. 5. Johnson, S., 2010. “The SEC has a Few Questions for You.” CFO Magazine (May). 6. Botosan, C.A. and M. Stanford, 2005. “Managers’ Motives to Withhold Segment Disclosures and the Effect of SFAS 131 on Analysts’ Information Environment.” The

Accounting Review 80 (3): 751-771.

■

Bradley E. Lail, CPA, Ph.D., is an assistant professor in the Hankamer School of Business at Baylor University in Waco, Texas.

Lail can be reached at Bradley_Lail@Baylor.edu.

Today’sCPA

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CPE Quiz SEGMENT REPORTING: A SUM GREATER THAN ITS PARTS

Today’s CPA offers the self-study exam below for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the BY BRADLEY LAIL, PH.D., CPA preceding article. Mail the completed test by 1 Which factor has not contributed to the December 31, 2013, to TSCPA for grading. current segment reporting environment? If you score 70 or better, you will receive a certificate verifying you have earned one A. Segment disclosures are a highly useful footnote disclosure. hour of CPE credit – granted as of the date B. The high degree of discretion granted to managers in the test arrived in the TSCPA office – in segment reporting. accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you C. A demand for more industry-specific segment disclosures. score below 70, you will receive a letter with D. The lack of external monitoring by the auditors. your grade. The answers for this exam will be posted in the next issue of Today’s CPA. PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.

2 SFAS 131 is characterized as adopting what approach to segment reporting? A. “through the eyes of management” B. “more is better” C. “ease of compliance for better transparency” D. “satisfying the demands of external users”

3 What is a major advantage for managers regarding segment reporting under SFAS 131? A. Reduced workforce due to ease of implementation. B. Greater satisfaction of external users’ demands for more segment information. C. Addressing of proprietary concerns by encouraging improved segment disclosures. D. Alignment of external reporting requirements with the internal structure of the organization.

In the current segment reporting environment, management cannot choose: A. whether to disclose segment-specific sales. B. the internal organization of the company. C. the measure of segment earnings performance. D. which segments to disclose.

5 What were the standard setters’ intentions regarding segment disclosures when enacting SFAS 131? A. Ease the burden of segment reporting for managers. B. Allow external users to make more informed decisions. C. Increase the quantity of segments disclosed. D. Escalate the importance of segment reporting amongst footnote disclosures.

6 Which of the following is not a claim made by the FAF in their postimplementation review of the current segment reporting environment? A. SFAS 131 has been implemented as intended. B. Consistency across companies remains a concern. C. SFAS 131 has been a definitive improvement over SFAS 14. D. Segment aggregation is growing in simplicity.

7 Which of the following is not true about segment reporting under SFAS 14? A. Mostly considered an industry approach. B. Weakly linked to the internal structure of the organization. C. Challenging to reconcile segment performance to consolidated results. D. Typically required an arbitrary allocation of expenses.

8 Which statement fails to accurately describe the external monitoring of segment disclosures? A. Auditors typically give little attention to segment performance. B. The SEC is increasing its attention towards segment disclosures. C. Audit guidance on segment reporting is deficient. D. External monitoring is more proactive than reactive. 9 Evidence pertaining to the success of SFAS 131 for segment reporting is indicative by all of the following, except: A. a greater increase in geographic segments over lineof-business segments. B. reported single-segment companies have declined. C. a continued growth in segments disclosed since 1998. D. an increase in financial items disclosed within the segment footnote.

10 Despite the success of SFAS 131, which of the following describes a remaining concern in the area of segment reporting? A. Management hiding either poor or strongly performing segments. B. Growth in technology presenting a challenge to segment aggregation. C. Continuing demands for greater information by external parties. D. All of the above are remaining concerns.

Answers to last issue’s self-study exam: 1. c 2. d 3. b 4. b 5. a 6. d 7. d 8. d 9. d 10. c Today’sCPA

| NOVEMBER/DECEMBER 2013

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$97,000 gross. East Dallas. CPA practice with high-quality client base of businesses & individuals. Perfect size and opportunity. TXN1332 $326,000 gross. HEB Area. Reputable CPA practice specializing in one niche industry with loyal, high-quality base of business clients. TXN1326 $90,000 gross. Garland. Well-established practice with revenues consisting of desirable, year-round bkkpg/acctng svcs. TXN1325 $132,500 gross. Mt Pleasant/Sulphur Springs Area. Quality CPA practice with 50% tax and 50% accounting. TXN1277 $525,000 gross. Wichita Falls. Highlyprofitable, well-established CPA practice with a quality client base and balanced service mixture. TXN1315 $820,000 gross. Arlington. Wellestablished, profitable CPA practice with balanced revenues, acctng/bkkpg (41%) and tax prep (30%). TXN1316 Todayâ&#x20AC;&#x2122;sCPA

| NOVEMBER/DECEMBER 2013

$455,000 gross. Fort Worth. High-quality client base including many businesses. Strong fee structure and a tenured staff in place. TXN1330 $113,500 gross. East Houston. Tax practice offering tax preparation for individuals primarily with W-2s and small businesses. TXS1130

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$330,000 gross. Friendswood Area CPA practice. Steady revenue growth. Tax (88%), acctng (11%). Turn-key operation. TXS1136

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$74,500 gross. Columbus, Schulenburg, LaGrange. High concentration of tax work (92%) with balance being accounting work (8%). TXS1129

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$183,500 gross. Northwest Houston. Acctng (40%), tax (29%), payroll (21%), & other svcs (10%). Consistent growth & year round revenue. TXS1132

We sell small & large CPA firms … 100 percent of our acquisition brokers are “Ex-Big Four” CPAs!

$820,000 gross. Southwest of Houston. Year-round income, tax (64%), acctng (31%) and other (5%) svcs. Strong fee structure and cash flow. TXS1133

We are the only firm of our type in the nation that can make this claim!

$60,500 gross. Spring. Tax and Acctng practice with year around revenues comprised of acctg (59%) and tax (41%) svcs and good cash flow. TXS1134

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$160,000 gross. West Houston tax practice comprised of about 500 individual returns. Staff in place to help in smooth transition. TXS1135 $138,000 gross. Houston Hobby Airport Area. Turn-key tax practice comprised of about 265 individual returns and 10 business returns. TXS1126 $800,000 gross. Beaumont Area. CPA firm with 53% tax and 47% accounting. Good fee structure and strong cash flow. TXS1109 $800,000 gross. Beaumont Area. CPA firm with 53% tax and 47% accounting. Good fee structure and strong cash flow. TXS1109 ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.accountingpracticesales.com Today’sCPA

| NOVEMBER/DECEMBER 2013

BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www. accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales

Software For Sale PROVEN OIL and GAS ACCOUNTING SYSTEM keeps getting better. Developed for CPAs by a CPA. Over 2,400 users. G/L, A/P, depletion, document imaging, payroll, joint interest billing, revenue distribution and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605. 325-677-1543 or 800299-1543. E-mail: sales@wolfepak.com. Automate your financial reporting (e.g., EDGAR filings/financial statements) – never manually recalculate anything again! Finalstretchconsulting.com

TSCPA offers opportunities for members and non-members to advertise in the Classifieds section of Today’s CPA magazine. To request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601. Or write to: TSCPA Today’s CPA Classified Ads 14651 Dallas Pkwy, Suite 700 Dallas, TX 75254-7408 All classified ads must be paid in advance. MasterCard, Visa, American Express, personal and business checks are accepted. Please contact Donna Fritz for rates and more information.

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